Building industry consolidating and diversifying
by Cape Business staffTo meet demands of second-home owners and retirees, builders are adding landscaping, remodeling and property management to their portfolios. A generation ago, it wasn’t unusual for a Cape Cod builder to pay his workers every Friday from the back of his pickup truck, distribute a six-pack and head out for the weekend.
Welcome to 2005 – home building is a whole new industry.
Today, if you aren’t offering health insurance, paid vacations, even 401k and profit-sharing programs, forget it. To survive, no less thrive, Cape builders are becoming full-service companies that are diversifying not only into traditional remodeling, but also into property management, landscaping and concierge services. It is not unusual to hear a builder talk about cost ratios and profit centers.
All of this is happening in large part because the customer has become far more sophisticated and demanding. In addition, top-flight craftspeople and subcontractors are in scarcer and scarcer supply. And zoning requirements and government regulations are becoming increasingly complex.
Together, it is creating a brave new world with more risks, but also far greater opportunities for success.
Those opportunities are spurred by a baby boom generation rapidly transforming the Cape from a landscape of seasonal cottages to one full of retirement and second homes, where – for better or worse – new residents don’t think twice about spending $50,000 to $100,000 for suburban-styled landscaping, replete with hot tubs.
Tony Shepley, whose Hyannis-based wood products company has grown exponentially over the last 20 years, sees the trends play out vividly.
Permits for new home construction, he noted, have dramatically plunged since the 1980s – from about 5,000 a year to far less than half that number now. Yet the industry has more than held its own, in fact it is growing because the value and size of new homes has more than doubled, while remodeling and home improvement activity has skyrocketed.
Shepley also is watching traditional builders transform themselves into full-scale businessmen and -women, with commanding knowledge of the law, taxes and human resources.
“This business is always changing, reflecting the Cape’s rapid socioeconomic growth,” he observed. “It used to be so simple. You could find one person who could do everything. “Now, you deal with vertical product specialists.”
Customers want their contractor to be more than a builder, almost a counselor,” Shepley said.
More often than not, that customer is a new retiree or a second-home owner who is spending more and more time on the Cape – even during the coldest winter months, around their gas fireplaces.
As a result, traditional homebuilders are deciding to add home improvement, property management, home-watch and even concierge services to their portfolios. It is increasingly common for a builder to grocery shop for a second-home customer so the refrigerator is full upon their arrival for a long weekend.
The rationale for all this is straightforward: The customer loyalty and trust built up during the home construction phase can be extended to a virtual maintenance contract. And if the builder doesn’t bring these services to the customer, someone else will.
In turn, this full-service approach is requiring many builders to expand rapidly, hiring architects, landscapers, project managers and financial experts and developing an increasingly sophisticated cadre of subcontractors, tax accountants and legal experts.
The most powerful driver to expand is tied to the shrinking pool of skilled labor. Running out of ways to attract and retain craftspeople and subcontractors because of the high cost of housing, more and more established builders are buying out smaller ones and absorbing them into the company.
Acquisition may cost more up front, but it guarantees many years of quality craftsmanship to more predictably build out the business. Meanwhile, it lets smaller contractors give up the hassle and costs associated with business and administrative overhead to do what they really care about – build.
Many of these trends are still in the early stages of development on the Cape, but they appear to be accelerating along with the rapid growth of second homeowners and the ever-diminishing supply of building lots.
Remodeling, for sure, is becoming an ever-bigger percentage of traditional builders’ businesses. While 10 years ago, it may have been marginal at best, today this segment may represent 20 to 50 percent of all activity.
It is why the Homebuilders Association of the Cape and Islands recently changed its name to include ‘Remodelers’ and the National Association of the Remodeling Industry has established a chapter on Cape Cod for the first time. It is aggressively seeking new members from the construction community from its Des Plaines, Ill., headquarters.
What’s happening on the Cape is occurring all across the nation. A new study by Harvard University’s Joint Center for Housing Studies identified $127 billion in remodeling activity last year, a 6 percent jump from 2003. This growth is why the federal government now is separating remodeling from construction for statistical reporting purposes.
