Retooling: After tough times, builders are ready to get busy
Friday, June 1, 2012
Building momentum: Positive signs for a recovering industry
By Christine Pratt, Business World writer
Are you ready right now to build something? If so, you may be luck.
In a cautious, recovering market where home builders and contractors are hungry for work, money is plentiful to qualifying borrowers. Prices can be much lower than expected.
“There’s a phenomenal amount of money in the system looking for a place to be loaned,” says Ken Martin, president of Cashmere Valley Bank. “A few years ago I would have told you that what we’re seeing now is an impossibility.”
Commercial loans across the lending spectrum have interest rates in the low 4-percent range, with home loans in the mid 3’s. Only a few years ago a rate in the 6-percent range would have been considered excellent, Martin said.
“Rates right now are 2.5 percent below great,” he said. “That money has never been cheaper. Every deal is aggressively looked at by multiple bankers. If it makes sense, they’re going to get the money.”
Jon Port, president of Real Homes, a spec- and custom-home builder, says low interest rates, combined with lower profit margins and land prices have made it possible to buy a brand new, lower-cost home for the price of an existing home built in the 1960s or 1970s.
Labor costs remain about the same, he says, but building-material costs have come down. A surplus of lots in area subdivisions that have gone bust during the recession have also helped lower the cost on land. But, basically, he says he has to charge less for the homes he builds.
The approximately 10 spec homes that his company is building around town sell for a minimum of about $170,000. He says that’s at least 20 percent lower than what they would have sold for 10 years ago.
“Spec” homes aren’t sold until after they’re built, compared to custom homes, which are built for a specific customer. “The market’s really good now for new construction, as long as it’s affordable,” Port said. “The builders who are suffering are the higher-end builders.”
On large, straight-forward industrial projects, the bidding climate is proving competitive.
The Port of Douglas County received 10 bids, including at least four from out of the region, to build the second phase of the its industrial park by Pangborn Memorial Airport.
The project includes extending a public road and installing water, electricity and high-speed fiber to add 36 more developable acres to the 70-acre park.
The contractor will also do some earth-moving and grading to make the sites more “shovel ready” for new tenants.
Lisa Parks, port director, said the $1.4 million low bid, submitted by Selland Construction of Wenatchee, was about 30 percent below the port’s engineer’s estimate for the project.
Even the highest bid of nearly $1.9 million was about 8 percent below, she said.
“My understanding from our engineers is that this is a good project. It’s a straight-forward, get in and get out,” Parks said. “The other thing is contractors need to have people working even if it means they aren’t making a huge amount. They have to have cash flow.”
On the private, commercial side of construction, mouth-watering interest rates haven’t necessarily been enough to coax a wary and hard-hit business sector to take on more debt for expansion or improvements.
In the wake of the deepest recession since the Great Depression, Martin says companies are still waiting for the most concrete sign of a recovering economy — increasing demand.
National news about the strengthening economy is not necessarily playing out across the business spectrum in North Central Washington, at least not yet.
Brian Nelson, developer of the Baker Flats Industrial Park and its sister park to the north, agrees.
“If you debt finance, you have to pay it back. There’s a greater awareness of that than there has been probably in my lifetime,” he said. “I think we’ve learned that you have to justify everything you do. People are more careful in what they do.”
Whether increased borrowing and investment will trigger demand or vice versa is a chicken-and-egg question, Martin says, but right now, its a borrower’s market.
“Rates right now are no hindrance to any commercial project,” he said.
Building business: Hard times, happy homeowners, hungry builders — who profits?
By Mike Irwin, Business World
Local contractor Vince Stimac, Sr., shrugs off the notion of “builder bargains,” those screaming deals offered during hard times by hungry contractors scrambling for building and remodeling jobs.
It’s not that they don’t exist. “It’s that they aren’t as common as everyone’s claiming,” he said. “And every job’s different — on some you profit, on some … well, not so much.”
Profit. It’s the key question facing builders today across Chelan and Douglas counties, construction ––insiders said last month, as change sweeps through an industry pummeled in recent years by recession, hard-to-get financing, out-of-area competition and rollercoaster costs.
Feeding the uncertainty, said experts, are rising consumer expectations for low-cost, high-quality work — all based on the assumption that competing contractors will dramatically slash costs to win projects and keep crews busy.
