Exceptionally strong demand for housing in the United States has large homebuilders taking the lead, and smaller builders poised to take over. Buyers are both local and Japanese.
M&A activity in single-family homebuilding is having a record year in terms of dollar volume, and is approaching a record number of deals, according to Margaret Whelan, founder of Whelan Consulting and one of the top investment bankers in the construction industry. space.
“The big ones want to get bigger. They want to get into more markets, more price points, more types of products, and as they do that, they find that the most effective way is through acquisitions,” she said.
There have been a total of 19 home building deals so far this year. Whelan says she alone has four other projects scheduled to close by the end of the year, and there could be more. The average number of deals across the industry over the past five years has been 12 deals per year.
This increase is the result of continued growth in housing demand that resurfaced at the start of the pandemic thanks to record low mortgage rates and a surge of new immigration. But mortgage rates have also caused a historic housing shortage.
Homes were flying off the shelves in the first two years of the pandemic, when interest rates were low, but when interest rates rose, homeowners stopped selling so they wouldn't have to trade a lower mortgage rate for a higher one. This dynamic, sometimes called the mortgage rate stabilization effect, has exacerbated the housing shortage.
Construction of a single-family residential project by KB Home in Menifee, California, United States, is scheduled for September 4, 2024.
Mike Blake | Reuters
The country's large homebuilders have taken advantage of all of this, especially since they have been buying up low mortgage rates to lure customers in the door. Five years ago, builders accounted for 1 in 6 homes sold. Now they make up 1 in 3, according to industry statistics.
The share of the largest construction companies has also increased from 30% of the market share five years ago to 50% today. Public construction companies have distinct advantages over smaller private construction companies.
“Public builders have a lower cost of debt (lower cost to borrow) than private builders and generally do not need to borrow to buy a large company,” wrote Danielle Nguyen, vice president of research at research and consulting firm John Burns.
This is not limited to general construction companies in the United States
Whelan said half of the deals she closed this year were with Japanese buyers.
“From their perspective, the growth at home is much lower than it is here, and they have a much lower cost of capital. And because their capital is so cheap, they can afford to pay more, so the M&A process tends to be very competitive.” “Whelan said.
Some of the biggest construction deals this year have involved Japanese companies such as Sekisui House, which bought MDC Holdings.
John Burns said: “The deal of the year was Sekisui's purchase of MDC, putting it in the top five builders. I expect Sumitomo Forestry and Daiwa House to follow suit, acquiring other large builders that are not gaining market share and struggling In competition. Founder of John Burns Research and Consulting.
The Japanese are particularly adept at value engineering the homebuilding process, partly by reverse-engineering building plans to remove any waste, Whelan said. They often “build” the house first using 3D imaging, which reduces waste by up to 20% to 30%, and use mills where they pre-cut all the wood that goes into the house, such as trusses, framing, and wall panels.
“I think what we'd like to see is that they would bring some of the efficiencies they have in Japan that would make housing more affordable and more cost-effective. They've done that successfully in the American auto industry.” Whelan said.
Homebuilding mergers and acquisitions are likely to continue in the coming year, as deals take a long time. The new Trump administration could provide a boost, too.
President-elect Donald Trump has promised to open more federal lands to homebuilding. It can also put pressure on state and local governments to relax zoning regulations that have hindered further growth.
However, he also promised mass deportations, which could severely impact the construction workforce. Currently, the highest costs for home builders are land and labor.
