How do you invest in the future when revenues, expenses, and costs are swinging so wildly that it is difficult to even determine where they are today? Underwriting investments has perhaps never been harder than today because revenue and cost assumptions have never been more unpredictable. Housing executives are learning to hit a moving target, which is inherently much riskier than hitting a stationary target.

Home Builders:

Home builders buy land today and, in most cases, won’t sell the homes for at least one year. How should they clarify the home revenue and cost assumptions that will ultimately determine how much they can pay for the land?

Building Product Manufacturers:

Building product manufacturers build plants and ramp up assembly lines, requiring massive capital investments that often take years to recoup. Should a manufacturer build a new plant to grow their business? Do they risk losing market share if they don’t? What will the demand be 3 years from now? How much supply will their competitors add? To hit the moving target, they must answer these questions:

Landlords:

In summary, big companies appear to have an advantage because they have resources to address each of the issues above. Perhaps this is one reason why industry M&A is booming. Small builders, manufacturers, distributors, and landlords have been selling out in droves this year. The risks outlined above are too much for many of them, and the price they can fetch for their business today is just too good. While we know plenty of smaller companies who succeed year in and year out and will continue to do so, we expect the big players to end up with more market share several years from now than they have today, partially because they have the resources necessary to learn how to hit a moving target.

Special thanks to John Burns Chief Executive Officer at John Burns Real Estate Consulting

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