Out of the Ashes : A Family Portrait of Independent Home Builders’ Struggle

Amid the roar of tractors and the aroma of fresh-cut lumber, home builder Paul E. Griffin III surveyed his newest project with a mixture of excitement and anxiety.

The fifth-generation construction executive would soon start selling homes at his Park Lane development in Simi Valley, and the results could determine whether his fledgling company survives.

But more than just money is tied up in Park Lane. There’s also family pride.

Only four years ago, the 40-year-old Griffin watched his father’s company collapse into bankruptcy as Southland housing sales and prices plummeted. The Griffin name was even stripped from a UCLA building after the stricken company failed to fulfill a $5-million financial pledge to the university.

Now it’s up to the younger Griffin to keep the family legacy alive. “This opening has got to work--we’re going to do it,” he said a few days before the project’s opening late in July.

For Griffin and many other small and medium-sized home builders, this year looms as a crucial turning point after their ranks were devastated by the brutal real estate bust of the 1990s.

The slump affected builders of all sizes. But it took a disproportionate toll on companies like that of the Griffin family.

Hundreds of these firms disappeared after construction activity and new-home sales peaked at the tail end of the 1980s. Since then, the Southern California chapter of the California Building Industry Assn. has seen membership tumble by more than half, to about 1,400 this year.

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Descendants of the freewheeling entrepreneurs who originally shaped Southern California’s suburban landscape, the small independents who survived the recession continue to find themselves on the losing side of an industry shakeout. Because of today’s unstable housing recovery, many privately owned builders are struggling to find a role in a dramatically changed marketplace. Their intuition and local connections are often no match for the efficiency and deep pockets of the corporate builders that are gobbling up a larger share of the market.

“There are still some small builders, but they are at a huge disadvantage,” said John Porter, a Newport Beach land broker. “They just have less resources, whether they be financial or managerial.”

The independent builders suffered the most during the recession because not only did real estate values and sales plummet, but credit became almost nonexistent. As a result, the independents tended to lack the financial resources of corporate rivals to weather the recession.

“It was a three-way hit that really devastated a lot of small to medium-sized home builders,” said real estate construction consultant Jeff Meyers of the Irvine-based Meyers Group.

The latest shakeout comes as the Southern California home-building industry, after falling behind and even hindering the regional economic recovery, finally appears to have begun a slow but steady recovery. Sales of new homes this spring and summer have been strong and money is more easily available to buy land and finance construction.

But construction activity and new-home sales are still only a fraction of what they were during the boom years of the late 1980s. Experts have been lowering their projections further because mortgage rates have risen much of this year.

Builders are expected to construct about 41,400 homes, condominiums and apartment units this year in Los Angeles, Riverside, San Bernardino, Orange, San Diego and Ventura counties, according to a forecast by the Real Estate Research Council of Southern California at Cal Poly Pomona. That construction activity will be about 14% higher than 1995’s level but still far below the 162,000 units constructed in 1988--the most recent peak year before construction began to plummet.

That’s only about two-thirds to three-quarters of the volume needed to help boost the economy, said David Hensley, a regional economist at Salomon Bros. He said the annual rate of construction needs to top about 60,000 in the Southland and 125,000 statewide before the economic benefits of home building and new-home buying spread to the rest of the economy. About 99,500 homes will be built statewide this year, according to construction analysts.

“I certainly think the worst is over and activity is stable,” Hensley said. But “you are just still bumping along on the bottom.”

Meanwhile, the independent builders face a new threat. Large out-of-state home builders have begun to infiltrate the California market, diversifying into the state just as big California builders are diversifying by focusing their own development efforts elsewhere.

In the last five years, for example, Los Angeles-based Kaufman & Broad Home Corp. has expanded into such fast-growing markets as Las Vegas, Denver, San Antonio and Phoenix. Those out-of-state markets now generate about half of Kaufman’s nearly $2 billion in annual revenue.

“Growth [in California] is still quite measured,” said company Chairman and President Bruce Karatz. “We decided that the disciplines that we had put in place were not paying very many dividends in California and had to expand outside the state.”

Still, such out-of-state corporate builders as Centex Corp. and Lennar Corp. have been able to enter or expand in the California market at bargain prices. In March, for example, Miami-based Lennar paid an estimated $50 million to purchase 2,200 acres in Coto de Caza in South Orange County and become manager of the planned community.

In Orange County--which only a few years ago was almost completely dominated by local, privately owned builders--publicly traded companies now command more than a third of the housing market and are rapidly gobbling up more, according to Meyers Group.

The profound changes in the business have forced many smaller independents to search for new ways to stay in business.

Brothers Bruce and Carl Akins sold their Irvine-based Akins Cos. to Catellus Development Corp., a giant San Francisco-based real estate firm with massive land holdings and a stock traded on the New York Stock Exchange. Although they have given up their independence, the brothers now operate the residential development arm of a corporation loaded with the assets they lacked themselves--cash and land. Catellus owns 850,000 acres in California alone.

“Catellus is the largest private landowner in the state, but they did not have much experience in residential development,” said Bruce Akins, now president of the Catellus Residential Group. “We were a home builder without assets. It was a match made in heaven.”

