Article Number : 2558 |
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| Date | 10/2/2007 9:39:40 AM |
| Written By | LGM & Associates Technical Flooring Services |
| View this article at: | //floorbiz.com/BizResources/NPViewArticle.asp?ArticleID=2558 |
| Abstract | By Steven Feldman Santa Ana Pubelo, N.M.—Survey the members of FloorExpo, America’s largest residential and multi-family flooring contractor association representing total annual sales of $3 billion, and you quickly notice something of a dichotomy... |
| Article | By Steven Feldman Santa Ana Pubelo, N.M.—Survey the members of FloorExpo, America’s largest residential and multi-family flooring contractor association representing total annual sales of $3 billion, and you quickly notice something of a dichotomy. The consensus on the part of Home Solutions’ 50 members, who install flooring in one of every four new, single-family homes in the U.S., say business is tough and they must work harder for the business that’s out there. Conversely, on the MultiFamily Solutions side, the 40 members who service property managers and apartment owners are capitalizing on the downturn. Home Solutions members are feeling the impact of a home building landscape that turned abruptly during the summer of 2006. But despite the challenging climate, they are not singing the blues. After many years of significant growth, they are well positioned to “hold their breath longer than the competition” until the up-turn occurs, which by all accounts will not be until mid-2009 at the earliest. “As far as a comeback goes, realistically 2008 is done,” said Julian Kroll, owner and vice president of Home Solutions member Design Floors in Morganville, N.J. “We are looking at getting out of 2008 with ’07 sales, but we think the overall market will see a decline.” That point was hammered by Steve Hoppe, owner of Arlun in Colorado Springs and Denver: “2008 is definitely done. The market isn’t coming back until the second quarter of ’09, and that’s if we’re lucky.” In illustration, Kroll noted that 38,000 permits were issued in New Jersey in 2005; this year the forecast is for just 22,000. And, in Colorado, permits are expected to fall short of 18,000. “Two years ago we pushed close to 26,000,” Hoppe said. But like most members, Kroll finds it hard to complain after 17 consecutive years of incremental growth. “You cannot expect [growth] until the end of time,” he said. “If we break even for the next two years and I put a few dollars in my pocket, I did well in this market.” If the numbers are any indication, FloorExpo is making a significant difference in its members’ businesses. According to Dave Gheesling, CEO, the group is down less than half the movement in the market, which is off 20%. “That means members are taking share,” he said, a fact confirmed by Hoppe, who noted that despite builder business being off 32% in Colorado, Arlun is down only 12%. Gheesling told members they can’t worry about business that has disappeared. “We must execute on the business that’s out there,” he said. “Share is going to emerge from the people in this room. We bring more value to the builder: expertise, efficiencies, quality control and assurance. We engage the homebuyer at the selection phase to ensure the highest level of upgrades. That’s huge in a down market. Upgrades affect margins and customer satisfaction.” Jay Smith, president, Floor Expo, cited four reasons for the homebuilding downturn: 1. Inventory. More houses were built than needed. “It’s classic supply and demand.” 2. Affordability. Housing prices have outpaced income growth. From 1990 to 2006, the median home price doubled to $185,000. However, during that period income growth was pegged at 60%, roughly matching inflation. In Miami, where income growth matched inflation, housing prices quadrupled. And, in Los Angeles, only 3% of the population with a median income of $61,000 can afford a home. 3. Credit tightening. Banks are no longer issuing aggressive products like subprime and interest-only loans, which allowed more people to swim in the new home pool. “Americans liked the easy money,” Smith said. “But all this wealth was fake. Incomes were not there to support their loans.” Kroll added that in New Jersey, jumbo mortgage interest rates are on the rise. “Right now rates are about 6?