Residential Construction Contractors
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Industry Overview
The US residential real estate construction industry includes about 170,000 establishments (single-location companies and branches of multi-location companies) with annual sales of about $325 billion, according to the National Association of Realtors. Major companies include DR Horton, KB Home, Lennar, NVR, and PulteGroup. The industry is fragmented.
In the global residential construction industry, top companies include Japanese firm Sekisui House, Mexican builder Desarrolladora Homex, and Brazilian firm Gafisa.
Builders of both single-family and multifamily housing are included in the industry, as are residential remodelers. The industry includes general contractors, who build on land owned by others, and operative builders, who build on land they own or control.
Competitive Landscape
Demand for new housing depends on population growth and is linked to low interest rates. Large builders have some advantages in purchasing and marketing, but building methods are essentially the same for large or small builders. While larger builders have efficiencies because they can repeatedly build the same home models, they generally develop projects on large pieces of land. Small builders, therefore, build most homes in dense urban markets where little land is available. The industry is capital-intensive: average annual revenue per employee is about $560,000.
Products, Operations & Technology
Major products are single family homes and multifamily buildings. Of the homes built in recent years, 70 percent are single family and 30 percent are units in large apartment-style buildings. Multifamily units can be either apartments or condos. Home remodeling accounts for about 15 percent of industry revenue. Companies generally specialize in either single family or multifamily work.
The building process consists of distinct steps: land acquisition; land development (roads, sewers, utilities); permit acquisition ("entitlement"); construction; and marketing and sales. The time from initial land acquisition to final sale of a home is usually 12 to 24 months, but can be longer for large projects or in congested areas with a lengthy entitlement process. Some companies work as general contractors for developers (as is typical in commercial construction), but most companies are "operative builders," who build and sell homes for their own account.
Actual construction consists of foundation work; framing (exterior walls and roof); and build-out (interior finishing, including electrical work, plumbing, floors, walls, ceilings, and carpentry). Construction time is about three to six months for a single-family home, nine to 15 months for a high-rise. Construction costs for single-family homes (including land acquisition) typically equal 80 percent of the eventual sales price, according to the National Association of Homebuilders (NAHB). Building materials generally account for 60 percent of construction costs, labor for 25 percent. Subcontractors are often hired to perform specialized work.
Larger homebuilders generally develop projects on raw tracts of land and enjoy economies of scale in construction that allow low pricing. Big builders may also engage in other types of construction to capitalize on project management expertise and counter residential real estate cycles. Some large companies also provide property management services, like security systems, pest control, and pool maintenance.
IT budgets are typically small, averaging less than 1 percent of revenue; IT functions are often outsourced. The industry's technology spending and use focuses on communications and security equipment in the office and on the jobsite, and computers and software to manage customers, inventory, subcontractors, marketing, and administrative functions. Adoption of mobile technologies including cell phones with two-way radios and Internet access is streamlining communication in the industry. Construction companies that have in-house architectural or engineering staff use specialized design software such as CAD and 3D modeling to create floor plans and technical drawings.
