Consolidation has found a spot in the local homebuilding industry in response to land preservation initiatives and a heavy demand for housing.
Some industry experts believe that consumers will benefit from the move, while others worry that consumers eventually could find their choices limited. Meanwhile, Maryland's smaller builders are looking for new ways to compete on a rapidly sloping playing field.
During the past year, Miami-based Lennar Corp. acquired two of Maryland's leading builders -- Harford County's Barry Andrews Homes and Howard County's Patriot Homes -- as well as a title company, to secure its footing as a full-service operation. Lennar, the nation's second-largest builder, now owns three of the top 20 homebuilders in the state -- the two recent acquisitions and former rival U.S. Homes, which it acquired in 2000.
Also last month, Carroll County-based Masonry Homes was sold to national builder Technical Olympic USA Inc. of Hollywood, Fla. Technical is the nation's 11th-largest builder, according to Washington-based Builder Magazine.
The big picture points to more of the same with estimates from industry magazine Builder 101 that, by 2010, the top 10 U.S. homebuilders will settle approximately 20 percent of all homes built in the country. It would mark an 18 percentage-point increase, up from 2 percent in 1990. The top 10 homebuilders currently construct about 17 percent of all U.S. homes, according to the Meyers Group, a Washington-based research and consulting firm that tracks new construction.
Scott Campbell, an analyst for Raymond James and Associates in St. Petersburg, Fla., predicts that during the next decade the top homebuilders will double their market share to 35 percent.
Predictions aside, the trend has translated into a change in business for smaller players, who are forced to adapt to survive the competition.
Jeff Powers knows firsthand the effects consolidation has had on the local industry. As owner of Powers Homes in Owings Mills, he believes that the domination of larger players in the market has hurt the competitiveness of midsize businesses such as his.
This year, Powers' company will build about 125 homes in the Baltimore metropolitan region. Compare that with the estimated 500 or more homes Lennar-owned companies are expected to build in the region.
"I think the consolidation of the industry has made things more difficult for companies like mine to coexist and survive," he said.
While the shortage of available lots has sufficiently challenged all builders, the capabilities of national players to more readily obtain lot inventory has hindered opportunities for local companies, according to Powers.
"They are able to do some very aggressive purchasing of land that makes it difficult for builders my size to compete," Powers said.
"Generally, I think, if developers can get a national builder as opposed to a local one, they'll just take a national one -- because the financial strength is greater and they're just more capable of doing larger transactions."
Powers competes by developing land, in addition to building homes.
"We're going out and looking at raw land, and we're buying parcels and developing them and building them ourselves," Powers said.
Further, the company has taken more niche jobs, an area many smaller builders now are considering.
Powers recently took a job in Baltimore, a location that he said traditionally carries a higher risk and lower yield and therefore has not appealed to national builders.
Although locally owned builders make up the majority of homebuilders in the state, critics fear that further acquisition eventually could lead to a monopoly. But John Kortecamp, executive vice president of the Home Builders Association of Maryland, said the industry is far from that threat, at least for now.
"I think at this point in time, the consolidation hasn't occurred to the point where anybody is thinking about antitrust activity, at least on the construction side," he said. "There are just so many small- to medium-size independent builder companies out there ... that there has been no expressed concern yet about a couple of giants taking over the whole market."
A key challenge to smaller builders is gaining land positions in a political climate that has restricted further development in an effort to conserve land and water -- as in the case of Washington County's recently imposed moratorium on development of rural property. Such initiatives have limited land availability for all builders, but larger builders retain the benefit of more buying power.
"If the land positions are being dominated by these large players, then it starts having serious consequences," Kortecamp said.
Rick Kunkle co-founded Patriot Homes in 1991, and in January sold to Lennar. Before the sale, Patriot had reached a pivotal point in its business, where the demand outgrew the capability of a midsize business, Kunkle said.
"We had reached a volume level of 400 homes a year, and for us to continue at that pace or to continue to grow, we really needed additional capital beyond what my partner and I were willing to risk," Kunkle said.
Lennar provided an appealing option -- a buyout with all the financial trimmings and an opportunity for Kunkle and his employees to remain with Patriot. Kunkle now is division president for Lennar and president of Patriot Homes Inc.
Regardless of ownership, the names of acquired companies thus far have stayed the same -- to keep local market identity solid in the consumers' minds, industry representatives said. Keeping the Patriot Homes name was an added bonus, Kunkle said.
By aligning with Lennar, Patriot can compete for larger and more expensive land deals that otherwise would have been out of reach, Kunkle said. "We saw this as a way to continue to grow and to provide security for us and at the same time opportunity for our other managers," Kunkle said.
Kunkle believes that the trend will continue. It all boils down to purchasing power -- something smaller builders lack. "I think it is becoming increasingly difficult for a small or midsize private builder to pay the new prices for land."
For Atlanta-based Beazer Homes USA, the nation's sixth-largest homebuilder, acquisitions are a means to secure land positions but there is more to it than that, according to Daniel Gregory, general sales manager for Beazer's Maryland division.
"Our corporate officers in Atlanta ... perform extensive research when determining which builders they may want to approach for acquisition," he said. "The time and resources involved are substantial."
Maryland's Smart Growth policies have tightened the already restrictive land market and forced national companies to consider acquisition as a way of gaining land rights for development. That was the case in the $28 million Masonry sale, which gave Technical access to 240 lots in Carroll County and southeastern Pennsylvania. As part of the deal, Technical also has options to buy more than 2,000 lots that a Masonry subsidiary already has in its pipeline.
"The pie can be sliced only so many ways, and with upward price pressure occurring due to a limited supply and a steady demand, small builders that have a 'land bank' are attractive to larger builders looking to expand in a market," Gregory explained.
That was one incentive for Beazer's entry into the Maryland-Virginia market in 1998, when it acquired Trafalgar House Residential, a small regional builder.
Along with enjoying greater buying power, national companies are bringing more full-service operations to the local market.
Beazer provides mortgage origination, as well as title and insurance services to its homebuyers. Lennar offers title, mortgage and closing services; high-speed Internet access; and cable television and alarm system installation and monitoring.
The one-stop shops are a bonus for consumers, say industry representatives, because they provide added convenience to the homebuying process. But others worry that the limited choices for consumers could drive out competition and raise prices down the line.
In the meantime, Powers and other local builders find their businesses are evolving to compete as best they can in the shadows of giants.
"When we started out, we were buying finished lots from developers," Powers explained. "Now, over time, we've seen the writing on the wall and we're changing the way we're doing business. Because we do see the difficulties we're having in obtaining inventory and going forward."
Top 25 builders
Report is ranked by sales of new single-family homes from January through October.
Ryan Homes Inc. - 423
Ryland Homes - 365
Bob Ward Homes - 191
Pulte Homes - 140
Gemcraft Homes - 132
Barry Andrews Homes - 127
NVHomes - 126
Toll Brothers Inc. - 101
Winchester Homes - 101
Universal Housing - 95
Richmond American - 84
Mark Building Co. - 78
Patriot Homes - 77
Powers Homes - 77
Masonry Homes Inc. - 74
Koch Associates Inc. - 70
Preakness Homes - 70
Maryland Landmark Homes - 67
Grayson Homes Inc. - 61
Altieri Homes - 54
Beazer Homes - 46
Dan Ryan Builders - 46
D.R. Horton Homes - 42
New Colony Village Builders - 42
Polm Companies - 40
Source: The Meyers Group