Driven to diversify: pressure from production builders, a wandering eye, and the promise of greater profits combine to drive builders to diversify their businesses, forcing dealers to choose if they'll go along

Prosales, August, 2005 by Rich Binsacca

Mike Weiss is the poster child of builder diversification. Educated and licensed as a mechanical engineer, he admittedly "backed into" construction as the general contractor on a light commercial job in the late-1960s, then moved on to develop multifamily projects, build single-family homes, and, finally, step into residential remodeling.

Along the way, Weiss became a graduate master builder (GMB), a certified graduate remodeler (CGR), and a certified aging-in-place specialist (CAPS) to go along with his title of CEO of the Residential Construction Management Institute, a general contracting firm in Indianapolis. "I've always had the opinion that if it can be drawn on paper and there's someone willing to pay for it, we'd try to build it," Weiss says.

It's an opinion shared by a growing number of single-family home builders. For reasons ranging from increased competition and lack of land to simple curiosity, builders are increasingly looking over the fence into other construction-related industries and market opportunities.

And as long as they don't stray too far from their core competence, fence-jumping builders are likely to take their suppliers with them--assuming those suppliers are willing to make the leap, as well. "I depend on getting good service from a well-organized supplier," says Weiss, including the willingness and ability to find and source special order products for commercial projects. "I have allegiances to my suppliers, but not if they offer a 'low service for low price' trade-off."

Diversity Drivers

In a recent poll of its 75,000-plus active (or "builder") members, the NAHB found that while 80 percent focus on single-family construction, including general contracting, 29 percent of that majority also dabble in remodeling, 13 percent in land development, and 12 percent in multifamily at some level. "There's an anxiety among builders about putting all their eggs in one basket," says Al Trellis, a custom builder and a partner in the consulting firm Home Builders Network in Mt. Airy, Md.

Meanwhile, in a national purchasing study conducted in 2003 by BIG BUILDER magazine, a sister publication of PROSALES, 17 percent of the nation's largest single-family builders indicated they planned to invest in multifamily construction, while 10 percent were considering light commercial jobs as a way to diversify their portfolios and profits. "The top 10 [largest] builders need to grow and meet their numbers to satisfy their shareholders, so they look to capture new revenue," says Carl Cullotta, vice president of Frank Lynn & Associates, a supply-chain consulting firm in Chicago. "Smaller builders are looking to diversify their risk."

Trellis adds that some builders, especially small and medium-sized firms, delve into land development simply to secure enough lots to sustain their operations or look to income-producing properties, such as tenant leases from commercial projects they build, to protect revenue and cash flow. "For some, diversification is the only way to survive," says Trellis.

That was the case for Fred Dallenbach, owner of Dallenbach Builders in Louisville, Ky., who shifted to light commercial work in the mid-1980s when the local residential sector went soft. "We weren't trying to grow the business, but just keep the doors open," says Dallenbach, whose resume includes building everything from a police department firing range to luxury spec homes to office warehouse condos--a diverse portfolio that enables the company to hedge virtually any market condition.

For an increasing number of small and medium-sized builders, mounting pressure from large production builders on land, labor, selling price, and the supply chain is the most pressing motivation for them to diversify. "Production builders are buying local and regional builders for their lots, not necessarily to boost their current [housing] capacity," says Weiss. "Meanwhile, mid-priced spec and custom builders are being squeezed on price [by production builders] and are venturing into remodeling."

In addition to survival, the current trends toward builder diversification can be attributed, in part, to the sustained strength of the housing industry. "There's a tendency among good companies to convince themselves they are successful enough to do anything," when the market is so good, Weiss says. "They view [strong market conditions] as an opportunity to see how green the grass is on the other side."

Regardless of the reasons their customers diversify, LBM dealers and others along the supply chain must decide whether to play along, get ahead of the curve, or get out of the way. "There can be a lot of supplier shifting when a builder diversifies," says Weiss.

Shifting Suppliers

For Dallenbach Builders, venturing into light commercial projects such as small retail strip malls and low-rise office buildings didn't require a whole new batch of suppliers and subcontractors. "Structurally, they're the same," says Dallenbach, comparing housing to light commercial construction materials and methods in his market. "It's a pizza with different toppings." The same can certainly be expected when builders or general contractors take on a remodeling job or broaden their offerings of new homes to different price points in the same market.