The Alarming and Rising Trend of Vertical Integration

[Stuart Udis]

I just got off the phone with a real estate developer. He along with two partners have been buying properties in the areas surrounding Atlanta for a few years. At the start they performed PM duties but sub contracted out construction  and brokerage. They now self perform all of their construction (along with offering 3rd party construction management services). Two of the partners obtained their sales licenses and also perform all brokerage responsibilities. I asked  how many staff members they now have and was surprised to hear its still the same 3 partners with no additional employees or support. Also important to note, two are still full time W2 employees.  I am seeing more and more investors vertically integrate as they scale without adding any additional human capital. From what I am observing it is seemingly reactionary to cover lower margins and out of necessity to make deals pencil.

Meanwhile I am hearing this spun or disguised to help raise capital, negotiate better ownership splits or to merely keep the lights on. There are certainly reasons to vertically integrate but only if those services can be performed better in house. That's not what's happening since costs are the driving force above all else. Who else is seeing rising trend?