You may have seen the impact of the residential bubble blowout on your local market, and if you’re like a lot of electricians who rely on residential projects, your business model has adjusted to accommodate shifts over the past two years.
According to the 2008 “Profile of the Electrical Contractor,” electrical contractors actually gained a few percentage points of average revenue from single-family construction in 2008, and the single-family category still accounts for the industry’s largest individual source of revenue, despite the so-called housing crisis
ELECTRICAL CONTRACTOR talked to several residential contractors across the country recently to see what’s been happening after the bust. Most are weathering the cool-down with diversified business plans designed to balance any losses, and nearly all are preparing for emerging opportunities in solar electric technologies.
The big picture
According to the U.S. Census Bureau and the National Association of Home Builders (NAHB), a ripple effect occurs even today from the housing downturn, and industry experts are cautious about projections for recovery with looming fears of a full economic recession, said David Seiders, NAHB chief economist.
“Housing production is still on a downward path, and improvements in new home sales and inventory positions must be achieved before any sustained pickup in housing starts can occur. We expect the recovery in housing starts to begin in the second quarter of next year, although we expect both housing starts and residential fixed investment to be down in 2009 on a year-over-year basis,” Seiders said.
In late July, NAHB members, home-owners and lenders felt relief when President Bush signed a massive housing bill intended to provide mortgage relief and stabilize financial markets. Regarded as the most significant housing legislation in decades, the measure allows homeowners who cannot afford their payments to refinance into more affordable government-backed loans rather than losing their homes.
Travis Larson, project manager at Academy Electric Inc., Madison, Wis., and member of the National Association of the Remodeling Industry (NARI), still worries about overreactions to the nation’s new economic reality.
“We are such a self-fulfilling prophecy on a possible recession. When the media hypes it, we believe it, we stop spending and we panic,” Larson said.
Diversified to survive
“I’m pleasantly surprised that we’ve come through this as well as we have. Our chapter currently [July 2008] has 95 guys working in the field and 10 unemployed. That’s not bad given the circumstances,” said Todd Michaelsen, manager of the Ohio/Michigan National Electrical Contractors Association Chapter, an area with traditionally robust residential activity and marketing savvy.
Michaelsen classifies the residential market into three segments of specialty work: remodel/retrofit, multifamily dwellings (apartments/condos) and new single-family homes.
“The most brutal part of that market is new homes. That’s what everybody went after for years, and it’s the most vulnerable segment,” Michaelsen said.
A few years back, with an impending slowdown on the horizon, Michaelsen forewarned area contractors to either shrink their business or diversify.
Transtar Electric Inc. in Toledo, Ohio, chose the latter. Though still offering home automation through home theaters, whole-house sound, security and lighting controls, the company’s key priority is broadening its scope of qualified services with solar installations. Also, a focus on commercial low-voltage work has resulted in a 100 percent increase in volume.
“Wiring a house with plugs, switches and lights is the bread and butter, but you’ve got to look at some different markets to diversify,” said Dan Bollin, Transtar Electric president.
Electrical contractors, such as Transtar Electric, are picking up work as a result of an initiative to rebuild Ohio schools and their surrounding neighborhoods in addition to significantly increased condominium and apartment construction.
“Banks want 15 to 20 percent up front to borrow for a mortgage. All the sudden, that is driving a lot of people to rental and lower-end investments, especially new people to the housing market,” Michaelsen said.
Anderson Electric Inc., Greenwich, Conn., has been doing residential work since its establishment in 1976, but started diversifying into commercial projects in the 1990s due to a growing disparity between union and nonunion pricing. Today, Anderson Electric’s business—directly impacted by the metropolitan New York market—is experiencing a surge in high-end, multifamily construction with large condo developments and 20-story buildings.
“We’ve seen a lot of the baby boomers, who had large country homes with a staff, transition into luxury condominium units with little or no maintenance, so they can travel more and not worry about the upkeep,” said Tom Anderson, Jr., president Anderson Electric.
On the other coast, in Portland, Ore., Karl Jensen of West Side Electric Co. Inc. reported that, in late 2007, the company noticed fewer pricing requests for remodeling projects, while the new construction division’s work slowed due to excess inventory. It eventually felt the pinch in February.
