June 20, 2010 in Business

Contractors weather tough times

Cutting costs has helped, but turnaround needed
Kim Frlan Journal of Business
 
Kim Frlan photo

Chris Swanson’s Homestead Construction has about one-third the business it had before the recession.
(Full-size photo)

The economic recession and resulting construction industry swoon haven’t been kind to contractors, as state licensing numbers and association memberships show, and those who have survived say they are cutting costs, getting creative and hoping for a turnaround.

The number of licensed contractors in Spokane County this year so far has fallen by about 590, or 10 percent, to 5,190, from 2009, according to the Washington state Department of Labor and Industries. The fallout also has shown up in membership numbers at the Spokane Home Builders Association, which has seen its roster decline by 5 percent so far this year, said Joel White, executive officer.

“I would guess what we’re seeing is that a lot of members have stayed in as long as they can,” White said. “If we’ve lost this much already, we’ll probably see a decline at a similar rate throughout the rest of the year.”

One of the companies to survive, Spokane Valley-based Homestead Construction, began seeing business slow down in fall 2007, and has stayed in business mainly by cutting expenses, said part-owner Chris Swanson.

“We had hoped it would be a little more gradual,” Swanson said of the downturn. “Right now we’re doing one-third of what we were doing three or four years ago. We’re all kind of bumping along the bottom.”

Kate McCaslin, president and CEO of the Inland Pacific Chapter of Associated Builders & Contractors Inc., said that organization, made up of commercial and industrial contractors, has “just had a couple of contractors going out of business.” Still, she said, many contractors have cut costs to the bare minimum to survive.

“They’re cutting fat – cutting overhead. What’s left is muscle,” McCaslin said. “We expect if the economy doesn’t turn around, they’re not going to be able to weather it.”

She adds that most building industry forecasters “don’t see a big turnaround until 2012 or 2013.”

In the meantime, among McCaslin’s main concerns is that bids these days are coming in very low, perhaps too low.

“Work is going very, very cheap – far below most people’s costs,” she said. “You can’t do that forever. Sooner or later, it will catch up with you.”

Wayne Brokaw, executive director of another prominent trade group here, Inland Northwest Associated General Contractors, said that while the recession has resulted in homebuilders going out of business, “We haven’t seen that impact on the commercial side or the highway side.”

Public works projects that have kept some Spokane-area contractors afloat during the recession include the North Spokane Corridor freeway project, the Spokane County wastewater treatment plant, and several community college and public school construction and remodeling projects.

Some larger contractors did more business in 2009 than in 2008, Brokaw said, as they completed higher-dollar phases of projects began in 2008.

Lydig Construction Inc., Vandervert Construction Inc. and Leone & Keeble Inc., three of Spokane’s more prominent contractors, reported higher contract revenue in 2009 than they had a year earlier, according to a Journal of Business report last month. Brokaw also said that the mild winter allowed projects to continue through the colder months, while in each of the previous two years, construction work was shut down due to heavy snow.

“A lot of people were happy to be working and providing for their families that normally would be laid off,” he said.

Brokaw believes there will be “a very slow recovery for the commercial building side.” He said highway construction “will move forward, but at a slow pace for the next couple years.”

Federal stimulus money has provided a needed boost in the Spokane region, he said.

“We didn’t get a lot of stimulus money, but we were one of only four projects in the country to be fully funded,” Brokaw said, referring to the $35 million Transportation Investments Generating Economic Recovery grant for construction of the North Spokane Corridor between Francis Avenue and Farwell Road.

Brokaw said some contractors without work are trying to liquidate their equipment to pay off bills and stay afloat. Some are hoping other contractors that have work will hire them as subcontractors, and still others are simply “looking at doing something totally different.”

Dave Baker, of Spokane-based Baker Builders, said speculative builders have been hardest hit by the recession. His company built its last spec home in 1998. Now Baker Builders specializes in custom-built homes and larger remodeling projects, while also diversifying and looking farther afield, such as Ritzville.

Baker said that in the early 1980s, his company went through what many small contractors are going through now. At the time, interest rates climbed to a level where consumers couldn’t afford home loans. Today, the issue is more that credit has tightened, preventing some consumers from qualifying for loans, but the result is the same – fewer homes being built.

The challenge builders have today is that consumers’ expectations for a new home have risen beyond what they can afford, Baker said. “Until expectations become aligned with reality, the market will continue to be slow.”

McCaslin said the residential market was hit earlier and harder by the recession than the commercial market; commercial contractors didn’t get hit hard until last summer.

Now, she said, it’s difficult for commercial contractors to get private funding for projects, and most members of her association don’t bid on public works because “government projects are a maze of bureaucratic red tape.”

McCaslin is aware of small- to midsize contractors who have cut their work forces dramatically, some from crews of up to 50 workers down to just five or 10. And owners have gone back into the field to work themselves.

“They’re the guys that are going to survive,” she said.

Swanson, of Homestead Construction, said his company has begun to buy older, repossessed homes in need of major work, then renovate them and sell them in the $129,000 to $139,000 range.

“There’s a market for that price in the Valley,” Swanson said.

He believes, in general, builders of lower-priced homes are faring better than those that focus on mid-priced to high-end homes. Swanson said the building industry overbuilt – here and everywhere – during the previous boom, creating a glut of empty homes. On top of that, buyers have the option of purchasing homes in foreclosure rather than new ones.

“Those houses always go cheaper than we can build them,” Swanson said.

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