A remodeling renaissance

You wouldn’t know it from the latest housing numbers, but some LBM dealers are having a very good year so far this year. At least some of them are doing it because they followed a old rule: Diversification insulates you from downturns.

Many dealers may not be feeling the pain in single-family new construction quite yet; builders are still working off a big backlog of unfinished projects. But through Q1 2023, YoY single-family permits are down in 334 of the 384 MSAs in the U.S.—and down more than 30% in 206 of them.

Analysts say the backlog is likely to dry up in the second half of 2023. When it does,  more than a few geese will probably be cooked.

Your goose might be okay if you supply multifamily and/or light commercial contractors. If you invested in MFLC coming out of the Great Recession, you may well have sacrificed some of the ROI you’d have earned if you had spent the money building single-family market share. Component plants, construction managers, and (sometimes) framers don’t come cheap.

But depending on where you are, this may be the year that investment pays off. Multifamily permits are up YoY in 134 of the 384 MSAs—and 102 of them are up more than 30%.

Construction is a cyclical business, but the timing and severity of the cycles vary from one segment of the industry to the next. That’s why diversification is critical. The crash of 2008 was a prime example: Dealers with all their eggs in the single-family production basket got whacked hard, and often didn’t make it.

At the other end of the spectrum, roofing suppliers and mechanical contractors incurred minimal damage because they’re well-balanced between new construction and rework, and between residential and commercial.

Back in the day, lumberyards were better balanced, too. The ideal mix in the 1970s and 80s was a 50-50 split between home builders and home improvement: DIYers, remodelers, and trades. But most dealers lost their walk-in trade when the “big box revolution” swept the retail sector in the 80s and 90s.

When that happened, lumberyards doubled down on contractors. They pared down inventories, boosted logistics capabilities, and vertically integrated—upstream into manufacturing and downstream into installation. Some of them abandoned pricey retail locations in favor of industrial parks.

Today, dealers are well-positioned for single-family builders and, with some effort, MFLC contractors. The question is whether MFLC is enough of a cushion for you.

The margins are often razor-thin, and while the timing of boom-bust cycles is slightly different, an MFLC crash will trigger your airbags, too. From peak to trough during the Great Recession, annualized monthly single-family starts fell 80.6%. Multifamily starts fell 79.8%.

Analysts still aren’t sure what’s going on in the housing market right now, but most agree that whatever it is, it’s temporary. The consensus is that demand is poised to explode when inflation finally comes back to earth and mortgage rates fall.

Part of the reason is an unexpected surge in new household formation. The oldest Millennials are solidly middle-aged now, and finally on their feet financially. “By 2019, households headed by Millennials were making considerably more money than those headed by Boomers and Gen Xers at the same age,” notes The Atlantic.

The trick is finding housing for them. A recent study from the National Association of Realtors estimates that from 2012 to 2022, “the gap between single-family home construction and household formation grew to 6.5 million homes.” The gap is just 2.3 million if you don’t count multifamily, but NAR says nearly all of those units are rentals.

Americans overwhelmingly want to own—and they overwhelmingly want to own single-family homes. In other words, this itch won’t be scratched until single-family homeownership is once again affordable for the average household.

Everyone knows how to do that: Build more homes. NAR is haranguing legislators for a “once-in-a-generation response” to “remove barriers to and incentivize new development,” and that would help. But it wouldn’t remove the No. 1 obstacle to single-family new construction.

Labor is the limiting factor. Single-family completions hit an all-time high of 1.65 million in 2006. We’d be caught up by the end of the decade if builders could match that pace. But according to the Bureau of Labor Statistics, the number of working framers is nearly 60% below its 2006 level. At current employment levels, capacity looks to be no more than about 1.2 to 1.3 million completions per year.

Until recently, European-style offsite construction was widely seen as a solution. Now the two most promising offsite providers have gone belly up. Katerra gave up the ghost two years ago. LP recently announced that it will shut down and liquidate Entekra as soon as its current projects are completed.

