What Cape Cod builders are saying – and doing – about the housing economy in 2007
by Cape Business staffJust as we did last year, Cape Business editors met with its homebuilder’s panel to gauge their mood about the economy and forecasts for the coming year. Their views have changed significantly in the wake of a housing slowdown. But each continues to build more diversified and sophisticated business operations – not only to weather the current storm, but also to take advantage of the changing demographic and economic trends on the Cape.
We’ve listened carefully to them and many others across the Cape to cull a series of trends to share in this special report. We’ve also chosen excerpts from our long conversation with the builders and share them with you here.
Our panel:
Everett Boy, Reef Realty, West Dennis
Thomas Capizzi Jr., Capizzi Home Improvement, Cotuit
Michael Cole, Cape Associates, Eastham and Barnstable
George Davis, George Davis Builders, South Dennis
Todd LaBarge, LaBarge Contracting and Engineering, West Harwich
Rob Padgett, Padgett Builders, Cotuit
Peter Polhemus, Polhemus Savery and DaSilva Architects, Chatham and Osterville
Tony Shepley, Shepley Wood Products, Hyannis
The economic trends
• A clear downturn, but still busy at the high end
• Builders diversifying beyond home construction to weather the storm
• Less speculation; more custom remodeling and home improvements
• Boomers and second-home owners will continue to move here
• A breather in home-price increases may not be so bad after all
Padgett: Real estate inventory is not moving. This stagnation is beginning to trickle down into the building industry. My business is renovation and remodeling. If people are not buying houses, they are not renovating and remodeling them. It is slowing my business.
Davis: A concern in our business is that while the cost of remodeling continues to go up, there is more inventory of good homes on the market, therefore it sometimes now makes more sense to move to a home that better fits your needs rather than remodel or add to your existing … that is, if you can sell the one you’re in.
Polhemus: We are actually busier than we have been in the last 10 years with projects under construction or design. But it is very much all at the high end of the market.
Padgett: But at the $300,000 to $900,000 price point, housing sales are slowing up. Leads for renovation are less than a year ago. At the same time, the situation now is far better than it was during the last downturn in the late 1980s and early 1990s.
Boy: We have not yet seen the real downturn in pricing. Currently, I am not seeing interest in purchasing land or constructing homes. As a result, we are refocusing on remodeling to fill the void. Building a new home on the Cape is increasingly a challenge. It’s awfully hard to compete with an existing home because of the sheer expense of building per square foot on top of land that costs $500,000 for less than an acre. Existing homes look better than purchasing a lot and building.
Cole: We still find ourselves very busy, but it is partly due to diversifying into remodeling, renovations and home maintenance.
Capizzi: Our business is 60 percent home improvement – roofing, siding, doors, windows – and 40 percent remodeling, like room additions, kitchens and baths. Our company’s biggest year was 2005, but this year began slowly. We had a seven-month ‘winter.’ But in the last 10 weeks, business has picked up to catch up with 2005. There appears to be a good deal of pent-up demand. It may be that the consumer has absorbed all the bad news and is ready to spend for their home again.
LaBarge: The scope of my work has changed from new construction to remodeling. On the surface, that is not as lucrative. But we are finding that one small addition is leading to more work. Customers grow to trust you and then say, ‘Can you do this room now, then the roof.’ I also notice that a lot of our customers are asking us to maintain the work we’ve done. Especially second-home owners. They feel they have a relationship with us.
Boy: The challenge is to make sure you don’t get spread out too thinly. There is less profit in more, smaller projects than a few big ones.
Padgett: We are dealing with two totally different markets. One is the baby boomers and the high end. The other represents people who have lived and worked here a long time. They tend to need smaller projects, which we tend to stay away from because they provide less return.
Davis: It totally depends on your business model. We, on the other hand, are well prepared to take on the smaller projects, and in fact, they can have very good returns if handled properly.
Boy: In the past, people came to us and sought new lots to build bigger homes in their current neighborhoods. But now there is little land to develop. Instead, they are asking how to upgrade their home because they love the neighbors and the neighborhood. Sixty percent of our work now is major remodeling, including razing and replacing an existing home.
Polhemus: We encounter many boomers who are about to retire, as well as high-end second-home owners. I think there will be continued demand from both groups. In Chatham and Osterville, I have not seen any slowdown. Chatham has become a destination; people from England, California and different parts of the country – CEOs and CFOs of large companies – are choosing to be in these two communities. Because supply is not great, this demand should keep the high-end market strong for the next five to 10 years.