At the heart of the remodeling surge are the baby boomers, and Cape Cod is attracting them in disproportionate numbers. Once that generation entered the housing market, expenditures for remodeling projects tripled between 1970 and 1980, and then jumped another 250 percent between 1980 and 1990.
Even during the 2001 recession, home remodeling remained strong – in part because Baby Boomers were more inclined to invest in their second homes than in the stock market. At the same time, interest rates were at historic lows, encouraging home-equity borrowing.
Within the remodeling sector, an ever-larger fraction of dollars – about 20 percent – is going toward pure home improvement – the maintenance and repair work needed to sustain a property’s value as opposed to a new bathroom or finished basement, according to the Harvard study, which reported that:
Nearly 45 percent of homeowner spending involves changes to interior space – kitchen remodels, bathroom additions and remodels, and room additions.
Another 28 percent involve roofing, siding, windows, exterior doors, flooring, wall finishes, and ceilings.
About 11 percent encompass the addition or replacement of appliances
The remaining 18 percent is devoted to projects such as driveway and retaining wall improvements.
“The home improvement industry is poised for continued expansion,” the study reported. “To realize this growth, however, contractors will have to respond strategically to several emerging trends – the increasing importance of the high-end market, the evolving structure of the industry, and the changing demographic environment.”
The Harvard researchers warned that contractors will have to constantly seek efficiencies through consolidation and diversification. Meanwhile, if the economy holds and interest rates don’t spike unexpectedly high, the industry should be able to thrive along with an estimated 3 percent annual inflation rate over the next few years.
To explore the Cape landscape further, Cape Business invited a group of homebuilders to discuss the industry, how it is changing and where it is heading. We share excerpts from this roundtable that included:
Everett Boy, Reef Realty Ltd., West Dennis
Thomas Capizzi Jr., Capizzi Home Improvement, Cotuit
Michael Cole, Cape Associates Inc., North Eastham
George Davis, George Davis Builders Inc., South Dennis
Elizabeth Kovach, Windswept Custom Homes, East Dennis
Todd LaBarge, LaBarge Design/Build/Maintain, West Harwich
Peter Polhemus, Polhemus Savery DaSilva Architects/Builders, Chatham and Osterville
Ed Ready, E.A. Ready & Sons, Hyannis
Over the last three years, have you experienced an increase in business? If so, can you measure it by number of projects? Value of projects?
Capizzi: We have had an 8 percent to 10 percent increase in the number of jobs. The big driver has been those customers adding work after we started the job. Twenty percent of our revenue is driven by work after the project is under way. The bottom line: people are convinced that real estate is a great place to put their money.
Cole: I prefer to measure trends over 15 years. There have been three five-year steps. When we came out of the 1989-1990 recession, things were pretty grim. There was a real shake-out in our industry. Those that hung on were able to slowly build back their businesses. The next five years leveled out and business was about a third of our current volume. By the late ’90s, we were picking up so much steam, I couldn’t imagine it getting better. But it has.
Polhemus: Over the last three years, we have seen a 28-percent increase in the overall dollar value of our business. That is based on an eight percent to 10 percent increase in the number of projects. The growth is not in numbers, but value per project. We are about 65 percent new construction and 35 percent remodeling, a breakdown pretty similar to three years ago.
Boy: Since the 1990 recession, we have seen a decrease in the number of our jobs annually when we peaked at 75 new houses a year. Back then, remodeling was not a part of our business. Now, we are probably 60 percent new, 40 percent remodeling. In the last three years, the average project has risen in value by 50 percent and total-dollar volume is 20 percent higher on fewer jobs.
Do you think that the recession of the early ’90s reduced the number of businesses in the construction industry so that demand now outstrips the supply of contractors?
Cole: Yes, people often are upset with builders, plumbers and other subcontractors because we are so busy. There are fewer of us around.
Boy: I am actually building fewer projects, but my average contract price is vastly higher than before. Our industry is being influenced by supply and demand. If someone is going to pay $350,000 for a lot, he or she is not going to put up a 1,500-square-foot, three-bedroom, two-bath house. People today have a very high entry level that they have to build bigger. Those upset with so-called McMansions must understand that builders did not create $350,000 lots.
What are the implications of demand outstripping supply of labor and land?
