Riding out the Downturn in New Housing
During the third quarter of 2006, builders cut spending on home building at an 18 percent annual rate, which is the most in 15 years. This is all pretty gloomy news for the economy in general, as well as for anyone involved in the residential new construction industry.
Mechanical contracting firms that rely on the new housing market for a significant portion of their sales are bracing for a tough year in 2007. While still concerned about what lies ahead, most contractors are looking to boost sales in other areas in order to make it through this latest downturn.
UNCERTAINTY CLOUDS THE FUTUREFor someone like Steve Saunders, CEO of Tempo Mechanical in Irving, Texas, there’s very real concern about the future. Approximately 84 percent of Tempo’s work involves residential new construction, and as Saunders noted, “Unfortunately, right this minute, my cup currently runneth over with fear, uncertainty, and doubt.”
That being said, Saunders’ goal is to be smart, be efficient, be of value and work harder than anyone else. “If we do that and with a little luck, we will survive through any potential Texas downturn. My current belief is that there are opportunities to grow market share and not be negatively impacted by a down year. But, I am also realistic. We are prepared for a storm. Our hope is the worst of the storm will not make landfall.”
To brace for the storm, Tempo has delayed some capital expenditures, and many may be delayed indefinitely. The company is also looking at ways to shave costs without shaving value to customers and without negatively impacting the finances of its employee/owners.
On the positive side, Saunders sees opportunities with rising energy costs, because that provides the ability to work on the energy performance of existing homes. “Our electric rates are 14.5 to 15 cents/kW right now, and that’s an important purchasing decision at this moment, so providing energy efficiency is a useful tool in differentiating Tempo,” he said.
Approximately 55 percent of Welsch Heating and Cooling’s business in the St. Louis area involves residential new construction. President and owner Butch Welsch said the downturn actually began during the fourth quarter of 2005, but “Due to the lag between sales and the time it gets to us, we really didn’t start feeling the effects until around March or April of 2006. It’s been significant. Here in the St. Louis area residential permits are down over 30 percent compared to the same period a year ago.”
That being said, Welsch also stated that he can’t complain too much because this is the first significant downturn since 1991 - an unprecedented run of over 15 years. The slowdown has affected his business, but so far his new construction work is only down about 10 percent. Having sensed a downturn was on its way, Welsch started taking steps in early 2006 to compensate for the potential losses.
“One of our new construction foremen retired, and we haven’t replaced him. We also dropped the least productive of our workforce, and we are doing about 90 percent of the business we were doing before with about 83 percent of the labor,” said Welsch. “In other words, we have been able to reduce labor faster than the market has contracted. We feel with our streamlined operation we can be competitive and remain profitable.”
Welsch anticipates that there will not be a noticeable increase in new construction sales until the third quarter of 2007, so the company has geared its operation accordingly. For example, they are seeking certain types of work, such as low-rise condominiums, which they did not previously pursue. Focusing on the service and replacement business will help as well. The company started the service and replacement division back in 1990, and it now makes up nearly 50 percent of the company’s sales. “That will help to ensure that we will be able to prosper despite the new construction downturn,” added Welsch.
DÃäJÃ€ VU ALL OVER AGAINDavid Anderson, builder upgrades and options manager, Chas. Roberts, Phoenix, said that this latest downturn has hit his company hard. About 90 percent of its business is in the residential new construction market, but Anderson has seen slowdowns before in his 29-year career at Chas. Roberts, and he’s sure everything will be fine on the other side.
“We went through this back in the ’80s, and our game plan is to just stay aggressive and hope for the best,” said Anderson. “We don’t see making any major changes to what we do. Our game plan is just to fight through it. We might have to get out and pound the pavement a bit and hopefully that will help, but basically we just need to wait until the market gets going again.”
Anderson’s job involves selling upgraded equipment to builders, and he sees this downturn as a potential opportunity. “Builders are going to want to look at other avenues from which they can get revenue. One of those ways is to sell more options and increase their margins,” he said.
Builders are often interested in IAQ products and programmable thermostats, as well as zoning. Anderson noted that several of Chas. Roberts’ base plans now have zoning as standard. “If we know there’s going to be a thumb room that sticks out and has three exterior walls, we look at adding zoning. Even production builders are interested in this upgrade.”
Customers would probably be interested in other options as well, but contractors usually run into the age-old problem of not being able to speak with them face-to-face. “Most home builders do not want us talking to their customers,” said Welsch. “We have made every effort to try and do that. Builders don’t have a problem showing different kinds of granite countertops, but with our stuff, they don’t want people to think there’s higher-efficiency equipment available. When we can talk to customers, we’re extremely successful in upgrading them.”
Saunders said that some of the smaller builders let him talk to customers, but it’s not usually a productive experience with the large production builders. “The more customized you get, the more you’re able to talk with the homeowner and sell higher-end products with higher SEERs, variable speeds, and IAQ equipment. With production home builders, it’s often standardized around 13 SEER equipment. Though in Texas, 14 SEER is becoming much more prevalent and will be the clear winner in the marketplace by the end of 2007.”
Since first cost in the residential new construction market is such a huge issue, some builders may not want to consider anything but minimum-efficiency equipment during the downturn. The good news is that many home buyers are becoming increasingly aware of energy efficiency and their own personal impact on the environment. When home building picks up again, customers may demand higher-efficiency equipment that has less impact on the environment, and builders will have no choice but to offer better heating and cooling systems. Keep your fingers crossed.
Publication date: 01/29/2007