Padgett: Housing inventory is running above 6,700 right now. During the downturn of the late 80s, inventory reached 7,000 homes.
Polhemus: But interest rates are a lot lower now and there was far more speculation 18 years ago. I don’t see that now.
Boy: Lots of people now see real estate as an investment. And it currently is stagnant or depreciating as an asset. They are not apt to pull the trigger, as they might by selling a particular stock, however. Especially at the higher end, they can wait until the market strengthens again. At the same time, will we get to critical mass? Who will be the first to run to door and sell low? Then, will others chase the market down?
Polhemus: I am not seeing as much speculative construction. High-end buyers are very discerning. They don’t want just a big box on land. If you look around, the very good properties are not on the market.
Shepley: People want to buy. They just don’t know when to buy. Their biggest fear is being embarrassed because they bought too high. Today, their neighbors can go online and see exactly what a house sold for. It’s become a very public experience.
Padgett: I wonder how much our local market is affected by the national real estate market. I have clients from Greenwich and Hartford in Connecticut. They must sell there before they can buy here.
Shepley: In some ways, we have needed a breather. Prices have been pumped up so fast. This is a time to take a step back. We’ve just gone through about 15 years of price increases. It had become like a pressure cooker. Some kind of moderate pace makes sense for most of us. We have gotten spoiled through what had become almost a housing frenzy.
LaBarge: The quality of homes and homeowners both have improved. Buyers don’t want something thrown together. They are getting involved, not just with the kitchen and the glitz, but with the entire construction; what kind of insulation to use, the home’s energy efficiency.
Boy: Some remodeling projects we do have been for people who have experienced tremendous appreciation in their home and are pulling out equity from their property. They bought their house 10 years ago and find it has doubled value or more and they have a small mortgage. They say: ‘At these cheap interest rates, I can pull $150,000 out and make it more grandiose.’ I see them taking debt and taking out 1 percent loans, but these may turn into 10 percent loans and negative amortization in a declining real estate market.
Shepley: If everybody gave crazy pay raises every year, the mason would make $250,000 a year. It’s actually time for us to catch our breath.
What customers want
• Outdoor amenities – pools, hot tubs, patios and fire pits
• Home offices – sometimes one for each person
• More time enjoying the Cape; less time maintaining their home
• Wiring for the Internet generation, including remote home automation
• Landscaping and underground irrigation
• Environmentally conscious construction and materials
• Accessibility: Showers instead of bathtubs; laundry on first floor
Padgett: Boomers want more time and less maintenance. They want higher-end finishes in the interior that don’t need a lot of care. They want acrylic showers and PVC trim rather than wood.
Shelpley: We sell a lot of PVC trim and fiber-cement siding. Both don’t require lots of attention and maintenance. There’s a lot less painting and replacement involved. PVC can replace wood in nearly any non-load bearing application and can be cut and shaped with standard woodworking tools. It is essentially maintenance free – indoors or out – and is resistant to moisture, rot and insect infestation, including termites and carpenter ants. And unlike wood or engineered trim, it can be placed directly on masonry or on the building grade.
LaBarge: Today’s products are not just maintenance free, they also don’t sacrifice look. On the other hand, we have lots of customers who value their time, but are willing to pay us to do the maintenance.
Cole: That is big. If you are there to maintain the house and provide service, the customer’s assumption is the home will last forever. And that gives us a continued relationship after we build the house.
Davis: I would say that our second-home clients (which is most), are typically better off, and therefore have more discretionary money in their budget, hence they’re able to upgrade their projects with higher-end materials, be it landscaping, appliances, plumbing fixtures, finishes, etc. Also, many of our second-home clients are planning on retiring in their Cape home, and are remodeling with an eye towards that. Most of our primary residence clients look more for the basics.
Boy: More and more customers have a conscience when it comes to their Cape home. Energy efficiency is more important today. It’s not just how much house to build, but also the quality of materials. Customers look for recycled materials. The efficiency of their heating and air-conditioning systems has gone way up. They may not get a total return on their investment until the next generation, but they do pay the money for a better world. Certainly, that was not the case for the last generation.