That leaves one solution: more framers. Higher wages and more job security would theoretically attract them. But they’d also boost construction costs.

Since 2012, the percentage of median-income households that can afford a median-priced home has fallen from 79% to 38% according to NAHB. It might be that the only way to resuscitate affordability is Levittown 2.0: smaller homes and simpler floor plans with minimal amenities.

This is all speculation, of course. But however it plays out, the notoriously price-sensitive production housing market is likely to get a whole lot more price-sensitive when the next single-family boom kicks into gear.

During the 1998 – 2006 boom, we had a surplus of framers due to an immigration surge in the early 2000s. This time around, labor will be untouchable, at least for a while. That will force builders to look elsewhere to squeeze cost out of the process, and it’s not hard to guess where they’ll be looking.

More than a few dealers have already abandoned production builders because the margins are too thin to be tolerable. Custom and semi-custom homes are certainly more profitable, but if you limit your focus like that, you’re cutting yourself off from nearly two-thirds of the single-family market at a time when the trend is toward entry-level and affordable homes. Plus, the luxury market is going to get crowded as price pressure drives more dealers out of production housing.

If you’re looking for something to counterbalance boom-bust cycles in single-family new construction, you can’t afford to ignore the other impending housing boom.

Remodeling is also poised to explode once the economy gets back on track—and the home improvement boom could be big enough to overshadow the new construction boom. “This decade will likely be remembered as ‘The Golden Age of Remodeling,’” says Zonda’s Todd Tomalak.

A number of factors are lining up to drive remodeling activity. First, with for-sale inventories as tight as they are, buyers have been forced to take what they can get. Zonda says that among homeowners who bought homes after 2020 and plan to remodel, over 40% say they don’t like the home they bought. What they like is their sub-3% mortgage. They won’t give that up, so the only alternative is to remodel.

Second, the median single-family home in the U.S. is now 43 years old according to the Harvard Joint Center for Housing Studies—i.e., long past ready for updates and upgrades.

Third, anyone who bought a home before the pandemic has equity to burn. Home prices hit bottom in 2012; since then the Case-Shiller National Index has more than doubled.

Finally, there’s the pandemic-induced trend toward working from home. The data is sketchy, but it all points to a huge increase in remote work. In 2019, 5.7% of American workers worked from home all the time according to the Census Bureau. Today that number is somewhere between 26% (Zippia) and 35% (McKinsey).

And the number of employees who want to work from home is even higher. The Society for Human Resource Management says 48%. FlexJobs says 65% want to work at home full-time while another 32% want a hybrid situation (at the office part of the week, home part of the week). “That’s an astounding 97% of workers who desire some form of remote work,” says Forbes.

Employers may not like it, but they aren’t likely to stop it. Labor force participation (25- to 54-year-olds, prime working age) is 83.3% right now, just slightly below its all-time high of 84.6% in December 1998. We don’t have a lot of slackers, and if there aren’t enough workers to go around, employers will need to accommodate them to reach the largest possible pool of candidates.

As remote work grows, everyone who works at home will need dedicated space to work efficiently and present a professional image. In many cases, that means a remodeling project.

The caveat to all this, says Tomalak, is that the mother of all remodeling booms will come with “a nasty slowdown in the middle.” We’re entering that period now—and even so, it is absolutely not an argument against chasing remodelers.

As of Q1 2023, single-family permits in the U.S. were down 31% YoY. Remodeling spending was up 14%, according to the Joint Center—and will continue to rise until Q4. By Q1 2024, YoY spending is projected to be down for the first time since 2009. By a laughable 2.8%.

Dealers who got burned by the big boxes in the 1990s are often reluctant to jump back onto the stove even if it has cooled. They’ll happily serve anyone who walks in the door, but many don’t actively chase remodelers’ business on the grounds that remodelers are too small to justify a concerted effort.

