Residential Real Estate Construction
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Industry Overview
About 170,000 companies build or renovate homes in the US, with combined annual revenue close to $500 billion. Large builders include Pulte, Lennar, and DR Horton. Most builders are small, with about 10 employees, build from five to 20 homes per year, and have annual revenue under $3 million. Only about 2,000 companies have annual revenue greater than $10 million. The industry remains fragmented: although large companies may build more than 20,000 homes per year, the top 10 builders together hold only 20 percent of the market.
Competitive Landscape
Demand for new housing depends on population growth and is linked to low interest rates. Large builders have some advantages in purchasing and marketing, but building methods are essentially the same for large or small builders. While larger builders have efficiencies because they can repeatedly build the same home models, they generally develop projects on large pieces of land. Small builders, therefore, build most homes in dense urban markets where little land is available.
Products, Operations & Technology
Major products are single family homes and multifamily buildings. Of an average 1.7 million homes built each year, 80 percent are single family and 20 percent are units in large apartment-style buildings. Multifamily units can be either apartments or condos. Home remodeling accounts for about 20 percent of industry revenue. Companies generally specialize in either single family or multifamily work.
The building process consists of distinct steps: land acquisition; land development (roads, sewers, utilities); permit acquisition ("entitlement"); construction; and marketing and sales. The time from initial land acquisition to final sale of a home is usually 12 to 24 months, but can be longer for large projects or in congested areas with a lengthy entitlement process. Some companies work as general contractors for developers (as is typical in commercial construction), but most companies are "operative builders," who build and sell homes for their own account.
Actual construction consists of foundation work; framing (exterior walls and roof); and build-out (interior finishing, including electrical work, plumbing, floors, walls, ceilings, and carpentry). Construction time is about four to six months for a single-family home, nine to 15 for a high-rise. Construction costs for single-family homes (including land acquisition) typically equal 80 percent of the eventual sales price. Building materials generally account for 70 percent of construction costs, labor for 30 percent. Subcontractors are often hired to perform specialized work.
Larger homebuilders generally develop projects on raw tracts of land and enjoy economies of scale in construction that allow low pricing. Big builders may also engage in other types of construction to capitalize on project management expertise and counter residential real estate cycles. Some large companies also provide property management services, like security systems, pest control, and pool maintenance.
IT budgets are typically small, averaging less than 1 percent of revenue; IT functions are often outsourced. The industry's technology spending and use focuses on communications and security equipment in the office and on the jobsite, and computers and software to manage customers, inventory, subcontractors, marketing, and administrative functions. Adoption of mobile technologies including cell phones with two-way radios and Internet access is streamlining communication in the industry. Construction companies that have in-house architectural or engineering staff use specialized design software such as CAD and 3D modeling to create floor plans and technical drawings.