LaBarge: I usually have several meetings with my customers. They actually talk about social responsibility. They know that the most efficient heating system will be defeated if the insulation isn’t as good as it can be. Many want to insulate with spray foam and not fiberglass. I am building houses using insulated concrete form technology. Continuous rigid foam insulation extends from the footings to the roof providing a superior building envelope. The insulated concrete form association estimates that this type of construction adds 3 percent to 5 percent to the cost of the building, but homeowners are amazed at the house’s quietness and air quality and energy savings.
Polhemus: We are building a home in Chatham that is LEED-certified (Leadership in Energy and Environmental Design). The owners care about the amount of energy used to produce the materials for their home. We will be reclaiming rainwater for the irrigation sprinkler system. They are very committed. They are willing to pay more for a project, and they want to inform other people about the practices. It’s not a decision made just by the return on their investment. It is based also on their concern for the environment.
Polhemus: Photovoltaics will become more mainstream and less expensive. MIT developed this technology 30 years ago, but it was too expensive then. Now it is being used efficiently.
Davis: For us, it’s sunroom and family room additions. Kitchens and baths are popular as well, but in many instances they have recently relocated to the Cape full-time from the larger family home and are looking for that space to entertain their family when they come to visit.
Capizzi: People are placing more emphasis on quality, even for smaller projects. Real estate is seen as a major investment. They also want to leave their home for future generations. We educate the consumer. When you do an upgrade or remodel, we try to educate them. If they are not in for a quick flip, but plan to own the house for at least several years, it still is worth investing in the home. If they put $100,000 into remodeling now, that investment likely will grow to be worth $200,000 in 10 years. Generally real estate doubles in 10 years with moderate growth.
Davis: They want accessibility: wider doors; showers instead of tubs; the laundry room on first floor. Maintenance-free exteriors are a big thing with our clients as well, but it must be well done.
Cole: We are meeting many recently retired people who want to expand their new homes here. Often, it is to accommodate the grandchildren. But increasingly it is to build a home office. One couple both wanted their own offices because they did not want to entirely retire. Each needed a place for his and her own computer.
Cole: Our market is heavily skewed toward couples retiring here. They want a house for three generations for two weeks out of 52. They want spaces for adult children. They are fastest-growing Internet segment, so they want a completely wired home.
Boy: New homeowners are not coming here to retire; they will work here.
Housing costs and building regulations
• Sticker shock; double the bill from five years ago
• The good news: Commodity prices have slackened
• Septic system regulations don’t reflect today’s realities
• Insurance companies are driving the cost of construction
• Spend wisely to storm-proof your home; save money later
Padgett: Finishing a basement was $15,000 five years ago; now it can reach $30,000 for the same job. Family rooms today come in at $60,000 to remodel; some go as high as $120,000. That is almost what they paid for their original house.
Davis: We definitely watch our numbers, and adjust accordingly. Actually, our clients tend to be less sensitive to cost, and more to service, reliability, quality, reputation, etc.
Shepley: Building codes and insurance companies are driving consumers to spend on materials to protect against storms and hurricanes – impact glass, shutters. Your insurance rates will go up even higher and faster without these kinds of protective products. From a remodeling standpoint, this is a sleeping giant.
Boy: Spending $10,000 on storm-resistant windows will pay off. In the long run, insurance companies will recognize this investment and give homeowners credit for it with smaller deductions or premiums. You may not be able to actually pay off the initial expense with cheaper insurance, but it may get to the point that you won’t even get coverage without storm-resistant materials.
Shepley: We won’t live long enough to see the payback on these materials and storm protection construction, but people will spend the money to protect their nest. It means more portable generators, impact glass, shutters.
LaBarge: I am seeing a lot of people asking for insulated concrete form technology – mainly because insurance companies are driving decisions about structures. If I spend a lot of money on an expensive house, I don’t want a storm to take it down.
Shelpley: One in seven people live within one mile of the Gulf and Atlantic coasts. Forty-two percent of us live in coast communities nationwide. That is staggering. Insurance companies are not making up the threat, but they are taking advantage of it right now.
Boy: It’s not baloney. We all have to prepare ourselves for a 1938-type hurricane. Those cottages then are mini-mansions now. And homeowners don’t have coverage for floods beyond $250,000 in federal insurance.