It’s still true that most remodeling contractors are very small. There isn’t a lot of data available, but as of the 2017 economic census, there were 797,000 remodeling establishments in the U.S. 526,000 of them were one-man bands with no payroll. But that leaves 271,000 potential target customers—and not all of them are small.

The median revenue of a remodeler listed in Qualified Remodeler’s 2021 Top 500 ranking was $5.3 million. For comparison, NAHB’s latest Cost of Doing Business report says the small-volume home builders (1 – 25 units) who make up 83% of its membership typically generated $5.4 million.

Some remodelers have gotten very big. Just like home builders and LBM dealers, the remodeling industry today is made up of a handful of megaplayers plus a blue million independents. But the smallest company on QR’s top 500 list still generated $2.5 million in 2021.

Beyond that, nearly a quarter of the 271,000 remodelers with payroll generated over $1 million in 2021 according to Joint Center tabulations of Census Bureau data.

The opportunities vary depending on what kind of business you decide to chase. Replacement/improvement contractors and kitchen & bath specialists typically won’t be customers. They buy from one-step specialty distributors (roofing, siding) or direct from manufacturers (windows, sunrooms, cabinets), and some fabricate their own products (vinyl windows). Many operate out of showrooms and could just as easily be defined as LBM dealers with installation services.

That means there’s no reason why you can’t do what they do. If they won’t buy from you, you’ve got nothing to lose by competing with them. Chances are you’ve got equal (if not better) brand recognition than they do. All you need is installation, and you can get it by partnering with your subcontractor clients.

Dealers worry about competing with customers, but you aren’t competing if you’re feeding them work. Yes, your reputation is on the line. But there’s nothing unfair about making them meet your service standards—i.e., show up on time, wear a shirt with a collar, no scary tattoos or piercings, wear booties inside, clean up at the end of each day, etc.

More than few full-line dealers are already in the business. For example, Tulsa-based Mill Creek Lumber & Supply has 17 Mill Creek Carpet & Tile stores in three states. Flooring Express in Lafayette, Ind. is a subsidiary of Henry Poor Lumber. Nisbet Brower in Cincinnati operates a kitchen & bath showroom and fabricates granite countertops.

Getting started is no mystery. It’s the same as any specialty niche: Find a GM who knows the business, then let them lead. Word on the street is that there are plenty of experienced big box department managers who would jump at the opportunity to be entrepreneurs.

Full-service and design/build (FSDB) remodelers are no mystery, either: They’re scaled-down custom home builders. Scaled-down doesn’t necessarily mean small, though. The design/build firms on QR’s top 500 list averaged just over $140,000 per project while full-service remodelers averaged nearly $150,000. Those numbers are probably valid for smaller FSDB remodelers, too. The projects are similar—they just build fewer of them.

In markets with an exceptional amount of renovation activity, there may be a large enough pool of FSDB contractors to support salespeople dedicated exclusively to remodelers. Scherer Bros. Lumber in Minneapolis-St. Paul and National Lumber (now owned by Builders FirstSource) in Boston are examples.

Not all major metro markets support that model, though. The Houston MSA is larger than Washington, D.C. (7.3 million vs. 6.4 million), but QR’s top 500 list includes 22 FSDB remodelers in the D.C. area and none in Houston.

The more common model is to lump FSDB remodelers together with luxury home builders. That works up to a point. In many markets, the leading remodelers are also custom home builders. The services required by each don’t line up perfectly, but they are similar.

Production and spec builders are manufacturers at heart. The largest sometimes call themselves high-volume builders, but from a supplier’s perspective, they’re all high-volume. Whether they build 20 homes per year or 20,000, the objective is to maximize efficiency and output. The only difference is capacity.

Custom builders and FSDB remodelers are high-touch contractors. Their job is to shepherd clients through the project to a satisfied outcome. Most don’t need jobsite co-management support from their suppliers. On projects where clients are living on the jobsite, most remodelers don’t want suppliers’ salespeople around.

But both custom builders and FSDB remodelers can use help solving design and construction puzzles, researching and evaluating products, sourcing and managing special orders, and managing material flows to their jobsites.

