COMMON CENTS CONSTRUCTION
Future-Proofing the Home Building Industry
By Patti Walsh
The residential construction industry is in the midst of rapid and unprecedented transformation. Evolving mortgage regulations, new building codes, increased market competition and tighter lending guidelines have made it more challenging to not only break ground but to move homes that are already built. At the same time, these changes are impacting the types of products consumers want to buy—with many demanding less expensive homes and making buying decisions based on a home’s energy efficiency and environmental impact.
These industry shifts make it difficult for builders and contractors alike to prepare for the future. Since the pace of change isn’t expected to slow anytime soon, conducting “business as usual” is no longer an option. Many homebuilders already know this and have recognized that to thrive in this environment they must expect the unexpected. This involves adapting to the changed landscape and capitalizing on the opportunity by finding new ways to align their operational processes with today’s shifting market.
While this is a challenging task, it’s by no means impossible. Below are three ways to position your business to realize opportunities, regardless of what may lie ahead.
It’s hard to thrive in today’s evolving market if you’re not meeting your buyers’ changing needs. And in light of the most recent mortgage rule changes—where all buyers must undergo a “stress test” by either qualifying under the Bank of Canada’s benchmark rate or their institution’s contractual rate plus two percentage points (whichever is greater)—more buyers’ needs are changing when it comes to price.
Many homebuyers have seen their buying power diminish since the new rules took effect on January 1. As a result, builders—regardless of whether they build on spec or custom build—are experiencing customer expectation gaps between affordability and desirability. In response, they must find creative ways to make homes more affordable.
Fortunately, there are steps you can take to maintain profit margins while still attracting price-sensitive buyers. To reduce your costs and improve negotiating power with buyers, you can revisit existing contracts, renegotiate with your trades and suppliers, or use alternate product lines or materials.
Another option is to explore vertical integration with your supply chain. For example, consider a joint venture with a land developer to secure land position at a desirable cost, or bring traditional outsourced contract work in-house to offer an integrated solution that reduces time and cost.
Pluralize your lending partners
Whether you’re having trouble landing financing due to tighter lending guidelines or because your long-time underwriter at your preferred lender retired, one thing is clear: In today’s lending market, relationship doesn’t play as strong a role in lending decisions as it used to.
While it’s still important to establish a strong reputation with your lenders and earn their trust, the reality is that lenders often don’t provide financing in the dollars, terms or turnaround they used to—meaning you may not obtain the funds you need from any one lender at any one time.
For this reason, it’s important to broaden your access to capital. Rather than limiting yourself to just one lender, consider working with multiple lenders. Not only will this increase your chances of getting the amount of financing you need when you need it, but it will also reduce your risk of being left exposed.
You may also want to start looking beyond traditional lending sources, like the major banks, and form relationships with alternative lenders. While it may take more paperwork—and cost a little more—they are a good additional resource to have and can be a great option when you need quick turnaround on financing.
Strengthen your business operations
To face the future head-on—and keep pace in a rapidly-changing market—your business needs to be in tip-top shape. This includes revisiting your tax strategy to make sure it reflects the federal government’s recent corporate tax changes and is properly formulated to help you reduce taxes and preserve wealth moving forward.
In addition, keep your financial information current and easily accessible to allow for quick and informed decisions. Some of the main items to monitor include your receivables, work-in-progress and progress billings. Having the right people and infrastructure are key to staying on top of this.
Relish the unknown
The residential construction landscape is changing quickly and it’s almost guaranteed that the homes built in the next few years will be different than those being built today. While it’s not clear what will change, you can expect that it will different. This change can be uncomfortable, however, it also can bring opportunity. The key to future-proofing your business and improving organizational agility hinges on your willingness to not only be open to change, but to look for it. Builders who take these steps now to become more nimble will be well-positioned to capitalize on the opportunities of the future.
Patti Walsh is a partner with Grant Thornton LLP in Edmonton. She works with organizations of all sizes in the construction and real estate sector. Patti can be reached at Patti.Walsh@ca.gt.com or by phone at 780-401-8246.