Five months after opening a new division to target Inland Empire sales, Richmond American has scuttled its plans.
Bob Scanlan, hired in August to open the company’s Seasons division, was told earlier this month that he and four other top managers brought aboard for the unit were without jobs.
“They gave us no explanations,” said Scanlan. “They just said that they had changed their mind.”
Last year, Richmond American officials described the formation of the Seasons division as a way to expand its Southern California base. At the time, the company was targeting a construction schedule to complete 1,100 new houses in the region this year.
The new move by the subsidiary of publicly traded Denver-based MDC Holdings could reflect a tightening of the market and foreshadow similar moves at other publicly held homebuilders.
The president of MDC Holdings in Denver, David Mandarich, issued a two-sentence reply to the Business Journal in response to questions concerning the subject.
“Richmond American Homes is a Top 10 homebuilder in Southern California, including the Inland Empire,” wrote Mandarich. “The company will build all of their homes in the Inland Empire, Orange County and San Diego County in one division led by division president Robert Shiota.”
But Shiota, who had no direct authority over the Seasons division, said that he was not sure of the reasons behind the decision.
“I’m sure their intent at the time was to expand,” he said. “It just didn’t turn out to be a good time to venture further out into the Inland Empire. So they’re going to put all of our eggs into our basket to further our expansion.”
Richmond American has a separate division for the Los Angeles market.
Richmond American has 16 subdivisions still selling houses in the Inland Empire. The company is also negotiating to close on a land deal in Rancho Cucamonga for a new development tentatively being called North Glen.
“We’re looking at acquisitions in the Inland Empire right now,” said Shiota. “We’ll continue to pursue opportunities.”
Last year, Scanlan was estimating that Richmond American would be in a position through its Seasons division to deliver between 300 to 400 new houses in the Inland Empire in 2001.
Tight Market
Shiota still believes his company will be able to add a considerable number of new units in the area in the next several years. But he cautions that Richmond American, like other homebuilders in the area, faces a tight market for finished lots.
“Lots are always competitive to find,” he said. “It’s an ongoing challenge to acquire well-located property at economical rates.”
Whether Richmond American can keep the same pace for development in the Inland Empire as Scanlan had projected, said Shiota, is “an unknown right now.”
“It will be a function of finding the right property,” he said. “But we’re certainly looking to grow.”
Steve Johnson, a partner with The Meyers Group in Corona, says Richmond American is already one of the five most active homebuilders in the region.
“Their existing operating division is already very competitive and a strongly positioned builder in the Inland Empire,” he said. “The question that probably evolved in their organization was that they already covered several sectors of the market in Southern California. So this could’ve created cross-competition.”
Johnson also believes Richmond American’s efforts to form the Seasons division shows serious intentions by the company to expand even more in the area.
“But the diversity of product already being handled by their existing division probably didn’t leave a lot of room for a new start-up division,” said Johnson.
So why did Richmond American even bother?
That’s a question Scanlan would like to know. He doesn’t see market conditions as that much different from when Seasons opened.
“The Seasons division was created as a complementary business to what Richmond American had before,” he said. “Bob and I both reported to David Mandrich and Bob didn’t know anything about this decision before it happened. So this was a corporate move for reasons we still haven’t been told about.”
Scanlan hasn’t decided what he’s going to do yet. Before being recruited by Richmond American, he was a Kaufman & Broad executive in Orange County and Los Angeles for a decade.
The Los Angeles-based homebuilder last month also made several organizational changes and saw its two top executives in Orange County leave the company.
Warning Signs
Scanlan, who didn’t want to name the other Seasons managers let go, believes more shakeups could be coming at homebuilders in the area.
He pointed out that public companies are watching as stock prices remain in a relative slump as building and land costs continue to rise
The Meyers Group’s Johnson agrees.
“I absolutely expect to see more homebuilders re-examining their operations to find greater cost efficiencies in the coming year,” he said. “It’s boom times, but the building industry is not sharing an overabundance of profits.”
Strong competition and land prices, which Johnson has seen increasing by as much as 50% in some parts of the Inland Empire, are driving profit margins to historically low levels.
Homebuilders on average are earning 8% to 12% after costs on a single home, he said.
“As recently as four years ago, we were looking at margins of 16% to 20%,” said Johnson. “I think most homebuilders expected to see a little more appreciation out there. But they’re not seeing it, so they’re tightening their belts.”n
