Toll Brothers CEO on How COVID-19 Has Changed Housing
(Miss this week’s Leadership Brief? This interview below was delivered to the inbox of Leadership Brief subscribers on Sunday morning, Jan. 10; to receive weekly emails of conversations with the world’s top CEOs and business decisionmakers, click here.)
The housing market is one of the starkest examples of the disparate impacts of the pandemic on America’s citizens. In August, the Aspen Institute released a report that estimated 30 million to 40 million Americans were at risk of eviction in coming months “in the absence of robust and swift intervention.” Yet overall, the housing market is booming as affluent, dual-income households take advantage of historically low interest rates (2.85% for a 30-year fixed-rate loan) and newfound flexibility to work from home—and perhaps move into spacious new homes with easy access to the outdoors.
At Toll Brothers, one of the nation’s largest home builders, demand has been surging since May. For its most recent quarter, Toll Brothers reported 3,407 net signed home contracts, the highest for any quarter in the company’s 53-year history; contracts were up 68% compared to the same period a year ago. Customers are also spending heavily to customize their homes. The average in buyer upgrades in the quarter was $183,000, also the most in the company’s history, as buyers feather their new nests with home offices and gyms, complete with rubberized floors, full-length mirrored walls and built-in ballet bars.
The pandemic has accelerated trends that are likely to reshape the housing market for years to come. Toll Brothers CEO Doug Yearley says buyers are leaving California and flocking to cities like Reno, Nev., and Boise, Idaho, as well as relocating to warm-weather states like Texas and Florida. Yearley expects the pace to remain intense in 2021, with the company opening upwards of 150 new housing communities this year as it follows customers into new markets. “We are very focused on geographical expansion,” says Yearley, a lawyer turned builder. “We’re chasing the sun—the Smile States, as they call them—which is North Carolina down through Florida, across through Texas and up the West, which is where most of this country is moving.”
Yearley, who was handpicked and groomed by company co-founder Bob Toll and has been CEO since 2010, has spent three decades at Toll Brothers. He recently joined TIME for a conversation about where Americans are moving, changes in housing design and the most popular paint colors (Alabaster and Agreeable Gray by Sherwin-Williams).
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(This interview with Toll Brothers CEO Doug Yearley has been condensed and edited for clarity.)
You’ve been in the business since 1990. How does the market in 2020 stack up?
Since May, we’re in the hottest housing market that I’ve seen in those 30 years. It’s a huge shock. In late March, I wasn’t sure we’d sell another home. I read recently that a third of resale transactions are trading above asking price. That’s unheard of.
Let’s break down some of the different drivers and if they will persist: Work from home?
I think the concept of having some flexibility to work remotely will survive the pandemic. We’ve already heard of some tech companies that have said forever or very long-term, you can work from home. I think that’s not the norm, but there’s going to be enough companies that do that. I still want people in the office a couple of days a week.
How are people’s buying decisions, calculations, changing?
If you were thinking, “My retirement plan is to go to Florida, to go to Hilton Head, to go to Charleston, S.C., wherever,” and you thought, “I’m gonna work till 63, so maybe around 61 let’s start looking.” The 55-year-old is now saying, “You know what? I’ll fly back to New York one week a month. My boss is gonna let me make it work. We’re going earlier.” We’re seeing more of that.
Where are people moving with this newfound flexibility?
We have a big presence in coastal California. Orange County, L.A. County and up around San Francisco—that’s still doing well. But there are a lot of Californians that are moving to Reno, Nev.; Las Vegas; Phoenix; Austin, Texas; Boise, Idaho; Salt Lake City; Denver. Our salespeople in Florida, they’re beginning to see Californians in Florida. They love coastal living, they’re just switching coasts. The cost of living of California is absolutely driving people to those markets I mentioned.
And on the East Coast?
We’re seeing migration out of the Northeast down to the Carolinas, down to Florida. Prepandemic, there’s been a big move into Texas. So you look at markets that have great weather, a great relaxed lifestyle, good jobs and more affordability. And that’s Florida, that’s Texas, and that’s those Western markets that I mentioned.
What markets have experienced the sharpest upticks for you?
So out of California, No. 1 and No. 2 would be Reno and Boise. They’re just wonderful places to live. They’re more affordable, great lifestyle, fresh mountain air. We’re seeing tremendous migration into those markets by Californians.
What are you seeing in big cities?
