New analysis of Qualified Remodeler’s Top 500 list shows that despite recent growth in the remodeling market, there are few indications of a trend toward consolidation.
Comprised mainly of small, local companies, the remodeling industry has seen enormous growth over the past decade. And the outlook for the next several years is equally strong. Which is why there has been more talk than ever about the industry’s potential for consolidation, where a greater percentage of the overall market is driven through a smaller number of top companies.
The Top 500 — firms with billings that start at $2 million — accounts for only 3.9 percent of the overall remodeling market. This is in stark contrast to the new-home construction market where nearly half of the $300 billion market is attributed to the largest 400 firms.
To Kermit Baker, director of the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies, all of the discussion about consolidation boils down to efficiencies. Are there inherent business benefits that will accrue to larger remodeling companies? If there are, consolidation is likely to occur over the long run. If not, the industry might change, but in different ways.
“There is some evidence that bigger firms have seen more growth and that larger firms have much larger billings, per employee than smaller firms, that they are able to achieve some efficiencies,” notes Baker. “So there are potential benefits to consolidation, which might point to more in the years ahead.”
Efficiencies aside there remains little current evidence of consolidation, says Baker, whose team studied current and historical data from the Top 500 as part of their study of remodeling consolidation.
“There are not really any traditional signs of consolidation,” says Baker, “of big firms buying up middle-sized firms, or even some organic growth among firms that is generating some leaders. In some industries you see increased share of activity among a smaller group of firms. There are no obvious signs of that in remodeling yet. There has been some growth in firms. There have been some losses of players. But it does not seem to be a dominant trend in the industry.”
Trend Toward ‘Specialization’
The Harvard analysis does indicate that some remodeling companies are making a choice to specialize in a clear remodeling niche. Among the largest 100 remodeling firms, 47 say they are specialty firms, focusing on everything from kitchens and baths, to roofing, siding, windows, basements and decks. Only 20 of the top 100 consider themselves “full-service” remodelers, and a dozen identify with the “design/build” tag.
“There does seem to be some movement toward specialization. And you can certainly imagine that specialization serves some of the same benefits as consolidation,” says Baker. “If I have a $2 million business doing just siding projects vs. a $2 million business that is a full-service remodeler, I can expect to generate some efficiency in terms of buying, in terms of organizing my labor force, in terms of efficiency on-site.”
The lack of current indications for consolidation does not mean that it becomes more evident in the future. Nor does it mean that traditional remodeling firms billing less than $500,000 annually will reap all of the benefits of future growth in the remodeling business. Traditional remodelers will see continued threats from the “installed sales” divisions of local distribution firms.
“The outlook is bright for consumer spending on home improvement activity. I think that is somewhat different than saying that the outlook is bright for the traditional, $500,000 general, full-service remodeling contracting firm,” explains Baker. “I think there is a lot of risk going forward in terms of how the industry is evolving. I am not sure that the status quo is the safest place to be.” |
Latest Market Indicators Hold Strong
The remodeling market showed resilience during the third quarter of 2005, the U.S. Commerce Department announced last month. Expenditures and improvements as well as repairs ran at a seasonally adjusted rate of $218.3 billion, 13.2 percent higher than the second quarter estimate of $192 billion.
Spending on maintenance and repairs was at a seasonally adjusted rate of $54.7 billion in the third quarter, while spending on improvements was $163.6 billion, or 74.9 percent of the total.
More good remodeling market news came out of the National Association of Realtors. The Chicago-based organization released existing home sales figures for the fourth quarter of 2005, which were the third highest on record.
The latest report on existing home sales shows that nationwide the seasonally adjusted annual rate was 6.9 million, up .3 percent from the fourth quarter of 2004. In addition, the report showed that sales activity increased in 24 states over the same period, year over year.
“Mortgage interest rates were at the highest level since the third quarter of 2003,” explains David Lereah, chief economist of NAR. “At the same time, we have seen strong double-digit appreciation in home prices, so a modest slowing from record sales was to be expected.”
Existing home sales are a good barometer of maintenance and repairs as well as remodeling improvements as research has shown that this activity is generated before and after a transaction.
Slower But Sustainable Sales for ‘06
NAR is predicting slower growth, but more sustainable levels of existing home sales for 2006.
Existing-home sales are likely to decline 4.7 percent to 6.74 million this year, down from a record 7.07 million units in 2005. The 30-year fixed rate mortgage should rise to nearly 7 percent by the end of the year, says NAR’s Lereah.
“Right now home sales are a little lower than projected but can be sustained,” says Lereah. “Even so, sales will continue at a historically high pace with moderately higher interest rates, and 2006 is projected to be the third strongest on record.”
Appreciation Stays Hot
Strong home-price appreciation has been an important factor in the strength of the remodeling market over the past decade, as homeowners have been willing to remodel with their gains. Newly released figures from the fourth quarter of 2005 show that prices were still rising steadily in most metropolitan areas around the country.
Of the 145 metropolitan areas tracked by the National Association of Realtors, 72 areas experienced double-digit annual increases in median existing single-family home prices, while only six areas posted price declines.
The national median existing single family home price was $213,000 up 13.6 percent from a year earlier. The biggest single family price increase in the nation was in Phoenix where the fourth-quarter price of $268,400 was 48.9 percent higher from a year earlier. Fort Myers, Fla. was next with a 48 percent rise to $293,100. In dollar terms the two highest priced metros were San Jose at $747,000; San Francisco at $718,700; and Orange County, Calif. at $699,800.