In Real Estate Challenges & Opportunities in 2021 (part 2) we will discuss Material shortages, poaching and holding on to land to get through the lean inventory times.
Material Shortages– This phenomenon caught everyone off guard early and even now. With COVID early on before the prescribed protections (masks and social distance) factories began losing up to half of their work force because of sickness and mandatory quarantines. In our industry I saw first hand the loss of production, generally 25% of workers out at any given time, in truss manufacturing, appliances, flooring, roofing materials, paver materials, trim/millwork, windows and drywall. Most all revolved around plant level manufacturing where workers were in close contact.
Today months after COVID peaked we are still battling shortages and higher prices. Understandably in the early day’s shortages would happen, but no one predicted the onslaught of demand in the middle of a global pandemic in our industry. Yet, here we are today and not enough adjustments in ramp up to feed demand is still forcing us to deal with long lead times and higher pricing.
Poaching– This has always been a problem in our industry ever since so many people left construction and real estate jobs after the great recession 12 years ago. However, now poaching has reached absurd levels with demand and workload high and the same basic universe of people left to support this higher demand. It is not just talent in the upper-level jobs, laborers, piece workers, secretaries, office and field support, and junior executives are moving around to higher paying jobs.
The raises and new salaries plus bonuses are sizeable and not meager. I have lost a couple of people recently but we were fortunate to find replacements (at higher salaries and bonuses) and actually saw an upgrade in talent. Fortunately, some older very experienced workers have been coerced into staying longer- but not nearly enough. Friendship among developer peers is no longer an impediment to poaching from that friend. So, it’s best not to take it personally.
Holding on to your land inventory– This is also new to the times. We recently sold some lots to a national builder in a subdivision we started and had built out about two thirds of the homes. They sold and built 5 of the 8 lots and put the others on hold. Why would they do that? It is also happening elsewhere with other builders. There are a couple of good reasons. First- the price of materials and the shortages of materials have made builder’s backlogs a dangerous dynamic. If you sell a house at a fixed price today and cannot deliver in a timely manner you are on thin ice. Price increases and delays are eating away at profit margins greater than ever.
Also, builders have sold much faster than originally planned thereby eating up land inventory. Pausing to catch up and improving your pricing makes a lot of sense. With the average entitlement time in Florida for vacant land at around 18 months, you could be out of saleable product and would need to reduce staff levels that will be hard to replicate when new lots are ready. Keeping sales and backlogs at reasonable levels gives you stability and sensible margins.
Stephen Gravett has been a real estate developer for over 45 years and was most recently CEO of Kennedy Homes for the past 11 years and is still CEO of Kennedy Development Partners (KDP) and full time Director of Operations for 5 Star Developers. He is also a state licensed broker and since 1980 a State licensed General Contractor Unlimited. He flew B-52’s in the US Air Force during the Vietnam war.