Economic outlook: Partly cloudy

It seems that, in general, the American public is not completely satisfied with the state of the union as it currently sits. Perhaps the best reflection of the national mood came in November, when voters swept incumbent Republicans out of power in both the House of Representatives and the Senate, despite few concrete suggestions offered by their new Democratic replacements.

This is why, despite economic conditions that remain generally favorable, the economic prognosis for the rural building industry could be categorized in two words: “Yeah, but …”Economy-Brown.jpg
“War, taxes, interest rates — people are afraid to spend money,” says Virgil Hartje of Hartje Lumber in La Valle, Wis.

For its annual economic outlook, Rural Builder’s editors contacted some of their most reliable sources for their views of the year just ended and the year ahead, and heard back from about 50 builders. The consensus was that things are going fairly well right now, very well in some cases, but that strength does not reach across all market sectors. Light commercial, horse barns, and various other ag markets are looking good. But a slumping housing market figures to have a negative impact on other building disciplines, affecting everything from consumer sentiment to labor supply.

A mixed bagEconomy-Hanke2.jpg
Not all builders are tempered in their assessment of 2006. Take Chris Hanke of Blue Valley Builders in Faribault, Minn. Sales for Blue Valley were up 36 percent in 2006, thanks to a strong local demand for commercial buildings. Hanke says his company also has fared well in the smaller building arena. “Ag buildings and personal use buildings are more competitive now than they have been in the last 10 years,” he says. “Consumers are shopping more vendors so we have to be more competitive to win these jobs.”

Esh Quality Structures of Richmond, Kan., saw a 150 percent increase in sales, the result of hiring two new salesmen, bringing in several new crews, and expanding into a new territory. “The building segment that is strongest for us this year is, as always, residential garages,” says Reuben Esh. “This seems to be about 75 percent of our business. The horse market increased for us in 2006 as well.”

He may not have seen a 150 percent increase last year, but Pennsylvania builder Eddie Smith considers himself the luckiest guy around. “We’ve been real busy, and probably turned down $1 million worth of work,” he says.

In Fairfax, Iowa, Zach Sobaski’s Eastern Iowa Buildings has seen recent high profile projects create positive word of mouth and a steady stream of referrals. In Shelbyville, Ky., new building features and new selling approaches had Randy Kirts and Blitz Builders up for the year. Similarly, Craig LaDuke says his Marysville, Mich.-based LaDuke Construction saw increased sales because, “I stepped up to the plate with better quality staff in the field and in the office. Plus, I have been delegating more by letting the great people I have do their job.” Gerry Richardson’s Hanover Building Systems in Abbottstown, Pa., has evolved into doing mostly larger, turnkey operations, and sales were up 15 percent.

There were also builders who realized notable downturns in 2006. Several happen to be located in Missouri, where “show me” turned out to be an apt state nickname. “With the economy and uncertainty in the Middle East, people seemed to prefer to wait and see what happens,” says one. “Business picked up a little in the last quarter, though it is not clear what the logic may be for that.”Economy-Hanke1.jpg

One Minnesota home builder says 2006 was worse than 2005 — which also stunk. “We had to enforce a couple of layoffs as well as some reduced hours for some of our staff,” he says. “We also cut back our margins, even on customs and presolds. There just isn’t anybody wanting to sign.”

That is also true for builders in Michigan, where the much-publicized troubles in the domestic auto industry have potential customers feeling the pinch. Michigan’s unemployment rate is the highest in the country, 6.9 percent, well above the historically-low national average of 4.3 percent.

Some builders are seeing competitors deal with tough times the wrong way — by slashing prices. “For some reason, most building companies and contractors that were slow seem to think that selling projects for little or nothing is the thing to do,” says Tim Schley of Schley Buildings in Marion, Wis. “Little do they know they are cutting their own throats!”
As might be expected, most builders surveyed fell somewhere in between the two extremes. Sales were marginally higher or similar in 2006 compared to 2005, but the latter was no banner year.

“Business in 2006 was a little better than 2005,” says Dennis Hoyt of Hoyt Construction in Three Rivers, Mich. “That isn’t saying much considering business has been in a downward spiral since 2003.”

California builder Bob Dorazio says business stayed steady in 2006, but “we were very nervous about the rapid escalation in prices for concrete, diesel fuel, and copper materials. We hope our business remains the same due to our customer base.”

