Over the past ten years or so, we’ve seen a housing boom due to bank bailouts, low interest rates, and a new enthusiasm from young first-time homeowners re-embracing the American Dream of home ownership after a number of years of cynicism and doubt when the 2008 housing bubble burst. Lenders have been more willing to give out money, and buyers have been more trusting of the mortgage industry.
Unfortunately, all the signs are that the housing market is going to fall in the coming year, or at least see a big slowdown. This can have a major impact on the construction industry. Residential contractors who count on this market to stay afloat and successful will need to explore other options, the most obvious of which will be transitioning to commercial construction.
The problem is that the commercial construction industry is already crowded and competitive, and more entries will make it harder for all around. Let’s take a look at what’s going on with the residential construction industry and what the slowing housing market means for commercial construction.
Why the Housing Market Is Slowing Down
At this point it’s no secret that the housing market is slowing down. What nobody wants to hear, however, is that it looks like it’s only going to continue into the near future. At the end of 2018, the market shifted into low gear, with appreciation in value of homes expected to slow from a high point of around 7 percent annually, to 3 percent or 4 percent annually.Why is this happening? There are three reasons, according to Goldman-Sachs. First, mortgage rates have increased significantly over the past year or two, which makes homes less affordable. Exacerbating the problem is the fact that property values are appreciating faster than income, which means fewer people can afford the prices, especially at higher interest rates. Finally, the new tax law made it less attractive to own a home because homeowners get fewer tax benefits from owning property, which is driving many back to renting.
A Crisis or Just a Slowdown?
Since late 2016, the housing market has boomed to higher than its pre-crash values, rising to record highs. Some analysts are predicting doom and gloom, claiming that the current market conditions remind them of pre-bubble bursting. Most, however, are cautioning buyers and investors not to panic. Most consider what is happening to be a natural correction of the market and that home values will achieve what Goldman-Sachs calls “a soft landing,” with the national average continuing to appreciate regularly.
Part of the reason for this, however, is that residential construction is slowing down. With the S&P Homebuilding Index down 21 percent, residential construction companies are feeling the pinch in a big way. Freddie Mac’s prediction is that home sales in total will be fewer this year than last year, though just slightly, despite the economy booming by all indications. This marks the first time in eight years that this has happened, and it’s having a marked effect on construction companies.
Commercial Construction Trends
With these conditions in place, many residential construction companies are looking at commercial construction as a potential shift to continue making ends meet. A number of telling trends can be expected in the commercial market this year, some of which will appeal to residential builders. For example, construction in senior housing communities is expected to see a boost, as these communities will be looking to upgrade facilities such as recreation centers, shopping and restaurant amenities.
Modular construction is another coming trend, a market that is expected to grow nearly 7 percent per year through 2023. These prefabricated units are showing up everywhere in the commercial market, and the newest, “stackable” ones can result in near-high-rise buildings.
The problem, however, is that commercial construction, overall, is expected to experience slower growth this year. A recent forecast put total construction increases at just over 4 percent this coming year, which is right around the predicted increase in home values. It is an increase, but the influx of new bidders in the form of residential companies shifting to commercial construction is likely to outstrip available jobs.
Concerns Moving Forward
Unemployment is at a relative low point right now, ranging right around 5 percent. Unfortunately, the current trade war with China, the uncertainty of our new trade agreement with Mexico, new tax approaches and the slowing housing market have combined to create a perfect storm of rising material costs and labor troubles. Currently there’s a labor shortage, with most firms (almost 80 percent) expecting to add jobs this year.
Still, as projects become scarcer and everything becomes more expensive, we could be seeing a downturn in available jobs as well. As it stands, the Bureau of Labor Statistics reports that average hourly wages for construction workers only saw an increase of 3.86 percent in 2018, which doesn’t keep pace with the cost of living.
