Remodelers are expecting a good 2014. In fact, 78 percent of those who responded to Qualified Remodeler’s annual online market forecast survey reported having either an excellent or good outlook on the year ahead. This is an improvement over the 61 percent who felt this way one year ago.
The sentiment supports the double-digit growth predicted for 2014 by the Joint Center for Housing Studies’ Remodeling Futures Program at Harvard University. Harvard’s Leading Indicator of Remodeling Activity, however, calls for a slowdown in growth toward the middle of 2014, but to levels that will remain healthy.
In late October 2013, the National Association of Home Builders’ Remodeling Market Index — which measures remodeler confidence — stood at 5, the highest rating since 2004.
Expectations of growth come with fears and doubts, however. Remodelers responding to our survey rank the biggest threats to growth in 2014 as follows: the economy in general; consumers’ fears; the availability of skilled labor; government regulation; and material prices.
Growth might not be guaranteed, but if past performance is an indicator of future activity, remodelers can expect a profitable year. Survey respondents tell us that profit margins are at healthy levels. The bulk of remodelers (45 percent) report margins between 16 and 50 percent. Only 11 percent of remodelers report margins of 5 percent or less.
“Around here homeowners retain the mind-set that they can get a job done for any price they want, just by telling remodelers they have to come down to the lowest bid,” says Stephen Gidley, GMB, CAPS, CGP, CGB, CGR, CPRC, CR, president and CEO of Stephen C. Gidley Inc., Darien, Conn. “The only way to combat this mind-set is honestly and openly. For example, I take the state of Connecticut handbook that says if a contractor is doing a half-million a year he should be at about a 50 percent markup, and contractors doing more than a million should be at 60 to 70 percent markup. I come in with a markup that’s less than what’s in the book, but is still healthy for me and demonstrate why my markup is fair and reasonable. It works.”
Margins for Michael Menn, AIA, CGR, CAPS, CGP, NCARB and principal, Michael Menn Limited in Northbrook, Ill., are good, too, and have been rising. “In the past three years margins have gone up significantly. In the previous five years, they were down to a minimal sustainability level. Only through financial stewardship, layoffs and bearing down on trades have I survived.”
Margins don’t budge much for Molly McCabe, owner and principal designer, A Kitchen That Works in Bainbridge Island, Wash. “We know what it takes to run a business. My margins have been fine because it’s not worth it to work for nothing.”
Sixty-two percent of survey respondents tell us they expect their firm’s revenue to increase in 2014, with 21 percent expecting revenue to remain flat. For Tim Piendel, principal, GreatHouse in Roswell, Ga., growth in 2014 will be about control. “We plan on growing revenue only 10 percent. We need to control our growth after more than doubling our expectations in 2013. That caused some problems, including lower margins. We need to work on our infrastructure by hiring field and office staff.”
Twenty-two percent of respondents to our survey tell us they plan on growing by hiring staff in 2014. Menn, in Chicago, already hired two project architects toward the end of 2013. “The only other person I might add is a project manager. I plan to remain fluid with those plans; if I feel like I need someone I will hire someone.”
McCabe knows that bookkeeping isn’t her forte, and that she and her husband can get stretched too thin at times, so she might hire someone to work in the office. “It would be nice to have someone to delegate to.”
Banks and lending
More than a quarter of survey respondents expect banks’ lending practices to remain a challenge in 2014. This should not be a problem for the 70 percent of remodelers who say their clients paid for their projects in cash; the problem might be raising the number of homeowners that finance their projects.
For Gidley in Connecticut, there’s no doubt that lending will remain a problem. “And yet, we’re in an upper-middle class area. The problem is everyone is leveraged too much with tuition, car payments, mortgages, plus healthcare and energy costs are going up. When banks look at debt-to-income ratios, they don’t see a 65/35 ratio; they see more like an 80/20, and they don’t want to lend because there’s nothing to lend against.”
Piendel’s clients in Atlanta are writing checks, too, but also are using credit cards again. “Some of our medium-sized projects in the $30,000 range have been paid for half in cash and half on credit card. I’ve been in business for 10 years, and in those 10 years I’ve done maybe 10 credit card transactions. In the last year, however, I’ve done 10. It’s clear that consumer confidence is up, but I’m wondering if people are slipping into the habit of making stupid decisions again.”
Spending has returned
Homeowners once again are opening their wallets for the finer things, like they did before the recession. No longer do projects consist only of have-to repairs; homeowners are checking off items on their want-to lists as well.
“They’re spending more dollars per square foot, in larger kitchens and additions,” Menn says. “They’re opting for better quality products such as doors, windows and flooring. As far as detailing like a backsplash, they’re choosing specialty tile or for decoration in a shower. There’s also a greater call for heated floors, which they haven’t been asking for until recently.”
Piendel’s clients also are spending again, but tend to wait until the last minute to request upgrades. “I think I’m going to finish a project on a Friday, and on Thursday the client tells us they want to add heated floors, extra windows, screened-in porches and fireplaces. It makes it difficult to satisfy them and start the next project on time, but at least clients are upgrading again.”
McCabe says consumers are looking for design and construction that adds value to their lives. “The purse strings are definitely open wider but not like they were prior to the recession. People are also asking for contracts during the first or second meeting, rather than scheduling multiple meetings plus phone calls before making a decision. Very few people are saying, ‘Thank you for your time; we need to think about it a little longer.’ That is definitely different than 2011, the height of the recession for our geographic area, and somewhat different than 2012.”
Labor issues, undercutting
One of the most talked-about challenges facing the remodeling industry the past few years has been the availability of skilled labor. Almost 40 percent of our survey respondents believe this will be a challenge to growth in 2014.
Gidley sees the challenge with labor coming from unregistered contractors that also are not insured and don’t pull permits. “They get in the living room after me and make the playing field unlevel. I’m then in the position of convincing homeowners that they’re at risk with an important investment by trying to save 30 cents on a dollar. It’s not rampant, but I’ve run into it on a few jobs.”