Ready: I have seen a shift on the demand side both geographically and psycho-graphically. Tear downs and remodels are outbuilding the neighborhood. New owners don’t have an objection to this. They are often from New York, Connecticut, the Boston suburbs, and are more urban-minded. They don’t have a problem with density on a lot. They have the affluence to seek their lifestyle, rather than the traditional Cape Cod lifestyle. Historically, I like the rural small cottage mentality, but the cry for that is fading away rapidly.
No matter how much legislation and regulation, this new taste won’t stop. The density per cubic foot will continue; the trend is irreversible. The Cape Codder has been priced out of the market.
This is the same thing that occurred in Aspen and other ski areas in Colorado. Cape Cod has developed such a national awareness, even international, that demand continues to grow beyond supply. One house we are building for someone from Connecticut is typical. He is getting 50 percent more value per square foot on the Cape than in Connecticut that the guy thinks he is getting a bargain.
Is that why we are seeing an increasing number of teardowns and redevelopment, and how is this trend affecting you?
Capizzi: Because real estate values are so high, it is easier to justify a $100,000 remodeling job. As a percentage of the home’s market value, the cost is not that dramatic.
Boy: For many old houses, we encounter functional obsolescence. Are you going to throw a $350,000 remodeling project over $100,000 of sticks and stones? It may be better in the long run to tear it down and add the $100,000 to the project.
Polhemus: I would say that 60 percent of our new home construction involves teardowns. Cottages, especially those near the water, were not designed for year-round living. It makes little if any economic sense to add or upgrade a structure never intended for winter living. That will be the norm from this point on.
The general public has a hard time with that. They see another house being torn down. Yes, there may be emotional attachment to the old house, but it doesn’t warrant the energy and money to restore it. I love it when I find a house with solid bones, but so many are built poorly to begin with.
The Harvard study and your own observations indicate that baby boomers are driving the remodeling and rebuilding trend on the Cape. What do they seek from the housing market?
Boy: These are not Depression-era customers like our parents. The previous generation of retirees, if they had a million bucks, maybe would splurge for half a bath more. Our contemporaries with a buck are willing to spend it. They are not worried about fixed-income retirement.
Ready: They see it as a good return for their investment, above and beyond a riskier stock market. If I have expensive property, I should make it conducive to sell someday to upper-income buyers.
Polhemus: The rise in sophistication among both customers and employees has required us to upgrade our business skills to meet this demand. We have five construction managers in the field at higher levels than six years ago. Two came from Boston where they were handling big projects. They have much higher skills than in the past.
Boy: The Cape now is a second-home and retirement economy. People come here to enjoy themselves and are more free in their spending.
Polhemus: The baby boom generation is in its prime earning years. They desire second homes or they already are retired. The demand is greater than the supply. That is certainly what has driven this economy for the last five years and demographics suggest the trend should continue for eight to 10 more years.
Cole: The second-home owners also come to the Cape more than in the past. They may not be full-time, but they are more-time residents. And when they come, they don’t really want to do yard work. That means property management will be very big going into the future. We have begun to offer such services.
LaBarge: Yes, today second-home owners don’t shut down their homes after the summer.
Capizzi: They are trying to rob every weekend they can. They are here now in February, enjoying their gas fireplaces.
Kovach: There also is a definite increase in the 40-something customer building 3,000-square-foot homes for eight weeks a year. Ten years ago, it was almost all retirees; now we are getting people from other parts of the state who are willing to make the trip to the Cape all year long.
Davis: One of my frustrations is that I don’t work with young families anymore. They cannot afford our services.
Capizzi: People want their primary home and second home to be their oases. They are building a place as paradise, backed up with the logic that it is a fundamentally sound investment. They are only moving their asset from a bank account or portfolio to a piece of real estate.
Cole: There is an irony here. Our customers want what they want. They want their property, their view and size, but as soon as they have it, they join the side that says no more.
Is this ‘mansionization’ leading to a ‘no more’ reaction in many places, and is it also forcing those who can’t afford a home here to move off-Cape?
Cole: There is a movement – especially in places like Chatham, Wellfleet, Eastham and Dennis – to regulate the size of reconstruction projects. Site-plan review is a thinly disguised architectural review. I constantly am having to defend why my customers want a bigger house, especially if they are retired. They want a three-generational house for their children and grandchildren.