This works great, local builders agreed, if companies can bid smart, bid low, get the work and make it pay.
Otherwise, it becomes an unbalanced business model, they said, where the consumer often wins big while the builder earns too-thin profits or doesn’t break even.
Those reduced profits have resulted in a shakeout of local builders, said Randy Gold, owner of Gold Construction Inc. in Wenatchee. He estimated the number of contractors in the two-county area has fallen 30 to 40 percent in the last four years.
“Of course, some of those were already on the edge and just needed a push,” he said. “Others were opportunists, many of them from out of town, just here to make a quick buck and move on.”
Word on the street is that contractors in the last year have bid fiercely on custom homes and remodeling projects, with some homeowners reporting upwards of a dozen bids on a $15,000 kitchen remodel. True?
Maybe, said Stimac, if a contractor could put the squeeze on sub-contractors to offer discounted work and be part of the low bid process. “But my guess is that many of the bids on a project are all in the same ballpark” with a few dollars separating them, he added.
“No question that competing contractors means the consumer benefits during this slump,” said Marc Straub, executive officer of the North Central Home Builders Associaton. “Materials might be a little cheaper, wages might be a little less, interest rates are way, way down and project costs might come in lower than ever.”
But extremely low bids bring certain factors into question, said Straub.
For instance, licensed and bonded contractors can only bid so low, he said. Otherwise, they “hit the floor” and can’t bid lower without breaking certain state and federal laws and industry agreements governing wages, health insurance, and state Labor & Industry fees.
To cut those costs means trouble, said Straub. “Working under the table is never a good way to go. The consumer has no recourse if anything goes wrong” with a project.
Material costs are always in play, said Gold. The costs of, say, studs and plywood may be a dollar or two lower now, but they’re certain to rise as the building industry regains its footing.
“It’s actually kind of scary when you consider today’s low inventory, low mill capacity and the potential for skyrocketing costs if demand spikes for building products,” he said. “Prices could go through the roof.”
Another increasingly real problem in figuring costs, said Stimac, is the global economy itself. In past decades, the U.S. was a major supplier of raw materials. When U.S. production lagged or surged, the world economy and material costs rose or fell with it.
Now, he said, huge supplies of raw materials come from China, India and South America. “It’s become almost too complex to track,” he said. “Costs vary on factors out of our control.”
Another key factor to consider is financing, said both Straub and Gold. The consumer greatly benefits from historically low interest rates (hovering around 4 percent in mid-May), but only if they qualify.
“That’s the big and continuing challenge,” said Straub.
In the end, it all comes down to good work and good service to the consumer, said Gold. “That’s what builds a reputations and builds a business.”
Stimac agreed. Since 2008, straight through one of the worst downturns in history for the region’s construction industry, Stimac built more than 200 homes in the Wenatchee Valley. His crews continued to work through last winter in at least two local residential developments.
And his homes have sold almost as quickly as they were finished, most priced at $220,000 or lower.
“No secret to it,” said the East Wenatchee contractor. “Two words — ‘quality’ and ‘affordable’ — are what keep us going.”
National construction forecast flat for 2012
The 2012 forecast for the U.S. construction industry — including residential, commercial and public sector projects — isn’t awful, but it’s not great either.
The McGraw-Hill and Dodge Construction Outlook, an annual analysis of the building industry, predicts that construction starts will be near $412 billion, 4 percent less than the forecasted level for 2011.
Other findings for 2012:
• Single family housing will improve 10 percent in dollars, corresponding to a 7 percent increase in the number of units to 435,000. This total is low due to an excess supply of homes in foreclosure.
• Multifamily housing will rise 18 percent in dollars and 17 percent in units to continue its upward trend over the last few years.
• Commercial building will grow 8 percent. Warehouses and hotels will see the largest percentage increases, with remodeling and improvement for offices and stores more modest.
• The institutional building market will slip an additional 2 percent after falling 15 perent last year. Government budget cuts will continue to dampen school construction, and the uncertain economic environment will limit growth in healthcare facilities.
• Construction of manufacturing buildings will increase 4 percent, following the 35 percent gain in 2011, as the low value of the U.S. dollar continues to support export growth.
— Mike Irwin, Business World staff
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