Finally, there’s the question of infrastructure funding by the government. Contractors continue to hope for a comprehensive spending plan for infrastructure that will allow the repair and upgrade of our crumbling national infrastructure. The House of Representatives says it will be a major agenda item, and the White House seems to agree — it’s one of the few areas that seems to be a bipartisan priority. Unfortunately, a specific agreement on such a plan is still a long way off.
How to Grow a Construction Company in this Climate
The question, then, is how can one grow a residential construction company in such an uncertain climate? Growth is essential, not just to success, but to the survival of any company, and as it stands, growth for many residential contractors may be uncertain. Keep in mind a number of key practices that will help you grow, even in these uncertain times, from reviewing your business practices to knowing how to attract funding.
Assess Your Business Practices
The way you operate is every bit as important as the jobs you bid. Slow times are an ideal opportunity to assess your business practices. Make sure you’re operating with the best possible systems, from bookkeeping to scheduling and communications, invoicing and project management. Take the time to look at your organization to assess your financial stability, availability of repeat customers, the number of referrals you’ve got and your turnover rate.
Look specifically for ways to improve, and don’t make excuses because your gut tells you that your existing systems work fine. It’s vital to step back and attempt to look at things honestly. No matter how long-term and comfortable your current practices might be, they very well may not be the best practices, either for the industry or for you as a company.
Funding is essential to any business, and smaller construction companies constantly have problems with cash flow. You’ll need to find the right ways to fund your business, from investors to the right lines of credit, loans and overdraft protection. The more stable your funding, the better able you’ll be to complete jobs, which will improve your reputation and will result in you being able to secure higher levels of surety bonds, which allow you to bid on bigger jobs.
Don’t Be Afraid of Smart Staff
If you have a staff member you think is smarter than you, or you have the opportunity to hire someone brilliant, don’t view them as a threat to you. Don’t shy away, and don’t resolve to keep them in their proper place. If they’re smart, they’re an asset. The smarter and more talented your staff are, the better able they’ll be to take on greater challenges, and the better able they’ll be to work without constant supervision. An intelligent and adept employee is worth their weight in gold.
Breaking into Commercial Construction
Of course, the goal for many residential companies in the coming slowdown is to break into the commercial construction business. The first step in this process is to know what you don’t know. This may seem like a non-sequitur, but you’ll find that commercial construction has a very different set of requirements and best practices than residential. You should begin by creating a business plan, just as if you were starting a new business.
Do your homework and do your research. Understand that you’re going to have some learning to do, and use the business plan as a template for both that learning and for securing the financing you’ll need to move forward.
Having the Right Legal and Financial Help
You’ll need a great business attorney and a great CPA in your corner. The ones you currently use may serve perfectly if they also have experience handling commercial jobs, but if they are focused strictly on the residential sector, you should consider hiring professionals that work in commercial jobs as well. The additional cost will pay for itself when the time comes to understand the finances and legalities of the commercial contracting industry.
Hire New Employees
If your current staff are all seasoned experts in residential construction, there’s no reason to let them go. You do need, however, to find staff that have experience and expertise in the commercial contracting business so that you can hit the ground running when you secure your first job.
It’s not a matter of just hiring experienced commercial contractors, either; you’ll need to understand that they are experienced experts and treat them as such. Listen to them when they point out issues like best practices, safety precautions and policy. Give them their due attention. After all, there’s a reason you brought on this new staff.
Finding Jobs to Bid
Of course, the big hurdle is finding that first job upon which to bid. This can be a daunting prospect. You’re suddenly dealing with a wealth of issues, people and details you may not have had to face before, including high-dollar clients who don’t have an eye for detail and offer up impossible demands with no willingness to hear a counter, architects and engineers, and ideas like liquidated damages.
When you’re doing residential work, most of your jobs come from personal referrals, your online presence, local advertising, and contacts in the industry. While all of these are valid for commercial jobs as well, you’ll want to expand your reach. Look at and learn to use reporting services like Government Bids, Construction Market Data, BidClerk, F.W. Dodge, and others.
