Resolution and adaptability are key for builders to deliver a much-needed supply of homes
By Michael Berke
As builders strive to overcome financing obstacles, the challenging environment is fueling clear shifts in the industry. Financing constraints have created disruption and uncertainty for many who fight to commence their projects. Simultaneously, the desire for homeownership remains strong and supply is short.
The effort for builders and developers to fill their capital stack has become burdensome. Those projects that still make sense find their home prices increasing to maintain margins. Many fully entitled, shovel-ready projects are being delayed or forfeited, mostly by private builders. Despite these hurdles, the homebuilding industry as a whole is selling homes at a solid pace.
The existing home market remains stagnant due to homeowners not wanting to depart from their below 4% mortgages. New construction is the only game in town for many buyers, and builders are reaping the benefits, increasing their market share of all homes sold. The historical market share average of 12% has jumped to 33% today.
Private credit has exploded over the last few years as banking regulatory constraints make lending more difficult. $1.3 trillion of capital has been raised for these funds as an alternative to traditional banks. Healthcare and technology constitute a large portion with real estate having significant allocations. There has been a large shift in homebuilding to these private credit funds as they are aggressive, flexible, have deep pockets and prompt execution.
Public builders have grown their new home market share from 5% in 1990 to 50% in 2024, and over the next two decades projections are around 75%.”
Land acquisition, development and construction financing is more restrictive, meaning builders have to come out of pocket with more cash or raise more equity than they are accustomed to or tolerant of. More investor funds mean higher project costs. More out-of-pocket cash means less contingency and less ability to grow the pipeline. The private builders’ struggle to fill their project’s capital stack is having widespread repercussions on the industry.
Land pipeline is the key to growth, and builders are adapting by using all kinds of tools for success. By going more “landlight,” it keeps debt off their balance sheets, reducing risk and carrying costs during development. Also, more land and lot option strategies are being used allowing builders to accumulate and control land without debt. Land developers are using more private debt and new growth capital to continuously supply finished lots to builders, as their services are in extremely high demand.
Publicly traded builders are going full speed ahead and have been growing market share. In times like this, their growth accelerates. It’s mostly their access to capital which ties into land pipelines. Strong balance sheets, lower capital costs and lots of cash provide them opportunities in a restrictive lending environment. Public builders have grown their new home market share from 5% in 1990 to 50% in 2024, and over the next two decades projections are around 75%. When it comes to creating large land pipelines they can be more aggressive and move fast. They also can build more spec homes for readily available buyers.
Private midsize builders continue to carve out an important place in the industry and have been their backbone for generations. Their products are terrific, diverse and unique. Those able to complete their project financing are having great success in their markets. Their ability to expand land pipelines are essential in growing market share. Midsize builders, many of whom I’m involved with, are utilizing private credit and boutique equity funds to obtain the needed capital to finance their projects.
Housing affordability is challenged as builders’ carrying costs, land costs and other costs have increased. The big builders can offer rate buydowns while midsize builders offer other types of creative incentives. Potential homeowners are gradually becoming accustomed to today’s mortgage environment and are more willing to buy.
The homebuilding industry is proving its resiliency. As the economic landscape and industry evolve, builders are using diverse strategies to deliver quality homes at reasonable prices. There is a broader range of lending options, and a large amount of capital is seeking opportunities to be deployed. Furthermore, interest rate pressures may be easing providing a boost to all. Homebuilding is an excellent sector for credit and investment allocation, and the industry is poised for continued growth.
Michael Berke is founder of Tempo Capital Group, a financier to homebuilders nationally.