In Fort Gibson, Okla., National Barn saw a similar sales volume in 2006, but reached it in a different way. “The quarterly sales were quite different from previous years,” says Brian Keane. “We had a very strong first and second quarter, but the third quarter was below average.”

Smooth sailing has been hard to come by lately. Most builders have had at least one noticeably slow period in the past year.

Peyton, Colo., builder Tom Brown is generally booked four to six months out, but things were slow throughout much of the latter portion of 2006. Brown even alerted his crews to start looking for winter work. Then, “in a two-week period it just busted loose, and we’re booked into spring,” Brown says.

Walters Buildings vice president of sales and marketing Brent Henschel also noticed a fall drop-off. “It seems companies are promoting winter discounts deeper into the holiday season this year, which leads me to believe there is still winter work to book up across the industry,” Henschel said in early December.

MPB Builders in Ripon, Wis., saw this happening first hand. “Projects for this time of the year should be scheduling for February or later, but our construction time is very short,” Doyle Pokorny said in December. “This fall, early winter sales were very slow and few between.”

Home building
Lately, it has been hard to avoid news regarding the slumping home building market. After years of unfettered growth, housing is slowing down, reflected in the value of existing real estate and the slowdown in housing starts. Like politics, real estate is a local concern, and the downturn has hit selected overheated areas harder than others. But with housing starts nationwide down 25 percent from 2005, it is hard not to see a larger trend, and wonder if the slump has bottomed out or if it has further to fall. Housing economists say home sales bottomed out near the end of 2006, and expect a modest upswing starting this spring.Economy-LaDuke.jpg

What does this mean for rural builders not directly involved in home building? On the plus side, building materials like lumber have gone down in price, customers are focusing more on improving their own property rather than looking to build new homes, and labor is not as scarce as usual. On the downside, some out-of-work home builders are taking up post-frame building and not doing it well, and other customers are waiting for the worst of the downturn to be over before they invest any more in real estate.

In Winsted, Minn., RAM Buildings has been affected by the housing slump. “We have seen a more competitive market because there are residential contractors, and their subcontractors, looking for work,” says Craig Jackson. “They are trying to get work in any area the can, and are very aggressive in their pricing. It’s unfortunate that it’s happening, because we’ve seen many cases where a substandard building was constructed because the residential contractor did not know the proper construction techniques for a post-frame building. At the same time, we have identified a few subcontractors that do know how to construct our buildings the right way, and they have given us more options to be competitive in a tight marketplace.”

At Walters Buildings, Henschel also has seen home builders looking to post-frame for work. “With our dealer recruitment, I’ve seen some spike in interest of log home builders and general contractors who want to diversify into post-frame,” he says. “The residential slowdown will make labor more available. One of our recent salesman hires was a young carpenter that ran his own crew and built for a bunch of home builders. When his work dried up, he went to work with us in post-frame.”

Post-frame buildings are significantly different from a design and construction standpoint than traditional stick-frame homes, so it is not surprising that some of these home builders on hiatus are struggling initially to do things the right way. Glen Thomsen of Thomsen Construction & Supply in Lawrence, Mich., has seen recent construction work that has made him cringe. “We are seeing more people buying kits from lumberyards and the big box stores, then they have house builders or their laid-off employees build the building,” he says. “This is not necessarily good for our industry. Plans that are generally supplied are not complete, such as connection requirements, type of fasteners used at connections, etc. Footings have not been sized based on soil-bearing capacity or column reaction loads, geographical roof loads have not been properly established.Economy-Thomsen.jpg

“In many cases the truss loading may be correct, but the columns, roof support carriers, connections, and footings have not been designed to match the roof truss loading. Several of the so-called kit suppliers are selling treated deck lumber that is labeled as ‘above ground’ for their treated skirtboards, when skirtboards do in most cases come in contact with the ground. This is not good for our industry. In the long term, we will all be affected by the possible failure down the road.”

In Vermont, Bob Tortorice of Building Alternatives spent most of last year building a house for himself, a mix of energy efficient technologies like insulating concrete forms and structural insulated panels. While his business plan was different than usual, he still felt the sting of the housing slump. “We are trying to sell our old house, with no luck after one year,” he says. “Even with two home shows passed, we are finding fewer talkers and even fewer appointments for follow-up in-depth discussions. They are all waiting for the absolute lowest price for existing homes. They are waiting for an announcement that says, ‘Home sales have reached their lowest price and sales are on the up rise.’”