We have a good operation in New York City we call Toll Brothers City Living. We’ve built 30 plus or minus high-rises between Hoboken, Jersey City, Manhattan and Brooklyn. And that market has slowed. We’re already starting to see an improvement in our sales in our New York towers. And in our Hoboken, Jersey City and Manhattan towers. It’s not back to where it should be, but we are seeing an uptick in the last four to six weeks. The vaccine coming is helping. Longer term, I think the cities will be fine, but there’s no question that there are some people that have decided, having been through this, that they want a suburban lifestyle with more space.
What are your most popular custom features these days?
Pandemic-related, the home office is No. 1. You can buy a resale home and convert a bedroom, put something in the basement, put something in the attic. But when you buy a new home, or you’ve thought through how to integrate a home office into the way the family lives, bring technology to that home office in terms of wi-fi and whatever else. It really makes a big difference.
And home gyms?
So where we build basements, which is all market-driven—for example the Northeast, the Midwest—we dig holes, we have basements. They generally go down there. We put an extra foot of height in the basement ceiling, we’ll put a bathroom down there, and you create a true home gym with a hard rubber floor and a mirrored wall and a ballet bar for bar classes.
And families want to be closer together now?
After what we’ve been through, nobody wants to put their elderly parents in a nursing home. And the opportunity to design a home that has basically a small apartment within the home, that has an exterior entrance in, so Mom or Dad or both can have privacy, they can come in from the outside, lock a door, they don’t want to see the grandkids that day or whatever. They used to call it the in-law suite. We call it multigenerational suite because it’s not just for Mom and Dad. The 26-year-old kid who’s still living at home may be using it also, where he can have some privacy but be part of the family. You don’t want to make it too nice for the kid or he may never leave. So that’s another big option that we had pre-COVID, but it’s definitely more popular with what we’ve all been through.
What is the single biggest shift in home design you are seeing?
I think the biggest change to the home, and it was pre-COVID, is the open floor plan with the indoor-outdoor living, where the back of the house is a wall of glass that accordions, that opens up, brings the outdoors in. We started this in California because 300 days out of the year the outside temperature was within 5 degrees of the inside temperature, and there’s no bugs and you can open the back of the house up and double the size of your home. But it’s expanding—we do it in New Jersey. Obviously, the season is shorter and you have to put a screen porch maybe off the back because of bugs. But the opportunity to have an open, airy floor plan where the family lives together as opposed to the old-fashioned segregated living room, dining room, family room. Bringing the outdoors inside through dramatic walls of glass is absolutely the No. 1 wow factor that everybody wants, even if you grew up in the traditional colonial East Coast house. They’re all happy to leave that behind.
You started in land acquisition. How has that changed since 1990?
The No. 1 most important thing we do is buy land. If you buy the wrong land, it doesn’t matter how great your architecture is and how great your sales team is, you can’t overcome that land. And so we spend a lot of time on it. We have 65,000 lots in this company, building 10,000 homes a year, plus or minus. Every land deal comes through my office, every week.
Every single one?
I still like to micromanage that side of the business. I look at 20 land deals a week. It’s my Sunday night. And every Monday I get together with the regional teams and the division teams, and we talk through every deal. I have a legal background, so I probably cross-examine and get into the weeds a little more than they would like, but I do it on purpose. I do it as a lesson. Because I need to remind everybody how important it is to make sure we’re buying the right land in the right location. It is the No. 1 driver of success, the ability to opportunistically and thoughtfully buy the right land. And we’re really good at it.
And on those Sunday nights, what are you looking for?
I’ve been to every market we build in; I know every submarket of every market we build in. I have probably seen half the land deals that come to me on a Sunday because whenever I travel, I say, “Anything you think we may be interested in buying?” And that may come to me. I want to see it now, even if it’s six months out. The first thing, the obvious thing, you know, is it near power lines? Is there a neighboring use that would concern me?
What might that be? Landfills?
Oh, landfills, water-treatment plants. They may explain to me that it’s next to a beautiful park. But the first thing I see are ball fields. So the next question is are there lights on these ball fields? What time do the lights go off at night? It’s great if you live across the street from the ball fields. It’s not so great if you’ve got lights in your backyard at 10:30 every night.
Do you have any ironclad rules about buying land?
I’m not disappointed if we miss a deal because we couldn’t financially come to terms with a seller. I’m very disappointed if another builder bought a deal that we didn’t know about. So I need to know that our teams are on top of everything. So if I find out [rival] Pulte Homes bought this piece and I say, “What did we know? What happened?” And if I hear a story we did, they outbid us, no problem. If one of those “Oh, it was off market, it never came to a broker, we didn’t know about it,” that’s—you’ve got to know of all the opportunities in a market.
I’m hearing, if you are on your team, don’t miss a deal.
How has land buying changed since you were doing it?