Polhemus: Regulation may be the most critical aspect we deal with in the next decade. There is a very strong reaction to the kinds of ‘mansionization’ occurring here. I have mixed feelings. I think you can do a large house well without compromising Cape values. But some towns like Chatham are pushing regulations that will stop everything.
We need to take the lead and say, ‘The Cape is continuing to develop. How do we want it to happen?’ There will be areas that should be more dense than others. Go to downtown Osterville and Chatham. Density is what makes them so exciting and special.
Kovach: Speaking of density, I am a little concerned that we keep going toward larger-lot zoning. What’s wrong with neighborhood zoning that encourages a sense of community? Once we can get a little more density, prices can come down a little bit, and perhaps create workforce housing the postal worker, teacher, my own son and daughter.
Boy: To do this, we must tackle wastewater management.
Kovach: The technology is out there. The cost can be incorporated into denser housing development and conservation subdivisions.
Cole: It’s encouraging to see how wastewater treatment is becoming a high priority of government and business with the Business Roundtable leading the way and saying density is not a bad thing if it is supported by technology. There are regional wastewater treatment packages, neighborhood solutions that are no bigger than a traditional Cape Cod house.
Kovach: With compact wastewater treatment systems, a three-acre site can accommodate not two or three houses, but five or six houses without compromising the environment. So much land would not have to be devoted to septic systems. Then, the cost of individual housing could decrease.
Boy: We have the association model in place in many parts of the Cape. Associations can accommodate these small waste treatment systems from an operational and cost-sharing basis.
Cole: Another consideration about density is the type of person moving here. Most are empty nesters, so they don’t demand very many town services. Thirteen of 15 Cape towns are experiencing a loss of school-aged children.
LaBarge: Higher density and less expensive housing will help us, since it can accommodate the young workers we find more difficult to attract and retain because of the high cost of homes.
Cole: In Eastham, with current zoning, buildings are going up in the business district that includes offices just so there can be apartments on the top floors. They can’t build residential apartments fast enough. But these buildings are awful looking and poorly planned. If we are not willing to consider better planning for density and wastewater management, this is what you will get. Eastham has been the poster child for bad planning.
Is your company adjusting to the new pressures and opportunities of the marketplace?
Boy: Frankly, my marketing can outstrip the ability to build. I can’t find the quality people to grow the business. I could probably double or triple my volume if quality craftsmen could be found. Not only are there fewer workers on the Cape, but many who are employed are choosing to go out on their own. Because of the good economy, they see it as easy to do it now.
Kovach: Years ago, we probably were 20 percent remodeling. Today, it is closer to a 50-50 split. I agree, though, that the real challenge is fewer and fewer young people going into the business as craftsmen. Twenty years ago, there were carpenters’ apprentices. Not today.
LaBarge: We are moving more and more into design, build and maintain for existing customers. That’s replacing windows, roofs and siding. Maintenance has increased from about 25 percent of our work to 40 percent. The big thing is we have great customers. They trust us. Whatever they need, we are going to do it for them.
We’re tinkering with concierge services. If customers from Boston are coming down to play golf with a client, we will get a case of beer and steaks and put them in the refrigerator.
So, you are actually moving into other related businesses?
Polhemus: We ran a business model looking at this part of the business. We are not sure it is worth the time and money to watch and manage homes. But we are working with other businesses to do the work for our customers.
Cole: We have segregated our business into divisions: services, the painting group and the original builders group. In services, we have a full-time person just to inspect properties. He has 100 customers. He sits next to the service department manager. In this way, he can inspect a house and report that the gutters need cleaning, which leads to business there.
Cleaning gutters leads to a better client relationship. It’s also a separate profit center. It is the key to the nature of our business. Stay all over the customer.
Boy: We schedule 30-, 60-, 90- or 180-day appointments with many of our customers. We want to be proactive.
Davis: We will probably get more involved with landscaping. For one, our work photographs better with strong landscaping and that leads to more business. Also, we are starting to see a little bit of where clients don’t want landscaping left out of our quote. We are involved with a landscaping projects valued at $50,000 or more. We are being forced into the landscaping business.
