The current cycle in commercial HVAC installation focuses on new construction until the market cools, and then comes a search for opportunities among existing buildings. But what if contractors reversed that cycle? What if retrofitting paid the bills and new construction fueled the profit margins?
Doug Eisenhart, vice president of sales, marketing, and service for Cambridge Engineering, said some have started asking, “What would it look like if our business model was built to cover all of our costs on the retrofit market?” Even without going this far, expanding a company’s retrofit offering creates the kind of diversification needed to weather economic ups and downs.
“In a rapidly growing new construction market, the business is coming after us so fast that they don’t have to go prospect existing facilities for their business,” Eisenhart said.
The new construction cycle seems in a downturn, especially in commercial/industrial segments such as warehouses. The American Institute of Architects’ Architecture Billings Index (ABI) reached a low of 47.2 in August before a modest recovery. Any score below 50 indicates a decrease in billings. Analysts view the Index as a leading indicator for the nonresidential construction industry.
The existing square footage, however, is enormous — and so is the opportunity. Not all contractors operate in the retrofit markets. Those that do are often invested in service contract business, Eisenhart said.
“The service contract arms are fueling a lot of the opportunities, especially in the industrial market,” he said.
Vice president of sales, marketing, and service Cambridge Engineering
INCENTIVES FOR EFFICENCY
That’s the case for Comprehensive Energy Services (CES) Inc., a commercial HVAC service provider with four offices in Florida. About a third of the company’s business comes from service. The rest comes from major construction projects, such as the new Epic Universe addition to Universal Studios Orlando. But CES can’t guarantee a new theme park every year, said Shane Lantz, the company’s vice president of service sales.
There are other reasons for focusing on retrofitting, including the availability of incentives and increased demand from clients. Government programs are helping expand the retrofit market. For example, companies in southern Illinois are eligible for retrofit incentives of $6/BTU for improved energy efficiency. A growing number of localities offer rebates for direct gas-fired equipment on the heating side.
“It about pays for the equipment,” Eisenhart said. “There’s continuing conversations on energy efficiency for both the heating and cooling sides.”
Lantz hired an energy engineer when he joined CES to help customers take full advantage of these incentives.
“He looks not at just a piece of machinery,” Lantz said. “He looks at the whole building.”
This approach starts whole new conversations about a full system solution and an operating strategy. If clients understand the operations, it doesn’t take long to start talking about return on investment.
“When they sit down and look at it, they really get shocked,” Lantz said. “They didn’t know they could save that kind of money.”
One example Lantz shared saw CES showing a customer how to save thousands of dollars by cycling down their air conditioning at night. Prior to this, they spent as much to cool an empty building as they did one filled with workers.
An opportunity exists for contractors to present their customers with solutions of which they were unaware, Eisenhart said. This requires manufacturers to educate contractors on the system solutions available and contractors educating their teams on retrofitting. Manufacturers can help take legwork off the contractor by working as consultant to both contractor and customer.
“A lot of people want to see them succeed,” Eisenhart said.
Governments promote retrofitting through code enforcement as well as financial incentives. Rules designed to lessen hurricane damage drive a lot of business for CES.
“We’re securing a lot units that weren’t built for 160-mile-per-hour winds,” Lantz said.
NEW TRENDS, OLD BUILDINGS
Business trends also drive the demand for retrofitting. For CES, the latest source of demand comes from consolidation in the health care sector. The firm recently completed a retrofit project for AdventHealth, a national nonprofit that took over the former Florida Hospital, one of the state’s oldest hospitals.
Another driver of demand for retrofitting comes from warehouses converting to multiple from single users as large e-commerce companies like Amazon move into new facilities. This provides a lot of work for HB McClure Co., a commercial HVAC contractor in central Pennsylvania. The main concern that George Peters, the firm’s senior mechanical engineer, hears is ensuring good working conditions for staff.
“Storage is about the people’s comfort,” he said. “It’s not about the product.”
Warehouse operators today want better cooling and improved air quality. Amazon has driven this shift after making commitments to improving worker conditions overall, including warehouse temperature. HB McClure recently retrofitted three Amazon warehouses with air conditioning. Other warehouse and distribution center operators are following Amazon’s lead to attract and retain employees, so they are replacing systems.
“There seems to be more conversation around recruiting and holding employees,” Eisenhart said.
Peters said it was the same with commercial kitchens and automotive repair shops. For years, both lacked air conditioning, but then some employers started to add them and it became standard.
“If I can make the same wage and be in air conditioning, why wouldn’t I be in air conditioning?” Peters said.
There are other factors in retrofitting an HVAC system that improve employees’ working conditions. A major one is noise. Jeff Ihnen, CEO of Michaels Energy, said retrofits replace the “window-shakers” that heated many older buildings. Another source of retrofit business comes from the fact that many of these buildings developed piecemeal, Ihnen said. This creates challenges when a new owner takes over and finds a lack of heating and cooling in these added areas.
“You end up with a room that gets what it gets and doesn’t have a thermostat,” Ihnen said.
Another way retrofitting creates value for clients is by adding space, which is often at a premium. That’s the case for D&L Inc. Estimator Allan Andrews said his company specializes in climate control for steel mills to prevent flash rust in their storage areas. D&L has been installing and maintaining climate control systems at steel mills for more than 30 years.
The company generates a lot of business by replacing large heating units with more compact S-series models from Cambridge. Like all technology, heaters have grown smaller in recent years, and that appeals to steel mill owners.
“They don’t like to give up space,” Andrews said.
In some cases, contractors must decide to focus on meeting these growing needs over meeting the cash flow opportunities presented by service work. Favoring service work could prove short-sighted, Eisenhart said.
“Without doing retrofitting, you’re probably opening yourself up for one of your competitors coming in and solving the problem permanently,” he said — whereas with retrofitting, contractors can expand their array of offerings to their clients and, as a result, increase their sales.
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