Demand for housing in the U.S. is so strong that big home builders are taking the lead and smaller builders are ripe for a takeover. The buyers are domestic and Japanese.
Margaret Whelan, founder of Whelan Advisory and one of the industry’s largest investment bankers, said the single-family homebuilding industry is experiencing a record year for M&A activity in terms of value. The number of transactions is also approaching an all-time high. space.
“Large companies want to scale up. They want to reach more markets, more price points, more product types. “We’re finding that the way to do that is through acquisition,” she said.
There have been a total of 19 deals with home builders so far this year. Whelan says she alone plans to complete four more projects by the end of the year, and other companies may complete more. The industry-wide average number of deals over the past five years has been 12 deals per year.
The surge is the result of a still-expanding demand for housing that reignited at the beginning of the pandemic, thanks to record-low mortgage rates and sudden new immigration. But mortgage rates also caused a historic housing shortage.
Low interest rates during the first two years of the pandemic kept homes off the shelf, but as interest rates rose, homeowners were able to sell without having to exchange lower mortgage rates for higher mortgage rates. It stopped. This dynamic, also known as the mortgage rate lock-in effect, is exacerbating the housing shortage.
Construction scene of KB Home’s single-family home development. Taken on September 4, 2024 in Menifee, California, USA.
Mike Blake | Reuters
The nation’s big home builders are reaping all the benefits, especially as they have lowered mortgage rates to attract customers. Five years ago, builders accounted for one in six homes for sale. According to industry numbers, they now account for one in three people.
The largest construction companies have also grown from 30% market share five years ago to 50% today. Public builders have distinct advantages over smaller private builders.
Daniel Nguyen, vice president of research at John Burns Research and Consulting, said, “Public builders have lower debt costs (lower borrowing costs) than private builders and are generally more willing to buy large companies. There’s no need to borrow money.”
It’s not just U.S. public contractors
Whelan said half of the deals he has done this year have been with Japanese buyers.
“From their perspective, they have much lower growth domestically than here, and their cost of capital is much lower. And because their capital is so cheap, they can afford to pay more, and that’s why M&A The process tends to be very competitive,”’ Whelan said.
Some of the year’s biggest construction deals also involved Japanese companies like Sekisui House, which acquired MDC Holdings.
“The most important deal of the year was Sekisui acquiring MDC, making MDC a top five builder. , we expect to acquire other large construction companies that are struggling to compete,” said John Burns. Founder of John Barnes Research and Consulting.
Whelan said the Japanese are particularly good at value engineering the homebuilding process, part of which is reverse engineering building plans to eliminate waste. They often “build” their homes with 3D imaging first, reducing waste by as much as 20% to 30%, and using factories to pre-cut all the wood used in the homes, including trusses and frames. Use. , there are also wall panels, she said.
“I think what we hope is that they will introduce some of the efficiencies that will make housing more affordable and more cost-effective in Japan as well. They’ve done it successfully in the U.S. auto industry,” Whelan said.
M&A among home builders will likely continue into next year due to the long time lags involved in transactions. The new Trump administration may also provide a tailwind.
President-elect Donald Trump has promised to open up more federal land for housing construction. He could also put pressure on state and local governments to ease zoning regulations that have inhibited further growth.
But he has also promised mass deportations, which could hit construction workers hard. Currently, the highest costs for home builders are land and labor.
