Remodeling Update: Where Do We Stand?
October 1, 2009
Throughout the last 12 months, Walls & Ceilings has heard reports on lay-offs, downsizing, bankruptcy, an unusually high number of bidders and more. When the magazine reported on remodeling last year, everyone knew or expected that the worst was yet to come. And sure enough, our pockets are lighter and the current situation is pretty much as bleak as it was then. But looking forward, where do we stand and what is the construction industry forecasting? Well, there’s good and bad news.
The economy is strongly driven by construction, housing starts decline, and commercial construction improves about a year behind residential. The good news is that the housing market has shown slight, albeit very slight improvement. The bad news is that no one is projecting that things will be getting better before year’s end; most predict by 2010 we should see a turnaround by mid year.
This August, the National Association of Homebuilders reported some encouraging signs. Its Remodeling Market Index found residential remodeling showed gains during the second quarter of 2009, with increases in all indicators.
In that same report, the association said that a “significant portion of the market improvement came from the measure for major additions and alterations-jobs worth $25,000 or more.” Indicators for the market conditions improved throughout the Northeast, the Midwest, the South and the West, the index found.
On August 17, NAHB reported that builder confidence in the market for newly built, single-family homes rose one point in August to its highest level in more than a year, according to the latest reading of the NAHB/Wells Fargo Housing Market Index.
The next day, NAHB reported that production and permitting of new single-family homes continued on an upward trajectory in July, according to numbers released from the U.S. Department of Commerce in mid-August.
“With more calls from homeowners and more projects under way, remodelers are seeing better activity in their businesses,” said NAHB Remodelers Chairman Greg Miedema, a remodeler from Tucson, Ariz. “Although remodeling jobs are still harder to find, homeowners are showing more interest in remodeling spending.”
This is good news for the residential remodeling market on a macro level but how does the wall and ceiling industry equate in these reports? Several manufacturers and contractors report on their respective business activity over the last year.
FROM THE REMODELERS’ MOUTHS
Thomas Werline, owner of Thomas M. Werline LLC in St. Cloud, Fla. says he is just getting by. The specialty contractor does brick, stone, tile, plastering and other masonry. To extend his business, he recently began including caulking and sealants, under Division 7 to homes. For him, work slowed down when the financial institutions crashed last year.
“It was a nightmare that I can’t get out of my head. I lost customers but they lost their savings,” he says.
“I see the remodeling market to be pushing forward more than new construction because of the economic situation,” Werline says. “I see people have their purses zipped tight, because they don’t have confidence in the future. Remodeling is a hot idea, including repairs, etc., meaning that seems to be where the money is going, whether it’s residential or commercial.”
Currently 50 percent of Werline’s work is remodeling. Out of this percentage, the company is doing more repairs than expansion.
As a contractor of decorative finishes and high-end painting in residential and commercial construction, John Bass considers the remodeling market great. The president/owner of Widaka Wall Treatments, of San Rafael, Calif., is benefitting from the slow housing market.
“I consider it great,” Bass says. “With the housing market right now, realizing they can’t move as quick as they want, they figure they better squeeze more equity out of their house so more remodeling is being done.”
The company estimates that 80 percent of its projects are in remodeling. Bass says Widaka does not do much new construction, has some business with custom homes but mostly remodeling projects.
Part of Bass’s success currently has been that the company works on specialty projects.
“I have always worked with niche materials, and that’s helped with the economy slowing down. And I work with products that I view ‘recession proof’ and with a lot of high end clients.”
When asked at what point does he forecast housing to rebound and how it will impact his remodeling business, Bass is optimistic.
“Starting about three years ago, I had 25 to 30 percent growth each year,” he says, the implication being that that growth will continue. “But it’s hard to say.”
And is there a tendency to look closer at higher priced finishes (Venetian plaster, adding crown moldings, etc.) if presented?
“I think so,” he says. “My plastering part of the business is taking off more, it’s a big part of my growth. My custom finishes has gone up so it’s about 60 percent; 40 percent painting.”
Jason Gordon, CEO/president of Heartland Acoustics & Interiors, says the commercial work is still out there but is being done at or below cost by very small contractors.
“They will soon find out that you cannot work for free-even on the small jobs,” Gordon says.
The Englewood, Colo., based-company does remodel work on commercial office space improvements and retail space. This accounts for 20 percent of the company’s revenue.
When asked if Heartland Acoustics & Interiors has diversified its services, Gordon says, “We provide a lot of specialty type services within our field but this year we have been trying to get the word out to our clients about all of these services so they know we can provide them. We are looking into some other product lines for the future, too.”
In regards to the housing rebound, Gordon says that Colorado is on its way.
“June was our first month of increased housing starts in a long time and I think July is supposed to be the same. I think remodeling will still hold strong throughout 2010 as the overall economy recovers,” he says.
When asked if there is a tendency to look closer at higher priced finishes Gordon says the company is always looking to upsell finishes on projects. He says they create higher contracts and lower the labor risk.
And during this recession, what changes has Heartland been forced to make?
