Riding Out the Residential Slump

Even before the housing market went into its downturn, residential work was problematic for the electrical contractor. The complicating factors include work force competition issues, shifting patterns in the public’s housing choices and affordable income, and overly ambitious construction by general contractors who often have far too rosy speculation vision.

And then the home-building market went into its serious southward spin. According to U.S. Census Bureau statistics, privately owned housing starts at midyear were 24 percent below those of 2007, and building permits in a number of major states are off as much as 50 percent. And part of the problem in assessing just how much damage has been done to the residential sector depends on a definition of terms.

“Approximately 25 percent of our business is in condominiums and apartment buildings,” said Frank Amabile, president of Shamrock Electric Co. Inc., Elk Grove Village, Ill. “We consider that to be the residential part of our business, but it is a mixed-use development style that definitely involves a lot more than does single-family house construction. Typically, it includes risers, bus duct and special systems, such as fire alarms, TV and data.”

This particular sector of the residential market has held up well for Shamrock Electric, which is currently working on a 27-story apartment building in downtown Chicago, which includes a commercial level on the ground floor and four levels of parking.

The company is also at work on a retirement center in Evanston, Ill., with requisite medical facilities, a restaurant and independent living quarters—another example of a sophisticated, hybrid type of residential project.

“There are two problems related to the residential market today,” Amabile said. “First, the sector was overbuilt to begin with. [Second,] developers just kept on building and building, and then they suddenly realized no one was doing any buying.

“As far as electrical contractors are concerned, this has led to a migration across traditional lines. There have been a number of bankruptcies among contractors who specialized in the single-family and multifamily townhouse sector. The survivors are scrambling and looking for work in other areas, and unfortunately, they don’t know how to bid. [They] typically come in too low and cause unnecessary and costly confusion.”

A question of financing

“My understanding is that, throughout the country, those who were doing exclusively small residential work are moving into the low-end part of other markets just to survive,” said Milner Irvin, president of Riverside Electric Co. Inc., Miami, and president of the National Electrical Contractors Association.

But Irvin also gave an insight into a rare area of residential work that continues to bring in big bucks.

“A contractor I know does only high-end houses, and he’s seen no downturn in business. In the residential market, it’s a question of financing. The larger homes are in many cases a matter of all upfront dollars. Here at Riverside, we also do electrical and electronic work in the boating area. There are now more 100-foot and larger yachts under construction than are already in the water,” Irvin said.

But in the less affluent residential neighborhoods, things are much different.

“When the condominium market was in its boom stage just a few years ago, people were building so fast and furiously, there just wasn’t time to go out for competitive bids,” Irvin said. “So contractors got lazy. Now there’s a glut of condos that haven’t been rented or sold and this supply/demand imbalance has to be resolved before anyone will be comfortable about starting to build again. But when they do, contractors will have to be ready to start bidding aggressively.”

It’s not over yet

And all indications seem to be that the residential construction market hasn’t bottomed out yet.

“Before the big credit crunch kicked in, residential conditions weren’t all that rosy anyway,” said David Hardt, president of Hardt Electric Inc., Chicago. “The market was virtually nonexistent.”

Historically, 40 percent of Hardt’s work was residential, but that has dwindled to approximately 10 percent. Downtown Chicago has fashionable 200-unit condos, conversion jobs involving renovated quasihistoric industrial structures that are still mostly unoccupied because the builders simply can’t sell units. And even the high-end sector in that part of the country has stalled.

“We work with three specialty builders who focus on homes in the $3 million to $5 million range and even that has all dried up, which is quite unusual,” Hardt said.

A barometer of where things stand and where they are headed is the amount of activity at the local union.

“Right now, the local has only about 500 to 600 electricians out of work,” Hardt said, “which is basically full employment for a 12,000-man local. They say that there are a couple of big projects winding up, but when they’re finished, there isn’t much on the horizon. Come November, they feel they’ll be dead in the water with 1,500 to 2,000 guys out of work.”

Topping off the tank

And as though these conditions weren’t debilitating enough, there is the ubiquitous and pandemic fuel problem.

“My service trucks are costing me $1,400 a month just in gas. Nevermind maintenance,” Hardt said. “We’d like to cut back on at least one day of traveling each week, and I’m trying to reach an agreement to have electricians work four 10s—four 10-hour days instead of five eight-hour days. But this hasn’t been worked out yet.”

To offset the decline in its residential business, the company has focused more effort on its traditional mainstay market and moved into a new one.

“Our meat and potatoes has always been commercial remodeling of office buildings,” Hardt said, “so we’re going after that more aggressively than ever. We’ve also gotten into the photovoltaic field, which we see as having enormous potential.

“But in both cases, there are issues. When the big electrical contractors are busy, they don’t want to be bothered with stuff like commercial remodeling because it’s messy work. They’re geared for two-and-a-half-year jobs and don’t like a project that’s only good for three weeks to three months. But when times are tough, as they are now, they’ll move into the market,” he said.

“And as far as the photovoltaic area is concerned, it’s a hard sell. Currently, for the most part, the buyers are municipalities or large corporations that have discretionary funds available. The photovoltaic payback period right now is seven to eight years, but smaller organizations are looking for a two-to-three-year time frame. Competition in this market isn’t that stiff yet, but the interest is definitely growing,” Hardt said.

The speculation bubble

The definition of a spec house has changed radically in the residential market. Or at least the definition of what kind of spec house will sell.

“In better times, a spec house was one that a builder put up speculating that there would be a buyer out there who would like it,” said Greg Quinn, president of Quinn Electric, Eldridge, Iowa. “But those days are over, and those builders are sitting on three or four houses that haven’t sold in a year. And the banks want their money.

“But in today’s market, the spec houses that sell are the ones that are built to the customer’s specifications, typically lower cost dwellings. You have to adapt to the changing times,” he said.

Quinn Electric has turned its attention to these smaller, lower-dollar homes and to multiunit housing, and the strategy has worked with its multifamily project business up 50 percent over last year.

“We came off a rough winter,” Quinn said, “and early this year, we went heavily into multiwork because we saw that was where the business was. There’s been downward pressure in the market, with contractors who used to build $500,000 homes now working on $250,000 and less houses. You have to follow the trend, whichever way it leads.”

Quinn is cautious about near-term prospects, noting that commodity pricing, including copper and other building materials, has cut deeply into costs, and the possibility of higher interest rates would be even more troublesome.

“At best, the electrical contractor’s work is unpredictable,” Quinn said. “You have to always be proactively looking at other avenues of income or be forced into doing so.”

Irvin at Riverside Electric agreed.

“In this business—especially the residential area—you have to be inventive just to stay in business, so you have to be continually looking for different kinds of work in order to have some kind of advantage down the road,” he said.

David Hardt has a slightly more combative view.

“Every residential electrical contractor is looking at alternatives and options today,” he said, “and that means sooner, rather than later, everybody is going to be in everybody else’s rice bowl.”

QUINN reports on a broad range of business and industry issues for journals in the United States and Europe. He can be reached by phone at 203.323.9850 or by e-mail at mirabel@snet.net.

About the Author

John Paul Quinn

Freelance Writer
John Paul Quinn reports on a broad range of business and industry issues for journals in the United States and Europe. He can be reached at 203.323.9850 and mirabel@snet.net .

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