Smaller Dallas Homebuilders Could Be Left Behind As Goliaths Gorge On Land

Activity in the North Texas homebuilding market is heating up, creating a system of winners and losers that could alter the ownership profile of residential developments for years to come.

Private developers, sidelined by an all-but-frozen lending environment, are quickly losing market share as land for master-planned communities is gobbled up by publicly traded megabuilders. It’s a classic case of David versus Goliath, but the likelihood of an underdog triumph is quickly diminishing as well-heeled builders seize the opportunity to pad their portfolios with thousands of acres.

“They have the ability to nudge those groups out of the way if they want to,” said Justin Bono, president of Astra Development, a Dallas-based company that buys and entitles land for master-planned communities. “Over the past year and a half, the public builders have been the most aggressive buyers and have been stepping in to fill the void.”

Public builders took a step back when interest rates surged in the latter half of 2022, instead focusing on shedding existing inventory. They ramped back up in 2023, with their share of self-developed lots in DFW climbing from 50% in 2022 to 60% last year, according to data from Residential Strategies. 

Those same groups started 2024 with a bang, breaking ground on 14,217 units in the first quarter, a nearly 48% increase from the year prior, The Dallas Morning News reported.

When mortgage rates reached their peak, public builders pursued buydowns as a way to prop up sales, Bono said. Sixty percent of homebuilders surveyed by John Burns Research and Consulting in fall 2023 reported using this method, including 30% who said they offered full-term, 30-year buydowns. 

The method of helping buyers by taking some of the sting out of high rates helped keep sales flowing but requires a certain amount of liquidity that smaller companies, without nationwide pools of investors, can't access.

Smaller players who rely on bank lending to support their developments were left with a dearth of financing options and lacked the necessary capital to offer buydowns.

“I see a lot of smaller developers going away because it’s hard,” Mehrdad Moayedi, president and CEO of Centurion American Development Group, said at a February Bisnow event. “You have to buy a big piece of land to compete with the builders, and the builders have a lot more money than the developers do.”

Publicly traded builders have thrived under the conditions of tight housing supply, with the nation’s top companies reporting billions of dollars in profit and stock prices at all-time highs. 

Arlington, Texas-based D.R. Horton saw a 14% increase in sales in the fiscal quarter ending March 31, despite inflation and elevated mortgage rates, according to The Dallas Morning News. Lennar reported a 13% increase in revenue from home sales, primarily due to a 23% increase in deliveries.

Sizable war chests gave public builders the flexibility to embark on aggressive buying sprees, which created more competition in the market and increased the cost of land, said Bob Kembel, partner at The Nehemiah Co.

“They all accumulated a lot of cash, and they have more balance sheet strength than they’ve probably ever had in my career,” he said. “They’re really dominating the lot game. If you’re a small builder, it’s really hard to get lots right now.” 

At the same time, large-scale builders often have access to cheaper debt, which means they pay less per lot. Many have also ramped up self-development activity, all of which translates to offering homes at a more competitive price point than smaller developers, Hillwood Communities Vice President Andrew Pieper said at the Bisnow event.

“The builders are really driving prices down by doing a lot of self-development,” he said. “That keeps us honest, and we’ve got to kind of meet them or make a strong case for our premium.”

Lennar didn't respond to Bisnow’s request for comment. D.R. Horton declined to be interviewed, though Executive Vice Chairman David Auld said during the firm’s Q4 earnings call that the company was focused on consolidating market share by bringing more homes to the market.

“Our strong balance sheet, liquidity and loan leverage provide us with significant financial flexibility to meet changing market conditions and continue aggregating market share,” he said.

Absorbing market share is important, but too much land can threaten a builder’s profitability, Bono said. Excessive land holdings and loads of debt have spelled the demise of big builders in the past, so reducing the risk between buying a property and building a home is of utmost importance, Bono said.

“They need to make sure they’re getting a return on the asset that they’re buying, and if there is a risk that they can’t build homes on a piece of land, that is typically not a risk they are willing to take,” he said.

One slight advantage for private developers is a lack of shareholders or analysts demanding results. That allows them to hold on to land longer and trudge through the entitlement process, but only if they can afford to pay for the land and then sit on it. 

Public builders have been doing self-development for as long as Bono has been in business, and he expects they always will. The degree to which they scale up or pull back will depend on market dynamics, he said.

“At the end of the day, they have growth needs, and they will solve that however they need to solve it,” he said. “If they can’t do that through buying finished lots, they’re going to buy land and self-develop it.”

Kembel is waiting for the market to stabilize before he buys more land, but in the meantime, he hopes cities will continue to see the value in partnerships that help projects pencil.

“You’d rather have us build your city than the builders,” Kembel said at the February Bisnow event. “It’s hard. There’s a billion details to do a master-planned right.

“It really does matter who is building in your city, not just what.”