Recession and Residential Real Estate and C.P. Morgan and Housing Starts and Real Estate & Retail

Local builders slash jobs, offices to survive housing slump

January 28, 2008

At the market's peak, builders churned out more than 12,000 new homes a year in central Indiana.

In the current slump, new-home production has dropped to fewer than 7,000 per year, leaving builders with no choice but to slash prices, eliminate hundreds of jobs, and look to unload huge chunks of office space.

Builders have shifted gears to stay afloat--renegotiating what they pay for land, divesting some land holdings, and eliminating at least 300 local jobs.

Locally based Davis Homes LLC has shed 150 employees since its peak in 2001, and now has a staff of 50. Davis is trying to sublease 10,000 square feet of empty office space and may soon let go of another 5,000 square feet.

"I wish I had seen this coming in 2004 and 2005," said Brad Davis, the company's CEO. "No one saw it coming then. We all saw a softening in June 2006. The first few months of 2007, we had fairly decent sales. In May and June, the market took a huge turn for the worse."

C.P. Morgan Communities LP, a locally based builder with about 400 employees, also is hoping to sublease about 20,000 square feet of office space. The company has cut staff, but a spokeswoman refused to provide details.

During the last two years, Atlanta-based Beazer Homes has cut its local staff to 120, a reduction of more than 50 percent. The company is trying to sublease 20,000 square feet in its North Meridian Street headquarters. California-based Ryland Homes has cut about 20 percent of its work force the last two years, and now employs 75 locally.

And M/I Homes of Columbus, Ohio, has cut its staff about 30 percent since 2006, leaving about 45 local employees.

Los Angeles-based KB Home Inc., one of the market's largest builders, pulled out entirely in July, displacing dozens of employees.

Reasons for optimism

The cuts are another sign the nationwide housing slump is taking a toll even in mundane markets like Indiana, where prices rarely jump or fall by much.

The easy credit that fueled demand at the market's peak has evaporated here and across the nation. And many first-time buyers during those heady days now are overextended, especially if they have an adjustable-rate mortgage that has ratcheted higher.

Nationwide, the median home price dropped for the first time in 40 years in 2007, to $217,000. Sales of existing homes saw the largest drop in 25 years.

The average sale price for a central Indiana home in 2007 was $153,270, down 2.1 percent from 2006, according to the F.C. Tucker Co.'s Residential Real Estate Services Division. The only rising stat has been foreclosures, placing Indianapolis 13th in the nation.

Home builders aren't alone in feeling the pain.

In September, HSBC Mortgage and NovaStar Mortgage laid off a total of 631 employees from separate offices in Carmel, dumping more than 100,000 square feet on the office market. Both blamed the layoffs on the housing slump.

Still, most market observers see reasons for optimism. For one, the Indianapolis market peaked earlier than the rest of the country. Home prices here never jumped as much as booming markets in California and Florida. The area's population is projected to grow slightly in the coming years. And falling interest rates have begun to generate new buying interest.

It just may take a while for the market to return to normal.

"We didn't go into this slowdown overnight, and we're not going to come out of it overnight," said Jim Litten, president of residential real estate for locally based F.C. Tucker Co.

Litten expects a revival in existing home sales will come first, while sales of new homes will be slower because of concerns about resale values.

Home-builder discounting during the slump means buyers in new-home communities could have to wait up to seven years to break even or make a small profit on their homes.

That would be bad news for builders trying to hang on.

"I think we're about two years out from a market you'd really want to be in," said Davis, 47, who started the current version of Davis Homes with his father in 1985. "It's in my blood. As tough as it is, I still love it."

Davis Homes used to have sales offices in each of its 16 communities, but now has eight offices in the area. In some cases, the company has negotiated $5,000 to $10,000 lot price reductions in projects where it builds. And Davis is trying to sublease half its 25,000-square-foot headquarters on 82nd Street in Castleton.

One thing the builder can't do is lower home prices any more, Davis said.

"I firmly believe prices are as good as they're going to be," he said. "There's not much more room to go down."

Finding opportunities

For builders, downturns aren't all bad news. They're also opportunities to gain a competitive advantage and come out ahead when the market turns around.

M/I has been scouting opportunities to pick up "A locations" from other builders, said Cliff White, the company's area president.

An example is Willow Glen on 146th Street in Zionsville, a project M/I took over when KB left the market. White expects 2008 will be flat, but he sees an upturn for 2009.

C.P. Morgan recently expanded to a couple of markets in North Carolina, an area that has been stronger for home builders, said spokeswoman Blair Kendall.

Beazer is trying to grow its Indianapolis market share by giving customers more design and floor-plan choices, said Bruce Craig, the division president.

Craig said the most affordable of Beazer's homes continue to sell well.

"I'd like to think we're bouncing along the bottom here," he said. "But the market continues to be tough. Most buyers aren't confident right now because there are so many negative stories in the press."

Alan Goldsticker, Ryland's president for Indianapolis, has weathered three downturns with the home builder. His company began reeling in its employee and new-home counts back in 2005.

The company has lost about 20 employees, mostly through attrition, down from a high of 95.

"During the good times, everyone said we didn't have enough employees," he said. "Now, it's a good thing."

Beyond single-family

Ripple effects from the residential turmoil are beginning to hit other areas of real estate, including commercial. Builders and developers are getting nervous. The housing turmoil has dumped office space on the market, boosting supply at a time of slack demand. And since retail follows rooftops, will fewer rooftops mean less new retail development?

The uncertainty is putting downward pressure on construction prices, making it a great time for companies to build, said John Andrews, director of business development for locally based Shiel Sexton Construction, a company that is beefing up on government contracts to shield it from the slowdown.

Shiel recently won contracts to work on the $275 million expansion of the Indiana Convention Center and a $37 million renovation of the Birch Bayh Federal Courthouse.

Still, woes in single-family residential keep construction executives awake at night.

"When the rooftops dry up and there aren't new houses being built, you start worrying about what's coming down the road," Andrews said.

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