Batten down the hatches. Keep afloat. These are challenging times.
These types of phrases pepper recent conversations with contractors and developers, with the general consensus being that things could be worse, but they could be a whole lot better and that nothing is going to change very fast.
"Everyone is scrambling to keep their head above water," said Ron Frederiksen, president of RSV Building Solutions.
Residential sector shows signs of life
According to Mike Lamb, associate broker with Windemere Stellar Group, "some things are going on" in residential construction. But, said Lamb, new home construction will look a little different going forward.
"We have gone back to an older model, where builders live in a house they build, sell it, move out and build another one." Lamb said
The U.S. Department of Commerce recently reported that in the West, new housing starts were up 8.9 percent in January from the previous month, but still well below January 2009 figures.
Matt Lewis, spokesman for Pacific Lifestyle Homes, a builder active in the Portland-Vancouver metro area, concurred with these statistics.
"January and February have been better than the last six months, with enhanced traffic through our model homes, more sales and more qualified, interested buyers," Lewis said.
However, Lewis wasn't ready to declare normalcy in the market, citing cautious buyers with lots of choices, tight financing and low appraisals as some of the challenges home builders face.
Lamb pointed to overpriced lots, sometimes valued up to 40 percent of the total home price, also weighing heavily on the residential market.
Lewis and Lamb both said that lower-priced homes are the most active in today's market – a trend attributable to the continuing effects of a federal tax credit for first-time home buyers, which is set to expire this spring.
The surge in activity linked to the tax credit may account for Clark County's real estate market posting its best start since 2007, with sales activity up 18.5 percent from December and pending residential sales up 20.2 percent from January 2009, according to a February market report compiled by Lamb.
"For perhaps the first time since 2007, the market appears not only to be improving, but actually to be normalizing," Lamb said. But he cautioned that continued progress depended on buyers being able to get loans and, most importantly, upon increases in the number of people employed in the region.
"I don't see a whole lot more depreciation," Lewis said. "The question is – what kind of recovery will it be? A long slog is most likely."
Commercial sector prepared for worst
By all accounts, the next two years are going to be tough for commercial contractors and developers. According to the Institute for Trend Research, new commercial construction in 2009 declined 55 percent from 2008 levels, with predicted 2010 levels falling another 25 percent.
Frederiksen said his firm's numbers mirror these figures very closely, with RSV's year-to-year revenue declining 52 percent in 2009. "I'm planning on a further decline this year," he said.
Elie Kassab, president and CEO of Vancouver-based Prestige Development, said that although the mood of people in the construction and banking industries has improved somewhat, he thinks the recovery will take at least two years.
"Companies have to start feeling more comfortable to expand, the vacancy rate needs to drop and bankers need to feel more comfortable lending money," Kassab said.
According to a report released last month from commercial real estate brokers Eric Fuller and Associates, January's office vacancy rate of 18.65 percent marked the fifth straight month of vacancy declines – a trend the author of the report, Adam Roselli, called a "fragile recovery." But that's a long way from what Kassab said was a healthy vacancy rate, which he pegged at 7 percent.
John Bullwinkel, vice president of strategic business development in the Vancouver office of Howard S. Wright Constructors, said that with little job growth, the private sector of the economy has no compelling reason to build projects. And while federal stimulus money is creating jobs, mostly in the public arena, Bullwinkel did not consider that a sustainable growth model.
And with predictions of another wave of foreclosures hitting the market nationally, along with persistently-high unemployment, there are concerns that commercial real estate is in for a prolonged period of decline.
"I don't think we've reached bottom in the commercial sector," Bullwinkel said. "That's two to four years out."
Bullwinkel also said that many firms bought property at peak prices; but now that property values have declined and rent rolls have diminished, such firms are having difficulty meeting their debt requirements.
"2010 will be the year of
bankruptcy for commercial contractors and subcontrators," Frederiksen said.
Surviving the slog to recovery
Contractors like Pacific Lifestyle Homes, RSV Building Solutions and Howard S. Wright agree on at least one thing: adapting your business model to the market is paramount to survival.
"A strategic company is one that is most attuned to the buyer," Lewis said.
To make new homes competitive with similarly-priced existing homes on the market, Lewis said Pacific Lifestyle has added features such as hardwood floors and stainless steel appliances – giving the buyer more for their money.
Frederiksen said that he has restructured his company to the size they were in 2005 to "match the available market." He also considers a strong cash position very important.
Bullwinkel said his firm's survival plan consisted of four main tenets: understand that the market has contracted, pursue projects that have funding, make smart business decisions and watch the bottom line.
"You keep the very best people you have working and try to create opportunities to hire new people," Bullwinkel said.
Despite the obvious challenges, Frederiksen said that the current economy offered opportunities as well.
"I'm strangely invigorated by this environment," Frederiksen said. "Once you've been through the cleansing and made your company tighter – when the bump in volume does come, it can be very profitable."