Contact local construction organizations like the Associated Builders & Contractors or Associated General Contractors chapters in your municipality. If you’re not already a member of these organizations, join up. They sometimes will sponsor planning rooms where you can see and review specifications for upcoming projects.
Dealing With Architects and Engineers
Chances are, as a residential company, you haven’t had to deal in detail with engineers or architects. That won’t be the case with a commercial project. In some cases, you might get a bid package straight from the engineering or architectural firm, and they could be very selective in their distribution. These jobs are much bigger and more intricate than home building, and the people behind their design want to be closely involved every step of the way.
In addition, the vast majority of jurisdictions in the United States require any plans for commercial construction to be approved, stamped and sealed by engineers or architects (sometimes both). This is a requirement for getting a building permit, in fact. So you’ll need to increase your level of detail orientation and your ability to work closely with designers who, in many cases, may work theoretically as opposed to practically.
Go to Trade Shows
If you don’t attend trade shows, now is the time to start. Attending the larger trade shows will allow you to gain a wealth of experience, knowledge and industry contacts. It’s time that is very well spent. You’ll not only learn things you never knew about the industry, you’ll have the chance to shake hands with potential clients, grow your network and find better jobs right out of the gate.
Making the Transition
As you make the transition, it can help to start small and build, just as with any aspect of your contracting business. Start with those projects you’re comfortable tackling and don’t rush to get outside your comfort zone right away. Get adept at reading commercial specifications and blueprints. It’s a different ball game than residential construction.
Get to know the task sequence on a commercial project, which can change from job to job. Learn and implement commercial project best practices for safety procedures. Don’t be afraid to outsource things you’re not expert in, like commercial framing, hardware and even doors. As with any job, commercial construction is a factor of expertise. The more you learn, the better off you’ll be.
For example, something as small as the kind of fasteners you use for doors can be very different in a commercial job than in a residential one. Be aware of these differences and be prepared to implement them. Above all else, engage in the highest level of risk management, and that means the correct insurance and the right surety bonding for your company.
The Right Surety Bonding
When you get into commercial work, eventually you’ll probably bid on a government job, which means dealing with the Miller Act and Little Miller Act issues. You may never have even heard of these, but in short, they require you to carry a minimum value of performance and payment bonds based on the amount of the job you’re bidding.
Bonding itself will be costlier for commercial jobs, as the jobs themselves tend to be of a higher dollar value than residential ones do. There’s more at stake in these projects, and the entire industry can be more volatile. You’re dealing with business leaders or government entities who make huge investments, and they want to be sure their investments are safe.
In some cases, it can take a lot of work and building from the smallest jobs up before you get the reputation for reliability that many surety companies will consider. You’ll also need to understand the various kinds of surety bond, what they mean and which projects require them to move forward. Fortunately, there are those who specialize in helping small businesses get the bonding they need to make the transition to larger jobs.
National Surety Services, Inc.
If you’re a small or medium-sized construction company looking to make the transition into commercial construction, be it as a temporary means of remaining solvent in a slowing market, or as a permanent way to grow your business, NSSI can help. We understand how vital it is to get the bonding you need, as well as how difficult it can be to secure that bonding for many small businesses.
We value our clients and their success, and for almost a quarter century we’ve been dedicated to helping you get the capacity to bid on the big jobs that will enable you to find the success you need. We offer bonding programs for contractors of all sizes, from small companies who generate less than $5 million per year to those who generate $100 million per year and beyond.
We even offer a fast and easy way to apply for the SBA surety program, which will allow qualified small businesses to bid on projects of up to $6.5 million in value. We do encourage all contractors, regardless of what size your company is, to contact us directly for a consultation before beginning the process of applying for your bonds. This will allow us to get to know you and your needs and guide you on the correct path.
No matter what your surety bonding needs might be, National Surety Services, Inc., is here to help. Our success as a company is based entirely on your success as a company, and we will work to be a valued partner in building that success. Get in touch with us for more information and a consultation today!