Economic Outlook 2006

The rural building industry mirrored the nation as a whole in 2005, doing a little dance that left things the same in December as they’d started in January: two steps forward, two steps back. Without a clear-cut rise in the national economic tide to raise all ships, and without a terrorism- or war-induced tragedy to shake consumers’ confidence, most builders’ and suppliers’ fates were tied to local trends and business strategies.

For its annual economic outlook, Rural Builder editors contacted some of their most reliable sources for their views of the year just ended and the year ahead, and what we heard back from more than 50 contractors and suppliers could best be described as a mixed bag. “This year had many more ups and downs than usual,” says Mike Dunipace of Dunipace Buildings in Bowling Green, Ohio. “We were almost out of work in June and again in September, but right now (in December) we have at least 10 weeks of work ahead. But business is pretty close to typical, if it is averaged out.”

Different strokes for different folks

Catalysts for success were different for everyone. For instance, National Barn Company of Fort Gibson, Okla., found out that less could be more by changing the type of building it emphasized. “We completed 20 percent less buildings in 2005 than in 2004, but we increased our sales volume by 10 percent,” says National president Brian Keane. “We are building more higher-end custom buildings and homes this year, an internal marketing decision, not because of external economic forces.”

Lakeside Systems of New Holstein, Wis., saw business conditions improve in 2005. “I think this has a lot to do with steady milk prices,” says Lakeside’s Tim Steffes. “Last year was a year of more commercial work. This year has been a year of more ag work.”

Out in Kalispell, Mont., Swank Enterprises set new records with its sales volume. Growth in Montana’s Flathead Valley and the city of Kalispell helped, but so did Uncle Sam. “Governmental spending on national parks, veteran facilities, and education gave us a considerable boost,” says Swank’s Jim Lake.

Not all builders reported banner years. MPB Builders in Ripon, Wis., saw similar results in 2005 as in 2004. “And keep in mind that 2004 was not a barn burner,” says MPB’s Doyle Pokorny. “Some areas were up and some down. Agricultural projects were up and commercial was way down. The year was balanced.”

Hansen Pole Buildings of Browns Valley, Minn., saw an 8 percent decrease in revenue in 2005 and number of buildings sold. “Given the increase in material costs over the past 12 months, this means our average building size/features combination decreased about 20 percent from the year prior — fewer large buildings,” says Hansen’s Mike Momb. “I would attribute this to several factors, especially inflation in the cost of materials like steel roofing and siding. We have recently made a change in primary steel suppliers, due to pricing — the vendor we had been using had raised prices over 35 percent in 11 months! We lose credibility with our customers when we announce yet another steel price hike when the public’s perception is steel prices have softened over the same time frame.”

Northwoods Custom Homes in Elk River, Minn., also experienced some slowdown in sales in 2005. “Both years have been slow, but I would have to say that 2005 was worse for us as far as retail buyers go,” says Greg Holst. “I think that the economy has been unstable. The buyers in our price point, second- and third-time homebuyers, have just not been there.”

That may be true for custom homebuyers, but not so for customers of Perka Building Frames. Perka’s Martial Thevenot reports better results in 2005 than in 2004, mainly attributable to the company’s positioning for growth regardless of the economy. But he also saw a lightening of the national mood. “There seems to have been a lowering of the ‘fear factor’ among us, at least in regard to terrorism, which has distracted people from investing,” he says.

Companies that have been around a long time can typically rely on repeat customers for business, as was the case for California builder Bob Dorazio. “From what we hear, everyone is very busy,” he says. “Our baseline is the existing home repair and remodel business, and the commercial and government sector have been reasonably busy.”

Young businesses also found their way in 2005. Zach Sobaski started Eastern Iowa Buildings in Fairfax, Iowa, in the fall of 2003, and saw his sales double in 2005. He attributes the increase to hooking up with Lester Buildings, but also to the sort of leads that can only be generated by having completed projects in place. “I relied heavily on Yellow Pages advertising and jobsite signs in my first few years,” he says. “I now have a good flow of leads coming in, and a lot are from word of mouth. Several really good leads per month come from Lester’s Web site and their new online pricing system.”

Another young company, Dixie Building Systems, grew by controlling more of its work in 2005. “Last year, I did a lot of sub labor for other contractors, and not one of those projects started on time,” says Kentucky-based Lee. “This year I’ve done more projects on my own, although I have still provided labor on some larger projects from South Carolina to Atlanta to Chicago.”

Conversely, Six J’s Construction, a Minnesota installer of structural insulated panels and insulating concrete forms, found success with the opposite approach. “I believe that the installer approach versus the builder approach might have been less threatening,” says Jerry Olejar, who also credits better marketing and more educated consumers.

Virginia Frame Builders & Supply followed up an exceptional 2004 with another good year, which Larry Wills attributes to diversification. “Our continued attempt to diversify and reach into different markets is maintaining our growth,” he says. “Our projects ranged from the usual farm machinery and hay storages to dairy and equine structures to winery projects.