LaBarge: We went into landscaping full force. I have my own landscaping crew. Customers ask, ‘Can you do this?’ We work with a horticulturist. Landscaping is not just plantings, its brickwork and hot tubs. It is becoming a huge profit center along with property management. We are builders, yes. But more and more, we are a service industry.
Polhemus: Landscaping is a huge part of our projects. We work with a landscape architect. It is amazing how huge a component landscaping is to the overall building project. It may be about 20 percent of our budget; at least 10 percent.
LaBarge: Another nice thing about the landscaping, you can finish that project on Labor Day and next spring and fall be back in front of them with another project. We now employ two or three people to handle landscaping, window replacement. We keep them in-house.
Have the kinds of customers you work with changed in the last five years? To what degree has your business responded to the rising tide of retirees and second-home owners?
Cole: People coming down for the weekend call and ask, ‘Can you get the hot water turned on?’ If they ask, we will shop for them. We just have much more frequent contact with our ongoing customers.
Kovach: When you undertake a large project, you get involved and become friends with your customers. We don’t think anything about getting calls from them for maintenance and often do it free of charge. It invariably leads to good referrals.
LaBarge: Once we get into a job, we will stay there because the owner builds up trust with the contractor, and they tend to add on more work. In the old days, there was a lot of ‘take the money and run,’ but today, the key is to build up long-term relationships for repeat business.
Kovach: I agree. Some 70 percent of remodeling work, for example, comes from previous customers directly or because they provide strong word-of-mouth referrals.
Cole: Here is the difference between now and 1975 as a builder: You are not a tradesman anymore. If you survived the 1990 recession, you are a businessman or -woman now. You are surviving because, unlike 25 years ago, you run a business.
Polhemus: Regulations and zoning require us to become better businesspeople. Most projects require zoning boards of appeal and conservation boards. This works to our advantage because we have enough people in the office – from construction management to architects – to take the project through the regulatory process. Part of what we do is put a team of attorneys and engineers in place to coordinate the effort. That’s something that someone who comes in just to be a builder doesn’t understand.
LaBarge: Sometimes, you have to trade engineering for legal knowledge and psychology.
Polhemus: There is a constant pressure to grow to accommodate all the aspects of the business. But you also don’t want to take on too many people.
Ready: The complexity of the industry dictates that we have to constantly be learning. When I was building 20 years ago, it was so much simpler.
Boy: Another component of the business is the price of entry, which has become so high. If you want to develop land, you have to a have a pretty powerful signature or an investment group behind you. I see consolidation on the development side.
Do you see consolidation in remodeling industry here?
Capizzi: Consolidation is happening. It’s just like banking and big-box stores like Home Depot. It’s a lot more difficult for small builders. Consumers are afraid. They want bigger names to back up the job. Consumers are much more educated today. There is HGTV and the Web. They know about workers compensation and liability insurance.
Polhemus: Yes, and as a result, consumers are willing to pay a little more for that quality assurance.
Boy: Yes, the time has come. If you want to grow and do more, resources – people, land and business systems – are the big deal. You can absorb a company that can add to the bottom line. I see it happening, especially in the service side. You can make money with a guy and van and bunch of tools and bill out at $90 an hour.
LaBarge: If you bought a remodeling company, you have bought a tradesperson, and you are supplying him with the system and structure to manage permitting and the other parts of the business. If you can’t build by hiring, you build by absorbing.
Davis: That’s the key: finding the best people to work for you. With more competition, they have greater and more sophisticated demands. Health insurance is obvious. You have to have it now. They also want a good system to work within. People don’t want to work for companies that are not well organized and have to constantly run to the bank. Twenty years ago, you could work from the tailgate of your truck, write checks, have a beer and go home. Now, workers want a sense of being included in the company. Their sophistication is driving us to be better and better managers.
Boy: Employers have to offer stability, profit sharing, health insurance and paid vacations. These are things we never had before.
Cole: We really are not competing for customers as much as we are competing among ourselves for top labor.
Capizzi: We are more in the employment business than ever before.
Cole: It’s labor, labor and labor, more than commodities like plywood.
Boy: Over the last five years, costs have increased 75 percent, with labor being the biggest component.
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