Builders operating in the black despite market challenges

Supply bottlenecks, rising rates countered by builder tenacity

Builders operating in the black despite market challenges

The Association of Professional Builders on Thursday released its builder forecast for 2023 that yielded a study in tenacity among constructors despite challenging market forces that have disrupted the industry.

Select findings from the group’s State of the Residential Construction Industry (SORCI) Report – an annual survey of some 1,000 residential home builders operating in the US, Australia, Canada and New Zealand – found that 58% of builders still delivered homes on time and are operating in the black. Broken down to just US builders surveyed, the total was 59.6%, Russ Stephens (pictured), co-founder of the association, told Mortgage Professional America during a telephone interview.

“That was pretty incredible when you think what builders were up against, constantly rescheduling their margins,” Stephens said. “Their margins did take a little bit of a hit in order to do that because in order to keep the jobs moving forward, it did mean they had to pay higher prices. It was a case of sourcing labor where they could, sourcing materials. And really that’s what builders have been doing the last two years. But phenomenal results, really. It really demonstrates the tenacity of builders, which is a key trait.”

Even given his veteran status in the industry, Stephens acknowledged being surprised by the results of the exhaustive study. Stephens’s astonishment is rooted in the litany of challenges that have plagued and inhibited the industry -- supply chain delays, labor shortages, low unemployment rates, high inflation, interest rate hikes and builder burnout among them.

“When you look at the facts you wonder how any project can be delivered on time,” Stephens said in acknowledging his surprise. “It was amazing.”

Another positive finding: Builders reported 2022 as a record year for revenue and, most importantly, their net profits were up, Stephens noted. Moreover, many builders reported signing contracts at record margins during the last quarter of 2022 – even as the market softened, Stephens said.

The forecast comes ahead of APB’s annual report that is expected to be released by month’s end.

Will construction slow down in 2023?

Stephens said residential homebuilders should be buoyed by the signs emerging from the survey but urged a continued focus on tactics to remain profitable regardless of their company structure. The importance of taking such a stance is heightened in that APB has also cited a slower sales cycle in 2023. As such, the group urges builders to implement a structured approach to their selling.

In particular, the APB noted, builders must understand how their sales will affect their margins. “Builders who do not are often forced to drop their prices in order to win jobs, which can then in turn create a long-lasting domino effect that will ultimately impact their bottom line,” the group cautioned.

Yet there are signs that builders are heeding the advice: “We are pleased to see that builders are turning record revenues and net profit margins as it hasn’t always happened this way, even with less economic turbulence,” Stephens said. “We’re seeing builders get smarter about how to operate their companies. They are turning more profitable as a result of a better understanding of their finances, implementing better technology, and putting in place better sales and marketing processes.”

Does construction do well in a recession?

Stephens was prescient in predicting improved margins during an interview with MPA last summer when he posited how a recession-like climate may actually help builders – as counterintuitive as that may sound to a layman.

“In some respects, it will actually help them and that’s because builders tend to lose money in a booming market because their costs rise faster than their pricing,” he told MPA last July. “They can be very busy,  but not always making very much money, or any money at all.”

Under a recession, he added, builders “… have the ability to renegotiate materials and improve their margins.” But Stephens warned: “One thing they need to be aware of is demand is going to soften greatly once this recession starts to bite. That’s when they have to be prepared for that. They’ve got to be working on their marketing and their sales process now to ensure they can sign contracts in 2023. The sales cycle for a builder is very long. You’ve got to be looking ahead six to nine months if the contracts are going to be signed.”

The Association of Professional Builders is a leading business coaching service for custom home builders in the US, Australia, New Zealand, and Canada. According to its marketing literature, it provides “…tested and proven systems for builders to scale and succeed, based on data, experience, and results.”