On the commercial side we have worked on warehouse and office expansions, grocery stores, even a golf course. On the residential side, detached accessory buildings, workshops, and garages continue to be in demand.”

Evil sisters

The events that carried the most impact in 2005 were undoubtedly hurricanes Katrina and Rita. The two category-five hurricanes took turns ravaging the Gulf Coast region in late summer/early autumn, and led to catastrophic destruction and chaos in New Orleans. While the focus of the hurricanes’ aftermath has been on resurrecting the Big Easy and other larger cities like Biloxi, Miss., rural builders will have an opportunity to participate in the rebuilding process.

After all, a similar template was set a year earlier. Remember the four hurricanes that hit Florida in 2004? Lucas Construction and Development of Vero Beach, Fla., saw a substantial up-tick in business once permits went through. “The hidden blessing of the storms was the opportunity to grow fairly quickly,” he says.

Energy Panel Structures found a hidden blessing following Katrina, partnering with the Federal Emergency Management Agency to provide 250 houses for temporary and long-term housing. National Barn Company also found a silver lining, as several of its Mississippi customers expressed to Keane delight in their buildings’ performance in the wake of Katrina.

But how much did the hurricanes really affect the rural building industry? Not as much as people may think, says Lee. “More wind blew from the reporters than from the storms!” he says. Still, the hurricanes did affect consumers’ moods and building material prices and availability.

“After the hurricane, we sold three months’ worth of projects in three weeks,” says Pokorny. “People came to us and said they wanted to beat the increases or material shortages.” Steffes also reports that a few customers rushed to lock in prices after the hurricanes, but not as many as he thought.

On the other hand, Detlef Juerss of Steinbau Konstruktion in Pleasant Valley, N.Y., had a customer back out of a sale just after Katrina, and has seen lingering skepticism. “Some people are sitting and waiting to see how the economy will fare during the next few months,” he says.

Most builders surveyed, however, saw neither a mad rush to their door to lock down contracts nor a bunch of Chicken Littles stashing money under their mattresses. What they did see was price increases and/or shortages of various building materials: drywall, plywood/OSB, steel, insulation, PVC pipe, etc. “It kicked our butts,” says Virginia builder John Fuog, who says material prices went up close to 20 percent in some cases.

Some builders expect the situation to worsen as the rebuilding effort kicks into high gear. “You name the material, and it will be having price increases or shortages,” says Steve Keith of Stockade Buildings. To beat any further shortages and price increases, in early September MPB Builders stocked up on inventory, but saw prices for some of those items recede from the level they had paid, lumber in particular. But Pokorny says some items did go up and are still going up: doors, windows, insulation, steel.

Doug Thomsen of Thomsen Construction & Supply in Lawrence, Mich., says things are back to normal after a brief blip following the hurricanes. “There were a lot of price increases from suppliers after the storms, but some like OSB have come back down,” he says. “As far as getting items, it is normal lead times.”

The one annoyance everyone can agree on is higher fuel prices. Builders feel the pain at the pump twice: once when filling up their own crews’ trucks, and again when seeing fuel surcharges on bills from their suppliers. On the bright side, no business can escape the effects of high gas prices, and the extra expenses are not difficult to account for.

Beyond their impact on material and fuel prices and availability, the hurricanes will likely leave behind stricter building codes for Gulf Coast states. Louisiana recently adopted the International Codes, which will require buildings along the coast to withstand winds of up to 150 mph.

Also, federal funding for the rebuilding effort will divert money from other projects nationwide. Lake says Swank Enterprises had high hopes for a strong building program in Yellowstone and Glacier National Parks, but that seems to be on hold until the hurricane areas get what they need.

Similar to the forecast for terrorism in the wake of 9/11, experts say the next catastrophic atmospheric event is a matter of when, not if. Perhaps that will be the best indicator of what our country has learned about dealing with natural disasters. “I am not sure we can tolerate too many more disasters without affecting the economy,” says Juerss.

Interest in rates

The big news in the financial world in 2005 centered around the retirement of Alan Greenspan, who announced his retirement as Federal Reserve chairman.

During his 18-year tenure, Greenspan became an unlikely rock star economist, creating interest among the masses in monetary policy, a most unsexy topic. In the last five years, Greenspan attracted widespread attention for first slashing its benchmark interest rate to 1 percent to spur growth during the recession of 2001-02, then gradually raising the rate over the past year, to 4.25 percent, as the U.S. economy strengthened.

Future rate increases or decreases will be determined by Ben Bernanke, Greenspan’s successor. Reading into minutes from the Fed’s last meeting, it is unclear how much higher rates will climb; some observers predict just one more increase, others as many as three. David Seiders, chief economist for the National Association of Home Builders, says tightening of monetary policy should push 30-year, fixed-rate mortgages to about 6.75 percent by the third quarter, and an average of about 6.6 percent for the year as a whole.