West Side Electric has adjusted by lowering profit margins to keep work flowing to avoid losing developed talent. The company also is strongly marketing another of its specialties, upgrading electrical services and adding electric heat to 1920s through 1950s vintage apartment buildings that currently use oil-fired boilers.
“The residential market will always be here. We are well diversified in our residential skills and can take advantage of whatever segment of the market is going strong. We are in a temporary downturn like many before this one, and it may take a year or two, but we will once again have more residential work than we can handle,” Jensen predicted.
Perennial strength in remodeling
Remodeling continues to provide a softer landing for qualified contractors. Regardless of the health of new construction, remodeling has been consistently on the upswing, and research gathered by the U.S. Census Bureau housing survey and Harvard University’s Joint Center for Housing Studies for NARI reports the remodeling market grew to a $294.5 billion industry in 2007.
Academy Electric is a second-generation business that has traditionally focused 40 to 50 percent of its business model on residential, almost exclusively in remodeling. Downturns such as this make Larson realize the company’s operation is much like an island.
“Here in Madison, there’s much more remodeling than we’re used to seeing because wealthy clients are choosing to stay instead of build. Even though the pie called remodeling got bigger, the piece of that pie for remodeling specialists got smaller because the new construction contractors are undercutting industry prices,” said Larson, whose company also got squeezed by fuel costs that increased $45,000 over last year.
Larson takes solace in the fact that, over time, clients realize that the competition is not educated on remodeling.
“Frankly, remodeling requires a higher skill set. You can teach people fairly quickly to build new homes, but in remodeling, it’s tying a new system with an old system, especially on the service end, and there’s a lot of troubleshooting. It’s not a natural thing for many guys,” Michelsen said.
According to Larson, Academy Electric continues to focus on growing technology integrations into single-family remodeling.
“I’m training to specialize in audio systems in basement remodels and stay on top of trends in LED lighting design,” Larson said.
Bringing home the power of solar
“The biggest residential trend we’re seeing is solar power,” Jensen said, “and many of the projects we’ve watched and are currently pricing have 3- to 5-kW solar systems.”
Oregon and other states are offering incentive programs, including cash rebates and state and federal tax credits that Jensen said can reduce installation costs by up to 50 percent.
According to Mike Taylor, director of research at the Washington, D.C.-based Solar Electric Power Association (SEPA), the majority of residential grid-connected photovoltaic installations—nearly 12,000 of the total 13,000 systems installed in 2007—are residential systems concentrated in key Western and Northeastern states. California is the largest market followed by New Jersey.
“Solar markets aren’t just driven by the sun but also by state policies. The other part is that over 95 percent of the residential market is still retrofits on existing homes, but new home construction is a growing niche in California,” Taylor said.
SEPA’s new study, “Residential Photovoltaic Metering and Interconnection Study: Utility Perspectives and Practices” shares the insight of 63 electric utilities on methods to streamline and simplify solar integration for all interested stakeholders. While photovoltaics is a proven cost-effective solution for remote power generation, SEPA said the vast majority of installations are conventional, grid-connected systems that must follow building codes and pull electrical permits. And, nearly all have been installed by private contractors rather than by utilities or the customers themselves.
West Side Electric and Transtar Electric are pursuing specialist training, and Anderson Electric recently obtained its North American Board Certified Energy Practitioners certification.
“The business will open up a lot of trunk slammers, but what’s going to separate them from the professional installers is the certificate. That’s going to be huge,” Bollin said.
Taylor’s best advice is to assess your own state.
“Many small markets may have less than five full-time renewable energy installers. But, a new state policy could put them on the map over the coming years, and working into that growth, rather than reacting to it, would be smart,” Taylor said.
“If you’re not looking ahead to the future, and preparing your work force for it, someone else will fill the niche,” Bollin said, “My goal is to try to fill the gaps that I see and be ready for them when they get here.”
MCCLUNG, owner of Woodland Communications, is a construction writer from Iowa. She can be reached via e-mail at firstname.lastname@example.org.