That’s not to say they can’t do those things themselves if need be. Contractors who use warehouse retailers as a primary source of materials have done it for years. But a recent study by Zonda found that remodelers’ material purchasing practices are changing. 

Those who buy from big boxes are shifting their purchases away from Lowe’s and toward Menard’s and, to a lesser degree, Home Depot. But even more are dropping big boxes in favor of high-touch service from full-line lumberyards or “no-touch” service from online vendors.

E-commerce is getting the lion’s share of that shift, but lumberyards are running a close second. There is an argument to be made that those numbers could be flipped if full-line dealers pursued remodelers’ business more aggressively. The pricing is not that much different, and the lumberyard’s ability to prevent (or quickly correct) surprises is something no online vendor can match.

The obstacle for most full-line dealers is capacity. Outside salespeople are too busy trying to fry bigger fish. In many cases—not all—inside salespeople have a support mentality that makes them very good at customer service but not comfortable in an outreach role.

If you want to go after remodelers aggressively, chances are you’re going to have to bootstrap a program that is both dedicated to that segment of the market and able to reach smaller (if not the smallest) FSDB remodelers.

So the question is what that program might look like. It might look something like the niche Rick Wedding has carved out for himself.

Wedding is a 35-year industry veteran who spent the bubble years as a GM at a small-town yard that was part of a regional LBM chain in the Midwest. When his location was closed during the Great Recession, he decided to move home to Cincinnati. Job opportunities were slim, but Wedding ultimately found work on the sales counter at McCabe Lumber in suburban Loveland.

A lot of people take a temporary income hit at some point in their careers. Wedding decided to use his situation to see just how far he could push the boundaries of the inside sales position.

McCabe’s home builders work with outside salespeople, so Wedding’s customer base was limited primarily to remodelers. He knew most remodelers struggle with marketing, and figured that the best way to build a customer base was to become a steady source of job leads.

To do that, he needed a following among homeowners. He used a free DIY website builder to build his own personal website. As the Building Supply Guy, Wedding’s mission is to provide DIFM consumers “with all the tools you need to confidently choose the products and services that are right for your home.”

He uses the site to post product reviews and project advice, to showcase his clients’ projects, and promote products and services at McCabe Lumber. Each week they get bundled into an email newsletter that goes to a list Wedding built by promoting himself on social media platforms and a YouTube channel, and by inviting anyone who visits McCabe’s showroom to subscribe to his list.

Wedding has since expanded his repertoire to include a podcast and occasional videocasts in which he interviews contractor clients and promotes their services. His customers have come to see him as a partner and not a vendor, to a point where some even have him build and manage their websites.

It didn’t happen overnight, but eventually Wedding’s sales revenue far outstripped anyone else on the sales counter at McCabe. He was promoted to outside sales as a result, but his client base is still almost exclusively remodelers. The biggest change is that he now works from home. And makes more money.

At first glance, Wedding’s approach may look like a template you could use to tap into the remodeling market with your existing inside sales force. Maybe, but don’t be disappointed if it doesn’t work.

You need people who are willing and able to be entrepreneurs, and not all inside salespeople are cut out for that. They’re more interested in stability, and there’s nothing wrong with that. It’s why you also have outside salespeople.

So you may need to recruit from outside the company or even the industry to find people who are willing to do what Wedding does. Wherever you look, they’ll need to be comfortable with a job description that is more than slightly eclectic, at least for the LBM channel:

  • Build a personal website
  • Conduct internet research on products and projects
  • Build an email list
  • Write a blog with an email newsletter
  • Build websites for your customers
  • Launch a podcast and/or produce videocasts
  • Establish a strong social media presence
  • Manage a YouTube channel
  • Brand yourself as an influencer for your customers’ customers
  • Work flexible hours from home

It’s a weird mix, but there are bound to be people out there who would be attracted to a job that looks like this. Maybe even an entire generation.

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