Nigel Hawman, a Morton builder in Jasper, Ind., sees opportunity in home buyers’ reluctance. “If people are not buying new homes, they may be inclined to add storage space to their existing homes,” he says. “There is a nice market for the new home buyer who has a big lot and looks forward to that out building getaway.”

Upstate New York builder Bob Brisky says the housing downturn has helped Fingerlakes Construction. “The lumber market is soft, fiberglass shingles and insulation are more available, plywood is reasonable if not cheap, steel prices have stabilized, and labor is more available than it has been in a long time,” he says. “I think the housing troubles provide economic opportunities to the post-frame builder. People may not be building new houses, but perhaps they are fixing the ones they have and/or building out buildings, which are usually post-frame. The only problem I fear is the newspaper reports it like the end of the world is near. I think they will scare the upstate New York region into fears that a recession is near, and that will hamper growth and the building business overall.”

Other factors
Many housing and building markets have remained strong because of continued migration. Tom Brown says the Colorado Springs area has picked up many technology businesses relocating from California’s Silicon Valley, as well as people moving from the East Coast. More people means more potential customers, but also more potential headaches. “We just finished a barn in a new development, and there’s a gal from California on the architectural committee who doesn’t like horses,” Brown says. “She put the word out that you can’t build a barn and put horses on the roadside.”

In Oregon, Tom Buckingham also has seen an influx of Californians looking to escape sky-high housing costs and get more bang for their buck. Luckily for him, these transplants have more money to spend when they arrive. “Ten years ago a very large home was 10,000 square feet, and now that is commonplace,” he says. “To accommodate the larger homes, people are moving to rural acreages.”

In Pennsylvania, Richardson says builders are benefiting from favorable tax laws in relation to neighboring states. “We’re close to the Maryland border, and there is an influx of Maryland people who are retiring and moving to Pennsylvania because we don’t tax pensions up here,” he says. “People are selling their homes for $400,000 in Maryland and downsizing into a $200,000 home in Pennsylvania. There is not as much of that inventory around, so the housing industry in this part of the country is in pretty good shape.”Economy-Nissley.jpg

A year ago at this time, a projected rise in interest rates was on the mind of many builders, but even with an increase, rates remain low by historical standards. But rates are still on many buyers’ minds. “Customers looking to finance their project with home equity have shown concern with regards to interest rates,” says Keane. “Some choose not to continue with their projects until the interest rates were lowered. We construct many homes and have seen an increase in the number of inquiries, but the percentage that turned into contracts is below normal.”

The farm report
Rural building’s roots lie in the agricultural industry, and contrary to years past, conditions on that front seem favorable. “The farm market appears to be picking up due to the increase in grain prices and the expansion of ethanol plants, throughout Nebraska anyway,” says Dick McInturf of Chief Industries. “These ethanol plants and the higher grain prices tend to put more money in the producers’ pockets, which translates into potential increased building sales. We have seen in isolated regions expansion of turkey grower facilities and we have had a spurt of increased sales there in buildings that are 300 to 600 feet long, mostly 60 feet wide. A lot of small to mid-sized commercial businesses are also expanding.”

In Shenandoah, Iowa, Gee Systems’ building operations struggled in 2006, but the company’s grain bin business was booming. “The joke was that I could give them a new building and they wouldn’t accept it,” says Kim Gee. “I could not talk them into the flat storage buildings. Flat storage does not work for most of my customers. They were still reeling from the increase in diesel prices from last year, so what little cash they had went to higher fuel prices and fertilizer.” A 50 million gallon ethanol plant is being built in Gee’s county, and farmers need storage for selling to the plant. “If ethanol is played the right way and Big Oil and the government don’t mess with it too much, it could work,” she says. “It is a law of supply and demand. As long as corn stays at $3.25 (a bushel), I think 2007 will be pretty good.”

Prices for certain crops also have Thomsen bullish in Michigan. “Grain prices are up, blueberries have been good for several years and seem to get better every year,” he says. “Other fruit such as apples and cherries seem to be on the decline.”

