OUT OF THE ASHES
METRO ATLANTA HOMEBUILDERS SEE DRAMATIC REBOUND AFTER RECESSION
BY Randy Southerland
Around metro Atlanta, homebuilding is in full swing as new subdivisions pop up on once green spaces. The residential real estate market is back and so is a growing demand for new homes, making local homebuilders some of the fastest-growing companies around.
It’s quite a change from just a few years ago when the Great Recession brought the industry to its knees, so much so that three homebuilding companies recently landed on Atlanta Business Chronicle’s Pacesetter list of the fastest-growing companies in metro Atlanta.
“We’re one of many companies that were assembled from the ashes of the downturn,” said Terry Russell, CEO of FrontDoor Communities. “We actually started the company managing distressed assets for banks and equity funds. We had an eye on turning our efforts building homes in the markets we were representing as soon as the market recovered.”
As those markets, which included Orlando and Naples, Fla., Charleston, S.C., and Atlanta, grew stronger and foreclosures began to disappear, the company has launched a number of communities.
“The rebound has been dramatic, but quite uneven,” said Russell, noting that many areas where building had been active were still slow.
FrontDoor, like other builders, has instead focused on the “demand corridor” running up Georgia 400 from North Fulton into south Forsyth County and stretching west into Cobb and east into Gwinnett. Those are the places where a diminished crop of homebuyers wants to live. They are characterized by good suburban school systems or are urban enclaves attractive to the young and upwardly mobile.
“All the land acquisitions that are being done in metro Atlanta is back on raw dirt,” Russell said. “That’s obviously good news, meaning that all the distress has been absorbed.”
Today’s homebuilders are a different, more cautious breed from their predecessors who drove the real estate bubble. They are more focused on meeting actual demand rather than speculative building. They also are careful about where their capital is coming from and are likely to be monitoring the market’s temperature for an early warning of overheating.
Paul Corley, CEO of Edward Andrews Homes, had been a land developer providing lots to some of the city’s big builders when the recession hit. He started the company in 2007 primarily to build out the lots that he still had on hand.
“As we went through that process we quickly recognized there is a huge opportunity on the homebuilding side so we started taking on new projects,” Corley said. “We came out of the recession in a defensive mode to start this building company and quickly went on the offensive to start tackling new deals.”
The company’s path to success came from building a strong team from a diminished pool of local talent. It was followed by finding and developing the best locations in the metro area.
“Our land development expertise helps in finding a piece of land that we can create a community from,” Corley said. “We’re not just providing a house, we’re building someone a home in a community where they have amenities and are close to schools so they have the complete package.”
Acadia Homes and Neighborhoods LLC became one of the fastest-growing companies in Atlanta by “looking for areas of strong demand and then we bring in our product line to meet that demand,” said president and CEO Gregg Goldenberg.
“From a capital standpoint, having more capital in deals and less debt is obviously a strategy we’ve adopted,” Corley said. “We structured our company and our real estate holding with some built-in cushion in our deals.”
Finding the right financial sources and balancing funding from banks and private equity is also essential to maintaining a firm business footing, according to Russell.
Building in Atlanta, as well as other cities around the country, is being funded by private equity firms that have poured cash into buying and building homes through partnerships with companies like these builders.
“We went to one of the major capital funds and said, ‘You can’t sell all these to the nationals,’ ” Goldenberg said. “Starting a homebuilder would be a very opportunistic way at this time to build your way out of several of these neighborhoods that really have a lot of upside. That was the start of Acadia.”
Without the generous financing that banks once provided, builders need these partners and their alternative source of financing to acquire land and keep building. With few developed lots in the areas where they want to build, the companies must buy and develop these pieces of ground themselves.
“[That] slows down the growth. If we can’t get the lots done in time, we can’t deliver the homes,” Corley said. “Building a house is one thing, but if you have to buy land for 100 lots and develop the road and infrastructure, it gets extremely capital-intensive.”
The solution was an alliance with the Washington, D.C.-based The Carlyle Group, a $190 billion private equity fund that has invested in all kinds of real estate from homes and hotels to trailer parks.
Using partners like equity funds has helped these builders maintain a healthy debt level.
“Don’t overleverage yourself,” Goldenberg said. “That was a big lesson. So try to manage your homebuilding on a land light model, where a company develops lots and you buy as you need them.”
Getting the right personnel is also important to the long-term success of a company. When the home market collapsed many professionals — both trades and staff — got out of the business altogether. Now companies have to look longer and harder to find the right people. This extends from their own offices to the subcontractors and vendors they use on the job.
“It’s a real challenge hiring good quality people to help you grow your business,” Russell said. “You have to find them and then keep them engaged.”
This article originally appeared in the May 23, 2014 issue of the Atlanta Business Chronicle.