Five ways to prepare for a downturn
High interest rates, inflation, continuing supply chain and labor issues. It’s hard to say exactly where the economy is going, but a lot of factors seem to indicate it’s not going anywhere great.
This fall and winter might be harder than usual for builders, experts say. Ben Johnston, chief operating officer at Kapitus, which specializes in small-business loans, says many banks are starting to pull back on lending. A recent Houzz study found 15 percent of homeowners are holding off on a home renovation project. “It’s hard to imagine the economy continuing to grow at the pace it was growing a year or so ago,” Johnston says. “I think we’re going to learn a lot about the strength of the economy over the next six months.”
Yet, housing starts have been up nationally, and Johnston says recent infrastructure and clean energy bills passed by Congress could help provide stimulus for the industry. Additionally, high interest rates are keeping people in their current homes—and low-interest mortgages—which helps drive interest in renovations. The same Houzz study found more than half of homeowners have a renovation project in progress or about to start. “As homeowners choose to remain in their aging homes rather than move, they continue to turn to industry professionals for assistance with necessary repairs and discretionary projects that improve their quality of life,” says Marine Sargsyan, staff economist at Houzz.
Related: Lessons from the Housing Crisis
What’s next is anyone’s guess. “If I knew what was going to happen, I’d probably change my investments and become very rich,” says Kevin Juliano with Ascent Consulting, which provides consulting services for builders throughout North America. “It’s all speculative.” But whatever happens or doesn’t happen, there are steps builders can take now to make the most of good times and better weather the bad times.
Have capital ready
Builders should work to ensure they have the right funding in place should they need it. Due to the recent failure of Silicon Valley Bank and others, “banks’ willingness to lend has changed quite significantly,” Johnston says. “There’s a lot of anticipation that regulation will continue to tighten around the banking industry.” Builders might want to speak with their bank to make sure they’ll have access to funds. Lining up other funding sources, in case they’re needed, can also be helpful. “If you’ve always relied on your local bank, make sure you’re having conversations with that bank to gauge their ability to fund future growth,” Johnston says. “It doesn’t hurt to talk to other banks and non-bank financing companies too.”
Additionally, high interest rates are making it more expensive to borrow. “If you’re borrowing to purchase inventory or bring in a new crew, you’re paying more for that capital right now,” Johnston says. “And at the same time, if you’re taking on a big job, the sponsors of those projects are operating on thinner margins as well.” Before taking on a large project, it’s helpful to make sure the people or companies that are paying for the project have enough money to fund it all the way through. “Do a little extra due diligence on the sponsors you take on for your big projects,” Johnston says. “Make sure they have the financial solvency to be able to support something if the economy were to turn sideways.”
Hire and train now
In tight economic times, builders often have to streamline their crews and do more work with fewer people. Cross training staff ahead of a potential downturn can help make sure staff members can take on multiple duties, if needed. “If you have a young project manager, maybe they could spend six months out in the field learning how to be a superintendent,” Ascent’s Juliano says. “If you have people who are cross-trained and more proficient, they become that much more valuable.”
For builders with current or upcoming hiring needs, it’s important to hire early and hire well—and to have enough money to do so. “It’s always hard to find great people in a timely manner and when you do find them, they’re more expensive than they used to be,” says Johnston of Kapitus. “Make sure you have the dependable staff you need so you’re ready when you need to be.” At the same time, Johnston cautions that builders shouldn’t staff up too early for projects that haven’t been finalized. “You don’t want to hire for something if you don’t have the bird in the hand,” Johnston says.
Related: Labor Challenges and Opportunities
Build and maintain relationships
In both good and bad times—but especially in bad times—strong relationships can help builders secure more projects. “Absolutely do not underestimate the value of relationships,” says Ascent’s Juliano. In 2007 and 2008, Juliano was working as an estimator in the industry and saw projects come to his company because it had proven itself to be a good partner. “Projects came to us because the owners would say, ‘We know you, we love you, and we can’t afford to lose you,’” he says. In good times, it’s easy to discount the value of relationships, but they can mean the difference between success and failure in the event of a downturn. “Now is the time to foster those really healthy relationships,” Juliano says.
Builders will be better prepared to weather a downturn if they’ve taken the time to improve their business during the good times. “A lot of times, in seasons when things are ‘fat,’ I see a lot of builders and contractors almost get lazy,” Juliano says. “And then when things do get tough, they struggle.” Builders should work to dial-in efficiencies and enhance any competitive advantages now. “If you’ve figured out a better way to do something, now’s the time to do that,” Juliano says. “Now’s the time to work out the kinks, try things you wouldn’t try normally.” Builders can also take the time to learn new skills or add more services to their roster. “I love to tell people to diversify a little bit, but that’s not always practical,” Juliano says. “You can’t tell a painter to go get good at masonry. But where it makes sense, it can help.”
Investing in infrastructure, such as new software, can also allow businesses to provide better service and improve the quality of their work. “Technology solutions can ease communication, improve efficiency and streamline operations to foster strong relationships that lead to repeat business and referrals,” says Houzz’s Sargsyan.
The bad news is that good times aren’t permanent, but the good news is that bad times aren’t either. Ultimately, builders in the industry will fare better over time if they can roll with the punches and learn to adapt. “Times will change,” Juliano says. “We don’t know how they’re going to change, but they will change. It’s important to have that mindset that you’re always going to have to adapt.