With the homebuilding market in rapid decline, Paragon Communities succeeds by maintaining the quality and the local markets it has always served best
By David Weldon
It’s no secret that new home construction has suffered a major decline in the past 18 months. But there is one silver lining in the otherwise dark picture — sanity.
That, at least, is the view of Brian Catalde, president of custom builder Paragon Communities in El Segundo, Calif.
Catalde knows of which he speaks, since he is also the current president of the National Association of Home Builders (NAHB), a role he assumed in February of this year. Rather than an industry in freefall, Catalde is more likely to refer to it as an overdue correction.
“In our local markets, we’re returned to levels that are more constant,” Catalde says. “It’s not great, but what we were selling was ridiculous.”
To put things in context, Catalde says that Paragon is on track to build 250 new homes this year. That is down from a high of 950 homes at the company’s peak. But it also up from a recent year of 100 housing starts.
The increase in 2007 is due to the company finding specific ways to differentiate itself in its local market, and to maintain levels of quality while being more selective in where it builds, Catalde says.
Part of that strategy involves refocusing on its roots — concentrating its efforts in the Southern California market where it has done well for over 20 years. The company has also slowed down on its land acquisition efforts, but it has not cut back on what it is putting into its properties.
“Most of the large companies in California have dropped their purchase options,” Catalde says, which is understandable in the light of lower sale prices and rising material costs. “The land is a fixed cost. The only thing they can adjust is the house,” Catalde says, and that can be done by “one, taking the size down; two, reducing the cost of the features; and three, building partial finish homes.”
As its name implies, a partial finish home is one that the home builder does not complete in full, such as leaving the second or upper floors unfinished for the owner to deal with later, or not completing all final trim installation or other agreed upon work. The builder must complete all items necessary to obtain an occupancy permit, but that still leaves plenty of room for cosmetics and detail items that can be excluded from the finish product.
In recent months, a growing number of builders and buyers have opted for that route, Catalde says, but it is not the type of home he likes to work on.
Paragon Communities has built its reputation on top quality custom designs, and Catalde says that even in softer markets, leading builders can not scrimp on details. In many industries, the devil is in the details, as the saying goes. In the building industry, it is in the details that a builder truly distinguishes themselves, and impresses the potential buyer. That is especially important in an industry that owes its success largely to word of mouth referrals.
The company has been able to remain competitive due to a lack of debt, to the strategic use of technology in its operations, and by aggressively adopting energy conservation building methods and products that reduce its own costs, and also give the company a cost-savings edge for the consumer they are selling to.
Sweating the details
Though its properties span a range of styles and prices, Paragon Communities primarily builds two types of developments: single family home communities, and condominium communities.
Many of its projects are “gated communities,” Catalde says, or communities that are self-contained, and require entrance and exit through a guard station or checkpoint. As with many gated communities, Paragon’s dwellings are high-end custom homes and condos, and can run into significant price tags. One recent project in Plato Rae sold for $5 million.
But the company also designs many of its communities with young families in mind, providing high quality homes at affordable levels.
“Paragon strives to offer something more than a quality home,” the company’s web site notes. “Paragon acknowledges that lifestyle, as well as value, is also important to home buyers. Many of Paragon’s communities have included new school and park sites and offer recreational amenities that are thoughtfully integrated within the neighborhoods. Accordingly, many of its neighborhoods in Southern California are situated near some of the area’s most popular leisure attractions and precious natural resources.”
With higher end construction come full-range offerings, even in a tight market, Catalde says. The company has been able to maintain its level of quality, and its full range of offerings, by better targeting where it builds, not what it builds.
One thing the company has temporarily stopped doing is targeting waterfront properties. “Four years ago we were buying near the water, but prices were escalating dramatically,” Catalde says.
So as the market began tightening several months ago, Catalde says his immediate reaction was to build in more affordable areas, in order to maintain the full scope of features and options available within a house or condo. After all, he says the market will rebound, and each property the company puts its name to should stand the test of time no matter what a temporary market is doing.
A return to reason
Paragon Communities is now building at a rate on par with approximately five years ago, Catalde says. That is typical for many of the builders in the Southern California market. While that would seem like a major set back, it really isn’t, if you consider how aggressively builders were increasing their housing starts for the subsequent three years.
Indeed, the market can still be quite good, for builders that are creative with what they build, and what features they include, Catalde says. Quality never goes out of style, and those factors can be true differentiators in an increasingly competitive market.
A few years ago, builders began a trend of “future-proofing” homes, by adding in features and wiring that would serve the homeowner down the road, not just the day they moved in. Many builders have eased up on that practice, but Catalde says he still wires his properties for what ever may come. If Cat-5 wiring is standard in the market, Paragon is using Cat-6 (capable of carrying virtually any data, video or audio signal, in any format).
Catalde acknowledges that Paragon Communities could weather the current downturn by cutting back on such features and keeping a bit more profit. But the larger payoff comes down the road, by maintaining its level of quality, craftsmanship and offerings buffet, while the competitors do that.
The slower building cycle has also enabled the company to invest more heavily in customer relations management. For sales people, to design staff, to company builders and outside integrators, everyone in the process is being trained to spend more time with customers to help them get the “experience” they want in their new home or condo, not just the countertops they picked out.
That is another area where the company hopes to reap benefits now and in the months to come.
“What differentiates your company in the market is creating the impression of being a small hands-on business, with instant feedback from your salespeople, and instant satisfaction from your customers,” Catalde says.