In Los Angeles County, the Braemar Group, an Agoura Hills-based company, had spent the last half of the booming 1980s building mostly expensive move-up homes in the San Fernando Valley for $300,000 and up. But faced with the collapse of expensive-home sales, Braemar recently opened up a housing development in Pico Rivera that is designed to appeal to first-time buyers. The $175,000 homes are smaller than Braemar’s standard models and lack amenities such as marble counter tops.

Braemar will earn a smaller profit on each of the Pico Rivera homes, but the company will be tapping into the demand for lower-priced housing and the area’s large and growing Latino population. The builder also avoids direct competition with giants such as Centex and Kaufman & Broad.

“The way we maintain our competitive edge and the way we survive and the way we profit is to go into urban areas where these guys don’t go,” said Avi Brosh, Braemar Group executive vice president.

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One of many home builders wondering what approach to take in the 1990s was Paul Griffin III, whose family has been in the business for nearly 100 years. Some of the turn-of-the-century homes built by his great-great-grandfather still stand in Alhambra. His father, Paul E. Griffin Jr., built an estimated 30,000 homes throughout Southern California.

Growing up, the younger Griffin spent many of his summers either cleaning up or framing homes at his father’s projects. He and two brothers ended up working for their father full time as adults.

But in March 1992, Griffin Homes filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code after its lenders tightened up on credit and land values and home sales plunged. Despite attempts to reorganize Griffin Homes, the company and its 5,000 building lots were eventually sold off in pieces. The Sherman Oaks development that Paul Griffin III had been working on became parkland.

“I saw it destroyed,” Griffin said of his father’s company. “I saw everything taken away from him.”

The bankruptcy was an emotional as well as financial blow to the proud family. In a painful episode, UCLA ended up as one of dozens of creditors as it sought to make good on the $5-million corporate pledge made by Paul Griffin Jr. to his alma mater.

In the end, the company was liquidated. Because UCLA never received the money, it stripped the family name off the Paul and Gloria Griffin Commons. (The student office complex is now known as the Sunset Village Commons.)

The younger Griffin struggled to decide what to do next with his life. As his two brothers pursued careers in other fields, he contemplated moving east to live with his in-laws and start over again.

“I didn’t know what to do,” said Griffin, a tall, soft-spoken man.

But with the support of his wife, Marsha, Griffin decided to give the home-building business one more try. In 1993, he teamed up with a former IBM Corp. executive, John Terando, to form Griffin Industries.

Unlike his father, who could turn to banks and savings and loans for financing, Griffin had to find backers to sign on as long-term partners to buy land and attract additional financing. Among those that eventually joined Griffin were Prudential Homebuilding Investors and Taiwan-based Metropolitan Investment Development.

“I don’t buy land with debt; no one around would loan me money,” Griffin said.

He’s also keen on studying the local economy and job market to size up the potential demand for new housing--a fundamental step that was overlooked during the overheated housing market of the late ‘80s.

“Are people talking about employers moving into the area or moving out?” he said. “That might affect us.”

The company has also been able to take advantage of bargain-priced parcels once owned by now-failed builders and their lenders. With lower land prices, Griffin has been able to build fewer homes on the same sites--a popular move among buyers and city officials. It also allows him to offer the lower-priced homes that attract first-time buyers. The strategy worked well in a Thousand Oaks project in which Griffin has sold approximately 120 free-standing condominiums since early last year.

He duplicated many of the same ideas at Park Lane. Where the previous developer wanted to build 650 condominiums, Griffin has cut the number to 415 and separated the units with narrow side and back yards. As it happens, Park Lane’s unusual format will sit cheek by jowl with conventional tract homes built decades ago by Griffin’s father and grandfather.

The profit margin Griffin will earn on the Park Lane homes will be about half what his father used to earn on the homes he built in the late ‘80s. But those earlier margins would be hard to duplicate today, and Griffin and his investors are willing to settle for a smaller profit on lower-priced homes than take a bigger risk with more expensive models.

Two days before the Park Lane opening, the Griffin family was hard at work. Marsha Griffin, the company’s marketing director, was inspecting the color-coordinated row of model homes and sales offices. Outside, Griffin’s uncle Dale headed construction crews. Meanwhile, over in Calabasas, sister Kristene managed the main office.

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When opening day finally arrived in late July, more than 400 potential buyers showed up and 16 sales contracts were signed. So far, more than two dozen buyers have signed contracts or have put down deposits.

“We are excited. It was a good opening,” Griffin said. Still, he acknowledged, the company won’t be turning a profit this year, even though it expects to sell twice as many homes as it did in 1995.

“I’m just trying to stay in business every day--it’s not easy,” Griffin said.

Despite the many challenges ahead, Paul E. Griffin Jr., who serves as honorary chairman of Griffin Industries, has every confidence that his son and the family business will endure.

“I really thought the family would stay in the business,” the senior Griffin said. “It’s our heritage.”

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Coming Back?

Home-building activity in Southern California appears to be on the rebound--though it’s still puny compared with the late 1980s. Southern California residential construction, in the thousands of units*:

1997: 50.4

* Figures based on building permits; includes single-family homes, apartments and condominiums. Includes Los Angeles, Orange and San Bernardino, Riverside, San Diego and Western counties.

** Estimates

Source: Real Estate Research Council of Southern California at Cal Poly Pomona