Things are not as sunny on the livestock front. “The dairy industry, along with crop farmers, will be a double-edged sword,” says Pokorny. “It was a good year for crops, with prices being higher, so crop farmers will have some income to spend on projects. But now the dairy industry will have to buy that expensive feed, which will be a larger expense for the dairy farmers, and milk prices are low. So the agricultural industry will be balanced between the crop and dairy.”

Brisky has seen the same trend in his region. “The dairy business has been slow because of the price of milk, and other types of large animal confinement buildings have been zoned out in our area,” he says. “We have seen an increased interest in horse barns, and that market seems strong.”

The horse barn market has been strong for many years now, and shows no signs of letting up. At King Construction in New Holland, Pa., ag sales in general and dairy building in particular are slumping, but the upturn in equestrian building has more than offset that slump. “High-end equestrian facilities just seem to keep on trucking along, and it seems like these people are not impacted by the overall economic factors like farmers and people building a two- or three-stall backyard barn are,” says Dan Nissley. “Equestrian building seems to be recession-proof; in the 20 years I’ve been involved in that industry the growth has been upward every year. I think a stock market meltdown would impact this segment of the business, but years ago when the stock market was in the tank these individuals were only a bit more cautious for a short period of time, because they felt it was better to pour money into property and buildings.”

Crystal ball
When asked to predict the near-term future of the rural building market, many builders chuckle and crack wise about their crystal ball being in the shop. Still, most offered up thoughtful, well-informed opinions on what 2007 will bring the industry.

In Fogelsville, Pa., Kistler Buildings recently became a producer for Perma-Column, and is using the concrete column in all of its buildings. Ken Kistler says this has opened up his post-frame buildings to a number of markets that would not have otherwise considered the technique before. “We will have greater exposure through all segments and we have just scratched the surface of a broader market share,” he says. “We look at an economic slowdown as a possible advantage in all segments, as we can produce more with less investment. Folks will be looking for economic solutions for their needs and we are there. I have always said big money always has money and we position ourselves to be in that market through strong referrals, reputation, and continual advertising presence, even when we have a more than sufficient backlog.”

Keane sees similar things from the big money folks. “I don’t think we’ll build as many small buildings in 2007,” he says. “It appears that many of the quote requests we are receiving are from people that have large sums of money, or have access to large sums of money, or are making investments in their business. We have seen a decline in the number of backyard hobby buildings over the past year and we believe this trend will continue.”

The majority of Cross Metal Buildings’ business is building self-storage facilities in Texas, Louisiana, and Florida. Maurice Ferrell is projecting 2007 sales to be at least triple those of 2006.

LaDuke expects the housing downturn to continue into the new year. “In 2007 I think the market for new construction will be slower than 2006 because of the excess of new and used homes on the market,” he says. “The customers who will be looking for their last house are still out there.”

Given his company’s slowdown in fall and early winter, Pokorny thinks 2007 will start slowly as well. “But if energy costs stay low or stable, maybe the commercial industry will pick up, and then so would the residential,” he says.

Valley Falls, Kan., builder John Hayworth is relatively new to the industry, but has a good handle on what this year looks like. “Cost and quality are customers’ most common concerns, so interest rates and materials costs will be the primary factors for ’07,” he says. “If there is growth opportunity for the coming year, my guess is light commercial. That is an area where we can compete with any building segment in both cost and quality.”

After a decent but unspectacular 2006, Wisconsin Wick builder Tom Jackson sees more of the same for 2007. “Even though new leads are coming in, people are hesitant to make a commitment, and I really don’t know why,” he says. “The dairy market seems to be holding and the commercial and light industrial projects are strong, especially around the Wisconsin Dells and Madison areas.”Economy-Nikkel.jpg

Things are not as strong in Michigan, where Steve Nikkel’s Orchard Construction does business. “In early 2007 we have a transmission repair facility going for permits, but the balance of the year is very questionable,” he says. “We are actively looking at expanding our area of work to other parts of the country that have healthy work environments. Our advertising budgets have been increased, and our website hopefully will add to our ability to draw new clients.”

Ralph Twellman of Bilt Rite Buildings is optimistic about the light commercial and higher-end suburban building market for his Ashland, Mo., company. “I have some nice projects in the planning stage,” he says.

John Fuog of Purcellville, Va., also sees promise in light commercial building for the coming year. “I am optimistic about 2007,” he says. “Our phone is still ringing and we are working every day, and have a good backlog of work.”

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