Is Green the Yellow Brick Road to Success?

Most builders are wholly focused on survival today, for good reason. Many are introducing redesigned product with attention to size and price, but few are pursuing “green” designs and features today. Looking ahead, we envision a return to “Green” building and Low Impact Development (LID), which were gaining momentum up to the housing downturn. Builders and developers who master this approach will gain a significant competitive advantage, which will help them sell lots or homes, secure advantageous approvals, and attract attention from potential acquirers or investors.
Over the past few years hybrid and alternative fuel cars rapidly gained in popularity, for their reduced operating costs and consumers’ desire to reduce their impact on the environment. Propelled by the same reasons, and the improving technology and cost structure, Green building was beginning to gain momentum until stymied by the downturn. Builders have pulled back from Green and LID initiatives primarily due to cost considerations. While the long term benefits of a Green home are tangible, buyers are currently unwilling or unable to pay for the increased construction costs. In many locations today, new home appraisal values are below contract prices, so builders would be unlikely to recover the costs of including Green products or designs. As the housing market improves, the market penetration of Green products increases and costs to provide them declines, builders and developers will focus on this opportunity.
How does this trend impact investment and mergers/acquisitions? We strongly believe that the public and large private builders will return to acquisition mode in two to four years when, once again, the public builders come under pressure from Wall Street to grow. They have implemented dramatic staff reductions and closed divisions in the downturn, leaving them poorly positioned for future expansion. As in the past, we believe they will pursue acquisitions as a preferred expansion strategy, and this could occur earlier than most imagine. Following the bottom of the recession in 2001, the earliest builder acquisitions occurred in 2003.
Previously we have seen several examples of national builders buying business models (i.e., on-your-lot building, infill, and mid-rise) to gain expertise that could be leveraged throughout their organizations. We expect to see a similar demand for expertise in Green Building and LID as the housing cycle shifts to growth. Builders and developers implementing a Green/LID focus will be attractive to acquirers and investors because they will 1) benefit from strong sales as consumer demand manifests, 2) enjoy higher margins as a result of a competitive advantage, and 3) secure opportunities to build in jurisdictions that mandate these practices in order to reduce energy and water usage, and to mitigate the negative impact of storm water runoff, possibly with a higher density allowance. There is no question that Green and LID requirements will become more significant components of the entitlement process nationwide in the near future.
By embracing Green and LID initiatives, you will be positioned for profitable growth as the housing market improves, and will enhance your company’s value if you consider the sale of your re-grown company in the future.