% and projected to rise to over 7% in the next 12 months. That takes a lot of people out of the game.” 4. Subprime meltdown. This year will mark the highest number of delinquent loans in the last 16 years. It was recently reported in USA Today that 25% of Countrywide’s subprime borrowers fell behind on their loan payments at the end of June. In fact, there will be 2.2 million foreclosures this year as a result of subprime loans. For Design Solutions, other factors are negatively impacting business, particularly the re-sale business, which Kroll explained is distinctly related to new-home business. “New Jersey is typically an upsell market,” he said. “So new residential home construction is predicated on existing homeowners selling their homes.” The problem, he said, is many homeowners have unrealistic expectations of what their properties are worth. Scott Grugel, division president for Interior Specialists, which covers the five-state area of California, Arizona, Nevada, Washington and Oregon, blames the media for much of the downturn. “The national press spins an inaccurate story,” he said. “They have people believing there is more to the bottom, that the economy is suffering, that the inventory problem is worse than it is.” How members are responding In the face of challenging conditions, FloorExpo members are being proactive with their business. For example, Design Floors has grown geographically, from a 90- to 120-mile radius. Of course, that comes with its share of challenges. “We must keep the staff positive,” Kroll said. “Some days they may be traveling five hours in total to make one call.” Design Floors has also diversified its product offering, expanding into window treatments and soon custom closets. “Window treatments have been working out really well,” Kroll said. Arlun has diversified too, getting into window treatments and lighting, while Interior Specialists has started fabricating granite countertops. Members say another key to withstanding the downturn is controlling expenses and tightening up operations. “We are controlling inventory better and reducing head count as much as necessary,” Arlun’s Hoppe said. Meantime, Interior Specialists is making investments in the business “so we are stronger when things actually turn.” The multi-family story When the aforementioned cheap money was fueling homebuilding, flooring contractors who participated in the multi-family market were negatively impacted. That’s because condos, which traditionally comprise 25% of multi-family starts, had risen to 45%. Rentals are what drives the business for MultiFamily Solutions members. But the good news for this segment is the balance between multi-family and single-family is equalizing. “In the past renters were converted into homeowners on a short string because of flexible and low-interest products,” Smith said. “The renter market was down because of the low cost of money for purchasing homes. But now the renter pool is growing because of homebuyer issues. And more renters mean lower vacancies. Lower vacancies mean higher rents. Higher rents mean happier property managers.” The multi-family business is much different than its single-family counterpart. According to Bruce Caress, owner of Redi Carpet in Houston, the largest multi-family flooring contractor in the U.S., this business is immune from recession. “When occupancy rates drop, management companies are forced to improve to attract new renters,” he said. “When the occupancy rates increase, management companies start rehabbing properties. “What we sell is bread—it is a commodity, and they have to have it. There really is no such thing as a bad economy. We are impervious to pain.” As such, Caress noted that Redi Carpet comes off its biggest month in company history, and this will be its biggest year since it launched in 1981. “It may be our first $100 million year,” he said. So what’s driving the success? For starters, it’s Redi’s capabilities to develop internal growth, said Jerry Hosko, president. “Plus, the additional support we have received through price increases has helped drive up numbers.” Then Redi has been in an acquisition mode for some time and is growing in what are relatively new markets for the company, like Orlando and Tuscon. While no one can be certain as to when the market will turn, the fundamentals remain in place for prosperity. For starters, real GDP is up and unemployment is still low. Smith noted when new construction is backed out of the equation, the economy is growing at a 3% clip. Federal Reserve chief Ben Beranke recently said, “The economy is expected to expand at a moderate pace supported by solid growth in employment and solid growth in the global economy.” Smith added that Floor Expo members are well positioned for growth for a series of reasons, not the least of which is long-term demand. In the next 10 years between 11 million and 15 million new households will be put in place, he said, and 23 million by 2025. “That’s a lot of homes with a lot of floors.” Smith also noted how Floor Expo members are taking market share. “That’s a result of us being the best of the best,” he said. “The big guys take market share and the small guys struggle. “There is also going to be a return to equilibrium—a balance between builder and multifamily, between income and prices. In fact, we are seeing new-home prices coming down, in some markets significantly. “When you combine the economy with the demographics, the upturn will definitely happen,” Smith said. “Pinpointing the time is the challenge.” |