The great debate: luxury vs. starter-home. Experts disagree on whether builders should focus on the wealthier customer base, or turn their attention to first-time buyers entering the market looking for smaller properties. Many even say that homebuilders should start to shrink the square footage of their new houses to lure in the coveted first-time buyer, who are often looked to as the salvation of the housing market's recovery. 

But are first-time buyers of entry level properties necessary for a builder to succeed? Toll Brothers doesn’t think so.

The largest "luxury" homebuilder in the U.S. and the fifth-largest overall builder in terms of revenue, Toll Brothers has consistently impressed as it climbs the ranks of home construction giants. The Pennsylvania-based firm, which was established in 1967 and went public in 1986, stresses its focus on the luxury market, with target buyers earning more than $100,000 a year.

Fred Cooper, senior vice president of finance, international development and investor relations for Toll Brothers, believes the firm’s narrow aim is also its strength. "We are the only national builder that focuses on the luxury market," he told Construction Dive. "That niche of the market has probably recovered faster than the starter home market, which really is not a niche that we focus on."

That tactic has proven advantageous for the firm, as Toll Brothers has seen significant growth in recent years. Like the industry overall, the company experienced a downturn in revenue during the recession and housing crisis. Since then, however, revenue has picked back up and Toll is making moves to grow.

This year, Toll Brothers jumped 163 spots on the Fortune 1000 list, to #628. With its current momentum, the company is almost guaranteed a position in the Top 500 next year. Toll was also named 2012 Builder of the Year by Professional Builder magazine and the 2014 Builder of the Year by BUILDER magazine.

So what makes this luxury builder so successful? Cooper pointed to land acquisitions, the improvement of its rental division and the customization options it offers customers — in addition to its luxury market niche — as advantages for the company.

Land grab

The NAHB recently reported that the dearth of buildable lots has become a major concern for homebuilders, with a record high 62% saying there was a shortage in their areas.

Finding desirable locations to build has always been a challenge for companies. And Toll Brothers, with its luxury niche, is even more selective when it chooses a site for a new project, according to Cooper. However, due to the firm's "available capital and access to capital," it has been able to "win more than [its] fair share of the land deals," Cooper said.

He added that the recession somewhat benefited Toll’s land acquisition attempts, as it allowed them "to get some great land opportunities, and perhaps made some land sellers a little less aggressive in the pricing they were seeking for their sites."

The regions performing best for Toll Brothers — which currently builds in 19 states — include northern and southern California, New York City, Seattle, Colorado, Texas — particularly Dallas — and both coasts of Florida, according to Cooper. He attributed success in these markets to their strengthening economies. The San Francisco area, for example, has experienced a housing boom as the tech industry explodes. Toll also introduced its first active-adult community in the western market in Colorado, which Cooper said has received significant demand.

The company also scored a major deal with Shapell Homes in February 2014, when it acquired the firm for $1.6 billion. The acquisition gave Toll Brothers access to more than 5,000 entitled home sites in established communities on the coasts of northern and southern California.

Rental success

Toll Brothers has offered rental housing since the early 2000s, but recently has taken significant measures to ramp up its efforts, according to Cooper. The firm stresses that although this division offers options for renters, it is still a part of the luxury brand.

A few of Toll’s current rental projects include a 38-story tower in Jersey City and an apartment building close to Nationals Park in Washington, as well as suburban buildings in other parts of New Jersey, Philadelphia and Boston.

Cooper noted that by building in the markets where Toll has already established a strong for-sale housing presence, the company can capitalize on its brand as well as construction and purchasing efficiencies.

And although the rental market is "a little bit of a hedge, compared to for-sale housing," Cooper believes Toll Brothers' capital availability will allow the division to continue expanding. "We think it’s a good way to build the company," he said.

Customer customization

Another distinguishing characteristic of the company: Toll Brothers grants its customers significant control of home customizations, Cooper said. "Our average buyer adds $120,000 in changes to the home. It's not just upgrading cabinets and carpet. It's making major structural changes to the home."

Toll also prides itself on its ability to compete with small and mid-sized custom and semi-custom builders on a national level. Luxury homebuyers seek out a custom experience and want control over all aspects of their properties, from the smallest details to the largest decisions.

"That’s kind of a unique system for a company of our size and with our financial strength," Cooper said. "I think that’s a big differentiator."

Future plans

Despite predictions that Toll Brothers will soon expand into international markets, Cooper said the company doesn’t currently have plans to add to its American endeavors. He pointed to talks of expansion of urban projects beyond the cities it currently serves, and to growth of its active-adult division. "At the moment, we see a lot of growth opportunities in the U.S., so we're primarily focused there," he said.

And what about the housing market as a whole? Cooper was quick to say he didn’t want to make concrete predictions about the industry’s future, but he believes improvement will soon gain traction. "We believe there’s a pent-up demand still to be released," he said. "We think we have a very well-established niche in the luxury market … We believe that 2016 will be another year for growth."