“We have made cutbacks and had some lay-offs due to the decrease in workload. We have also trimmed a lot of overhead that has helped us be more competitive on our bids. It always hurts to do lay-offs but the overall health of the company has to come first,” Gordon says.
Our June 2009 cover story subject, Volk Drywall, says the remodeling market is highly profitable (percentage wise) but says its main revenue is still custom homes. The West Covina, Calif.-based company performs tenant improvement that includes steel stud framing and residential remodel work as well.
“We anticipate new home construction to begin increasing toward the end of this year,” says Mark Volk, owner of the company. “Here in Southern California, in and around the beach areas, we already see, in the custom home market, an increase in housing starts and permits compared to six months ago.”
Volk says the company has seen a sizable drop in its collected receivables for the last two months [as of August]. “This usually reflects a drop in sales for the previous months, but in our case it is more indicative of our customers’ lack of money or funding,” Volk says.
Carolina Specialties Inc. President Clint Burton supplies materials in Winston-Salem, Raleigh and Charlotte, North Carolina. Burton, also a member of CLAPCA, says as a distributor, he views the state’s remodeling market as average, though only 10 percent of his business goes to that sector.
To help with the recession, Carolina Specialties has added more to its product lines.
“I believe remodeling will very slowly grow as housing very slowly grows. Remodeling has actually been up a little as people settle with what they have. Instead of moving up, they improve what they have,” says Burton.
According to Burton, the company hasn’t been forced to make hard cuts-at least so far.
“Not yet-but considerations are not far off the edge of the table,” he says. “We were fortunate in that we had two high-level people make a change on their own.”
THE MANUFACTURERS’ PERSPECTIVE
Major manufacturer of several product lines, including those for the remodeling sector, is CertainTeed. Its Vice President, Corporate Marketing Eric Nilsson says contractors are taking greater awareness for energy efficient product lines, which CertainTeed caters to.
“Due to the ARRA, an increased focus on energy efficiency has led to stronger emphasis in retrofitting existing homes or buildings with additional insulation or solar reflective asphalt shingle roofs,” says Nilsson. “From a longer-term outlook, CertainTeed is well positioned to remain competitive through smart investments in emerging technologies, such as photovoltaic roofing products.”
And at what percentage does remodeling factor into the company’s business?
“We have a healthy stake in both the new construction and remodeling markets,” he says. “Through our Building Solutions Remodeler program, we work extremely hard at using our broad portfolio of products and education opportunities to earn the loyalty of remodelers.”
Nilsson says CertainTeed monitors economic indicators and industry forecasts regarding housing and non-residential markets to see which direction the current recession is headed. The company anticipates the new construction market to improve in 2010, which should drive growth in the remodeling sector, he says.
CertainTeed has seen a shift in remodeling tendencies from one area to another, (i.e. bathrooms, kitchens, roofs, exteriors).
“Remodeling projects have shifted to either smaller scale/smaller budget or to projects that provide a greater return-on-investment or result in a quicker sale of the house, based on the current economy and the resale market,” Nilsson says. “For example, updating kitchens and bathrooms have traditionally brought high returns and re-roofing is sometimes a requirement for a sale.”
Fypon, manufacturer of synthetic millwork products for the interior and exterior of homes and commercial projects didn’t get into great specifics on the economy but did allude that times could be better.
“The current economical conditions in the housing market have filtered through and are affecting product sales,” says Kathy Ziprik, public relations representative for the company.
When asked if the company has had to diversify its product offerings, Ziprik says several new products have been brought on the market to help its remodeling customers. The ProPak PVC Trim was introduced earlier this year, as well as other trim profiles.
On a note of good news, decorative ceiling and wall treatment manufacturer ACP reports that the remodeling sector is strong. Its Vice President of Commercial Sales Rob Larson says remodeling is approximately 70 percent of the company’s business right now.
Larson also says that when housing and commercial activity does rebound, remodeling will continue to hold steady according to Behr’s forecast.
Joe Richardson, senior vice president of Professional Products & Services at Behr Process Corp. says that remodelers are finding new pressures from builders and contractors that formerly focused more on new construction. The supplier of paints, stains and waterproofing products says this increased competition requires that remodelers find smarter ways to manage their businesses and improve their bottom line.
In regards to what type of cuts Behr is experiencing, Richardson says the economic slow down has brought on a new way of thinking and approaching business.
It appears that housing starts are what drives the economy and this inspires consumer confidence. Or, it may be the other way around; consumer confidence drives the housing market. But whether the chicken or egg came first, the housing market is the key. When starts are strong, people are working, spending. When housing starts are slow, those workers need to feed their families and they typically look to light commercial or remodel work. Homeowners know when the housing market is soft, their home price is down. This soft market may slow sales, but there are still people with good equity and some cash in the bank. While they are not willing to sell their house at a perceived loss to upgrade, they are willing to spend some money to remodel. Add to the scenario there are more contractors now willing to do remodel work makes all the factors point to a stronger remodeling market when housing starts and commercial construction is suffering.
Will stimulus funds fuel more building/remodeling? Will consumer confidence grow over the next 12 months? Only time will tell, but the interview subjects of this report all project better times await us in construction in the near future. W&C