In a good year, Tower Park Construction in Twinsburg, Ohio, builds about two dozen homes. But through mid-October 2008, Tower hadn’t started a house in two years. Like thousands of others in the construction trade, anxiously waiting for their markets to recover, Tower is “holding on,” says owner Jeff Budzowski, by taking on remodeling and commercial construction projects.
“[Home] builders who would have turned their noses up at certain kinds of work are getting into renovation, commercial, retail, and even limited-scope projects like decks,” says Chris Pattey, director of residential construction for the Salisbury, Md.–based architectural firm Becker Morgan Group. The St. Louis Post-Dispatch recently reported on one custom builder, Padgett Building and Remodeling in Swansea, Ill., which now gets 70 percent of its business from remodeling, versus 40 percent in previous years. And the same tale is being told in every corner of America’s hobbled housing industry.
“We’re doing a lot of remodeling,” says Budzowski. Those jobs have included adding garages and sunrooms and finishing basements, as well as a complete makeover of a house owned by a player for the Cleveland Browns football team. Budzowski’s experience illustrates some of the advantages and limitations of diversification: Yes, it keeps cash flowing, but the jobs are generally smaller, the margins can be tighter, and home builders must compete with those in other industries who are in the same boat they are.
But with residential construction on its back, builders may have little choice but to diversify, observes San Diego-based architect Kevin deFreitas. “The market that has existed for the last 30 years doesn’t exist anymore,” he warns, “and won’t exist in the future.”
New divisions for business
Several builders whose companies have made the transition to other types of construction say they expect such moves to outlast the housing recession. “We want to make an effort to restructure the company, because we definitely see the demand” for renovation, says Michelle Dashiell. Her firm launched a sister company to manage its renovation work, and since then it has been fielding two to three referrals per week.
The Dearborn Buckingham Group, a single-family and townhouse builder in Northfield, Ill., recently set up a separate division to handle remodeling projects as well. A few months ago the firm started contacting its home buyers to see if they were interested in improvements such as basement finishing or kitchen upgrades. “So far, the response has been pretty good,” says Chris Coleman, Dearborn’s president. But his company appears to be one of the few high-volume builders that have moved in this direction. Although, Coleman does find remodeling to be different from production home building “in almost every aspect. It’s similar to building a custom-made house [in terms of] scheduling requirements. Plus, the owner is living in the house,” so on-site supervision of the project is more intense.
During the downturn, some builders stumbled into renovation and commercial work. Two years ago, for example, Rachel Matthew Homes in Corrales, N.M., built a 4,500-square-foot office for itself that included many of the flourishes found in its high-end custom homes: granite countertops, Viking appliances and fine trim details. Its president, Steve Nakamura, says he intended to use the office as a showcase for the options his company offers to its home buyers.
“We realized there was a market for this kind of building,” he recalls, when a commercial broker brought one of his clients to the office, and that client offered to buy it. Nakamura accepted that offer, acquired another lot, built a 6,500-square-foot office that was even more ornate, and then sold that building in November for more than $1 million. Now, Rachel Matthew Homes is buying land for 25,000-square-foot office/condo complexes. “The people we build our McMansions for are their own bosses, and want to work in an amenable environment,” Nakamura explains. And his appetite has been whetted for commercial work in general: This fall, his company negotiated to build a 7,000-square-foot fire station for the city of Rio Rancho, N.M.
Have labor, will travel
Diamante Custom Homes has built both residential and commercial projects for years, but limited its services to customers within 30 minutes of its San Antonio headquarters. In early 2007, a client asked the builder if it would renovate a bus terminal in Eagle Pass, 150 miles away on the border of Texas and Mexico. Adam Sanchez, Diamante’s owner, took on this $300,000 project, but only after he was sure he’d have sufficient labor to complete it. “What surprised us was that our subs were willing to go down there,” Sanchez says. With the approval of its client, Diamante paid its subs a trip fee of $75 to $100 per day, or a per diem for meals and lodging.
Labor hasn’t been a problem for other home builders who say they are using their residential contractors for most of the remodeling and some of the commercial work they take on. Coleman notes, though, that he’s had to broaden his trade base because some remodeling projects are too small for his home-building subs. And Dashiell says her subs have learned to make concessions about what they charge if they want work, because “margins on renovation jobs are generally lower” than on home building.
To maintain a respectable profit, Sanchez says his company, when bidding for nonresidential or remodeling work, stays away from anything that’s higher than three stories or over $500,000 in scope. That way, he avoids mixing with larger commercial contractors that can come to the table with bond financing.
Work is where you find it
There’s no question that more builders are turning over every rock to uncover new business. Last December, Budzowski became NAHB-certified as an aging-in-place specialist, a designation he now markets to owners who want to stay in their houses longer. He consults with physical therapists or caregivers “to determine what [the owner] can and can’t do,” and then remodels accordingly, such as making a home wheelchair-accessible or improving its lighting. Budzowski recently spoke about aging-in-place to a senior citizens group in Independence, Ohio, and if that visit produces business, he intends to reach out to other senior groups.
Based on its success with the bus terminal project, Diamante Custom Homes is now promoting its services to markets farther away. It relaunched its Web site to be more generic, and spends more with search engines so that its name pops up prominently.
Builders such as Sanchez and Nakamura, whose companies have remained reasonably active on the residential front during the downturn, also are eager to sustain their remodeling and commercial businesses long term. That’s true as well of Lonnie & Chad Brown Builders in Versailles, Ky., a company that will build around 35 homes in 2008, down from the 45 it built the previous year. It will also complete 25 remodeling projects. Owner Lonnie Brown says his company will continue to bid on remodeling projects even after the new-home construction market revives. When asked why he would continue relying on lower-margin renovations, Brown responds philosophically: “Well, you can’t eat a lot of filet mignon, but at least you can eat.”