Polhemus: Title V septic requirements are not keeping up with the times. They were developed to accommodate homes with year-round families. But they stifle the ability to construct sufficient rooms for today’s retired and empty nest customer. Even if you have six bedrooms, most of them are used only two weeks a year. Title V also figures than any room designed as a home office, home theater or library is a bedroom. Even when the Title V law permits more rooms, most local towns don’t permit it.
Cole: There is a disconnect between government and what is happening economically on the Cape and demographically.
Shepley: Too many people are opposed to second-home owners, but they represent the Cape’s gravy train. They are assuming a disproportionate financial burden for government. And many of them are spending more of their time here and spending more of their money here.
Davis: Like everything else, our costs will continue to rise, and we will adjust our pricing accordingly. We’ll also look to alternative to “the norm,” try to be creative, in order to keep our costs down. For instance, if we can develop employee benefits that don’t necessarily cost us more money, but are beneficial to our employees, then we are saving money.
Landscaping mania
• The number of landscapers has more than doubled in the last 10 years
• Landscaping bills equal the cost of a house a decade ago
• People want to garden, but not mow their lawns
• Homebuilders are diversifying into landscaping
• With property costing so much, people want to maximize their investment
• The big question: Where will we find the landscape workers?
Boy: There probably are two to three times the number of landscapers on Cape Cod than there were only 10 years ago. And some projects now range as high as $250,000 to $1 million.
Polhemus: We actually have a landscape architect involved in almost all our projects. Landscaping budgets now are what entire homes used to cost. It’s a huge business. As an architect, I totally agree that well-done landscaping can fundamentally change the whole feel of a home.
LaBarge: Landscaping equates to maximizing outdoor living space, and this is particularly critical when people are spending so much more money today on land. Swimming pools and patios are very popular. You can expand the actual living space outdoors utilizing patios. Natural stone patios can also be environmentally friendly by not requiring fertilizer and allowing water to drain between stones.
Boy: It really works for smaller lots on the water. In the old days, privacy would mean an old stockade fence. Now, it’s about living fences, trees and landscaping.
LaBarge: Swimming pools are huge. People see the comfort of a pool. They don’t want to wait in line for beach parking lot. It allows them to stay at the pool in the morning and then go to the beach in the afternoon when the crowds are smaller. Swimming pools popularity is similar to sprinkler systems for grass.
LaBarge: We are installing energy-efficient pools with concrete forms and insulation. Then, after the pool is installed, we truck cedars and plants and build patios. People are spending on pools and related landscaping what they once built entire homes for.
Cole: You go where the market is leading you, and landscaping definitely is a growth market. The challenge is a labor shortage. Where do you find employees between April and October willing to work at a rate that is profitable for them and the company?
New ways to do business
• With more competition, many builders are becoming full-service companies.
• Many develop long-term relationships with their customers, especially second-home owners.
• Small projects can quickly lead to additional, bigger ones. Treat them all the same.
• The emphasis is on customer service and trust.
• Customers want to be far more involved in all aspects of the project.
• Changing times require constant reevaluation of the business model.
Boy: The key is to develop relationships and referrals.
Shepley: We are really providing a number of services and we must broker the rest.
Cole: Decades ago, our businesses were exclusively custom building. Not now. We must also move into services for our homebuilding customers – remodeling, even concierge services. There is more competition in the market. Meanwhile, customers are asking you to service and maintain their homes. We are finding seven-figure remodeling jobs these days.
Davis: Our clients will get more and more educated with regard to products and building science, as this older generation becomes more Internet savvy. Also, with the rise of home improvement shows, our clients seem to have all sorts of new information and education.
Padgett: Customers require far more professionalism and business integrity. They are much more demanding than in the past. We have to be more sophisticated to be competitive. And we have to be much friendlier toward our competitors. Tomorrow, they may be our associates on a project.
Davis: Remodeling has always been the mainstay of our business. In fact, we have been considering changing our company’s name and logo to better reflect that.
Padgett: It is harder to break into the business because of existing relationships and the dwindling labor market. Plumbers make more money here than airline pilots. We have to tighten up our procedures and market ourselves differently.
Cole: It’s not about a shortage of cement or gypsum. It’s about the labor, not the commodities. It’s what the electrician and the plumber get paid.
Davis: We are looking always to upgrade staff. With the housing slowdown, the good news is we are getting better people responding to opportunities because the labor market is looser. Independent tradespeople are now more receptive to joining us. It means they will get a steady paycheck instead of being out on their own in a spotty and more competitive market.