When I started, I spent a lot of time on front porches of farmhouses in rocking chairs, eating apple pie with the landowners. There’s some of that, but there’s not as much. We’re buying office buildings in the suburbs that are being repurposed to townhomes. We’re buying distressed shopping centers that are being repurposed for residential.
You oversaw Toll Brothers’ move from the suburbs to the cities. Was that your idea?
Yeah. So early 2000s, 2003, 2004, we took a bold step, one of the few suburban builders who had done it, to jump into high-rise. It started in Hoboken. We bought the Maxwell House coffee factory on the Hudson River. It was the largest coffee factory in the world in the early 1960s before Maxwell House moved to Jacksonville [Fla.]. When we bought it, it was a brownfield. We had to spend tens of millions of dollars to clean up the environmental issues. And we built 800 condos and four towers.
And what about the design? Did you use your same team of architects?
We did not use any of our typical architects. We use in some cases starchitects. The building on 28th Street [in New York City] was a Rem Koolhaas, a very famous international architect. We did the right thing: we kind of dropped our suburban mindset, we hired urban architects, we hired high-rise builders and developers.
How does climate change have an impact on your land-acquisition and home-building strategies?
There’s no question that we’re moving rapidly as an industry as we are as a society, as a culture. California’s leading the way. Solar roof panels, solar heating and cooling. Solar electricity is mandated in California starting [in 2021]. And you’re going to now see virtually everything built out there with solar panels. It’s interesting because in the old days you’d see a house with the solar panels and it really stood out. Now they have solar panels that integrate into the roof shingles or the tile on the roof, and you can hardly tell, you can hardly see it. That will expand beyond California.
So your homes currently in California: there’s some with solar?
Yes, it’s an option that we offer. Some take it. It’s a bit expensive. Part of this is driven by whether there are state tax credits for having it. Much like if you buy a Tesla you get a tax credit. We’ll see if President Biden comes up with a national position on this or he allows the states to continue what they want. Right now the states are a bit all over the place. So that’s No. 1 when you talk about climate change. I think solar is going to be the biggest change you’ll see to housing. And obviously the new home will lead because you don’t have the retrofit required of the existing home.
And what about trees?
We are very sensitive to the way the roads lay out, how they meander, how we’re saving trees and other environmentally sensitive areas. We don’t want a bunch of gridded streets where the houses all line up and you can look out your front door and pick up the newspaper and look down the street and see everybody else doing the same thing.
Do you have sidewalks?
In some communities. It depends on the local regulations. I like sidewalks.
How many toilets do you buy a year?
Well, if we build 10,000 houses a year, and we have on average four bathrooms in a house—there you have it.
Toll Brothers was founded in 1967 by Bob and Bruce Toll. What is it like for you to follow in the footsteps of people whose names were literally on the door?
Bob Toll hired me 30 years ago, almost 31 now, when I was a lawyer. I got lucky. I went to Cornell, Bob went to Cornell. I went to law school; I loved the law-school education, how it rewired my brain. Bob went to law school; he loved how it rewired his brain. And we both hated the practice. We both couldn’t wait to get out, stop billing time and start being businesspeople, getting involved in making deals. He said, “Leave that practice of law. I’m gonna send you out into a construction trailer. You’re gonna learn how to be a builder, you’re gonna buy land, you’re gonna expand this company into new markets.” Then I went out in the field for two years, and I was in blue jeans and Timberland boots learning how to be a builder, managing contractors.
Do you personally live in a Toll Brothers home?
I do not. I live in a 110-year-old home in the suburbs of Philadelphia.
I love hearing from readers. Please write me at [email protected]. Question: What was the favorite house you lived in? If you could live anywhere, where would it be, in what type of house? An A-frame in the Alps? A row house in Chicago? I look forward to hearing your memories about your homes and aspirations.
Interesting in housing? Here are some book recommendations.
Evicted: Poverty and Profit in the American City by Matthew Desmond
A TIME review said, “This Pulitzer Prize–winning book examines the plague of eviction, following eight Milwaukee families who struggle to stay in their homes in the face of a rigged system. With compassion and an expert understanding of the many obstacles to a solution, Desmond illustrates the ways that eviction serves to exacerbate the traumatic cycle of poverty.”
The Color of Law: A Forgotten History of How Our Government Segregated America by Richard Rothstein
This “powerful and disturbing history” exposes how American governments deliberately imposed racial segregation on metropolitan areas nationwide (New York Times Book Review).
Behind the Beautiful Forevers by Katherine Boo
Another Pulitzer Prize winner, this one takes readers deep inside the lives of the residents of a makeshift slum in Mumbai.
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