What will this mean to builders? “Future interest rate increases and inflation, either already realized and promised or expected increases, will affect our volume as soon as the second or third quarter of 2006,” says Keith.

Higher interest rates are expected to help slow down the housing market, which is showing signs of easing off its red-hot pace of the past few years. But bad news for homebuilders could mean good news for builders who erect accessory structures. “Rising interest rates should be good for the post-frame industry, as more people will then improve upon what they own now, rather than looking for quick profit-taking from owning for the short term,” says Momb. “I’d look toward the residential arena to be the strongest for the post-frame industry in 2006.”

Holst points out that the new creative mortgage products available for homebuyers will help ease a housing downturn for builders. Conversely, these mortgages have opened homeownership to higher-risk customers. “The 30- to 40-year-old whiz kids have taken out mortgages paying only interest,” says Steve Grodsky of Gotham Construction. “When the interest rates climb the whiz kids will walk away from the loans, leaving many banks with property.”

Higher interest rates can bring many positive effects for rural builders. For instance, salespeople can spend less time doting on marginal prospects. “As rates go up the market narrows, but on the other hand, the buyers that are out there are real prospects, not just ‘tire kickers,’” says Valparaiso, Ind., builder Michael Lemke. Also, the prospect of rising interest rates can help motivate prospects to lock in contracts.

Then again, people who buy low-rise buildings often are financially stable enough that they do not need to finance their purchases. “Many Baby Boomers will spend money even if the economy gets a little weak, simply because they are not in a position that is loan-dependent,” says Gary Niemela of Skandia (Mich.) Truss.

Says New York builder Bob Brisky: “The building business does not sell an impulse product that one would buy like an ice cream cone. A lot of thought usually precedes the construction of a building. Financing is only one factor. Real estate taxes are probably a larger factor than the interest rates of the monies used to finance the building.”

In the end, a successful building business will have programs in place to ensure solid results no matter the economic conditions at large. Take Web Steel Buildings, which president Rob Boaz says experienced a 20 percent increase in revenue in 2005. “Conventional economic wisdom says increased rates don’t bode well for businesses like ours,” he says. “But we try not to look for people, things, or events to blame for downturns. We try to find ways to prosper in spite of them.”

Crystal ball

So where do we go from here? Many of the factors that may have slowed the rural building industry in the past few years seem to have cleared up: no presidential election, no impending new war (although growing dissatisfaction with our military presence in Iraq may drag down the national mood), no recession. Higher interest rates are coming, another natural disaster is almost a certainty, and large issues like Social Security and Medicare loom, unresolved.

“2006 may bring about an awareness that things have already begun to transpire at a different level,” says Dorazio. “Some evidence can be seen in the housing sales backlog, as well as some exceptionally low bids on governmental jobs in the last three or four months. If people can make more money, they will pay more money.”

They may have to, according to Brisky. “Rising steel costs were not a factor last year as they were the year before, and lumber was very affordable,” he says. “I think this will change this year. I would expect that the South will absorb many building materials, and I can only hope the housing market cools off a little, freeing up some much-needed materials that are common to the housing and post-frame building industries. Steel is supposed to be in tight supply again in the first quarter, so I expect a small price increase in our metal products, hardware, doors, truss plates, nails, roofing, and siding.”

Still, most builders surveyed are optimistic about at least certain market segments, and are seeing it in their early 2006 sales. “I have seen a lot more interest this winter in people thinking about building, where in the past once winter and snow set in it always seemed as though everyone forgot about building plans until spring,” says Sobaski. “As of late December, we are booking into March and we are working on selling several nice projects that are set to start as soon as spring arrives.”

Markets builders are bullish about include:

– Residential remodeling. Minnesota builder Kevin McCormick does work with average-income families that cannot afford new homes, but are interested in updating their current homes.

– Large hobby buildings. “The suburban market is my bread and butter — retirees in need of a home for their toys,” says South Dakota builder Jon Gustad, who is also optimistic about …

– Commercial buildings. Some builders see no growth here, but more than usual do. “I have heard rumors that housing and commercial building is slowing some here, but not so with our business,” says Pea Ridge, Ark., builder Bill Myrick.

– Ag buildings. This sector is driven by commodity prices, which have been favorable.

– Equestrian. There’s plenty of work building horse barns and riding arenas for city transplants, who are typically high-end customers not affected by interest rates.

– Energy-efficient buildings. Maybe not a traditional market category, per se, but it is worth noting the impact green building is having on the construction industry. It’s been written on these pages before, but bears repeating, especially for those involved in the commercial market: green building is not just for hippies, it’s for any customer who would like lower heating and cooling bills. Look into it.

Things appear to be in place for a good year, with solid overall economic growth providing enough stimulus for a well-run rural building company.

“We just need some stability and some balance,” says Holst. “It’s anybody’s guess. We are a very headline-driven society — pray for good news!”

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