Capizzi: Increasingly, the key is to do more work for fewer customers. About 27 percent of our revenue comes from change orders, authorizations for additional work after one project is completed. Many customers want to test you with a small project due to their anxiety level working with a new company. They test us and we look at it as a first stage of a long relationship. We make sure our team is all involved. We clean up every day. We gain their trust. That frequently leads to another assignment. We don’t need 50 leads a week if 25 bring us more business and stronger customers. How can we maximize customer revenue? How can we make our customers so happy from day one that they decide to schedule more work after the initial project?
LaBarge: One customer called for a concrete pad for her hot tub. It was a small job, but the next thing I knew I was building her stairs to the hot tub, then $250,000 for a major addition. By not treating the first job as too small, I was able to build a long-term relationship and get a much larger job.
Capizzi: We want to spend time with any customer. That $5,000 job can lead to six figures.
LaBarge: It’s about relationships; we don’t want every customer, we want to do everything for our customers. If you call us, we will take care of you.
Cole: We have learned that maintaining homes for our customers is critical. We want to have the same relationship with a customer as we do with our employees. We have many stories of small projects blossoming into bigger ones. Not only does that work come from the customer, but that small job done well feeds word of mouth. One of best things we did was a start a quarterly newsletter to all our customers – past and present. It keeps our name in front of the customer.
Polhemus: We are conducting off-site meetings with six key people in the company and looking at every single aspect of what we do: construction, design, marketing. What can we do to make it better? It’s almost like starting over again. It’s easy to get complacent about how to do things. Frankly, we are extremely busy right now. But it is critical to reevaluate who you are and what you do. We also must be sure everyone in our company knows about our values. Even if it is in our handbook, we must communicate over and over again: Who you are and what you can do better.
Looking ahead to 2007
• Getting noticed in the marketplace is harder than ever.
• The key is targeting the customer as well as the advertising message.
• Despite the slowdown, builders see the Cape as a strong market over time because of retirees and baby boomers moving here.
• Despite less open land, construction will be strong because of Chapter 40b and trends toward clustered building and smart growth.
Capizzi: Ten years ago, not many people were advertising on the radio; now, seven or eight competitors do. It is more challenging than ever marketing your name and creating awareness. We are spending a lot more and getting whole lot less. Our messages are diluted. That’s why it is critical to maximize the relationship with every customer.
Davis: In our market, the housing stock is aging, which is great for our business model. To a certain extent, regardless of whether the homes are selling, we will be busy because we are established, well regarded and enjoy good name recognition. However, we do have to stay on our toes and continue to look forward.
Padgett: The key is to target your customer and then target the advertising.
Boy: There will be no wave of new buyers in the marketplace any time soon. But we will have customers because we live in a fortunate place. Even in the darkest days of 1988-1992, we managed to adapt to the market and survive. We need to get the current inventory problem behind us.
Davis: I think we’ll continue to grow at our modest pace that we’ve been working at. For us, we’re small enough that our ability to grow is more a function of our ability to effectively manage the additional work and staff than an economic one.
Boy: Chapter 40b will be used a lot. It will give us the density to compete with higher land prices. With speculative builders leaving the marketplace, I see land prices diminishing. I don’t see massive foreclosures as in the late ’80s, but I am banking on at least a year of challenging times.
Cole: There are a lot of retirees or soon-to-be-retired boomers who still want to live here. They are generally not dependent on interest rates or high inventories. That should help in the near term. The other market involves those who own homes that have matured and need some maintenance now. ‘Mike, Can you come look at the roof?’ This replacement work will be significant.
Boy: I agree. A lot of the housing inventory goes back to the ’60s to ’80s. It is tired. This will keep us busy – re-siding, new roofs, new windows. And sometimes, that will lead to more ambitious projects.
Davis: Permitting on Cape Cod is constantly getting more difficult. This is no small issue. When a company the size of mine needs a person nearly full-time to deal with permitting, it adds to the cost of construction. I can’t help but wonder if the general public is aware of just how restrictive and difficult the permitting process is on Cape Cod. In many ways, it’s not that it’s restrictive, but rather the processes that we must go through for the most simple projects is so cumbersome and time consuming that it really does add to the cost of remodeling.
Originally published in the Jan/Feb 2007 issue of Cape Business.
