Contractors report soaring work volumes.
Even though economists have been predicting a housing slowdown in recent years, it hasn’t happened. Sales of new single-family homes for 2004 topped one million and set a sales record for the fourth consecutive year, according to the US Department of Commerce. “Sales were up nearly 9% for the year and topped one million for the second year in a row,” said Dave Wilson, president of the National Association of Home Builders (NAHB).Still, both NAHB and the Associated General Contractors of America (AGC) are predicting that housing construction in 2005 will dip somewhat from 2004. Even if it does, the housing market will continue to support strong volumes of site preparation work—the excavation, utility construction, and paving that goes with new home developments.
The nation’s value of new residential construction jumped 14%, to $550 billion in 2004. So let’s say housing construction dips by 3% in 2005. That would put it at $533.5 billion—still substantially above, for example, the $448 billion posted by non-residential construction in 2004.
And non-residential construction is expected to climb this year, according to Ken Simonson, chief economist at AGC. “I expect that 2005 will be a reversal from 2004,” says Simonson. “The non-residential side will grow faster than the residential side.
“I expect a small dip in residential construction after several record-setting years,” Simonson continues. “By 2006, residential [construction] will be pushing ahead again.”
He predicts that hotel construction this year will be very strong, that retail construction should be solidly positive, and health care construction will continue to do very well. “Offices should be picking up by the end of 2005, and even factory construction may be moving into positive territory this year,” says Simonson.
Strong Housing Backlogs
As the housing boom continued through 2004, the large publicly owned builders posted financial numbers—and backlogs—that will knock your socks off. The Ryland Group, for example, expects to deliver 18,000 homes this year, up 19% from 15,101 homes in 2004. Ryland is based in Calabasas, CA.
“In 2004, we posted our sixth consecutive year of record profits, new orders, closings, revenues, earnings per share, and backlog, and 2005 looks even better,” says Marya Jones, Ryland’s communications director. Ryland operates in 27 markets across the US.
In fact, on January 18, Ryland announced that its year-end backlog of units had reached a record 7,620 homes—up a whopping 30% from December 31, 2003. Fourth-quarter new orders hit 3,217—a 27% increase over year-end 2003.
Ryland is not alone. At Pulte Homes Inc., the fourth quarter last year completed a record-breaking year in which revenues climbed by 30%, to more than $11.7 billion. “As strong as 2004 was, Pulte is entering 2005 in an even better position with a record backlog valued at $5.2 billion and a strong land pipeline capable of supporting our growth targets for 2005,” said Richard J. Dugas, Pulte’s president and CEO. Pulte is based in Bloomfield Hills, MI.
At Lennar Corp., Miami, FL, another top public home builder, revenues from home sales jumped 19% in the year ended last November—up from $8.0 billion in 2003. Stuart Miller, president and CEO, cited Lennar’s “exceptional position in land-constrained markets, our $5.1 billion backlog, our 823 communities at year end, and our strong balance sheet.”
Centex Corp., Dallas, TX, is another one. In the quarter ended December 31, 2004, Centex’s domestic home sales rose 12% compared to the third quarter of the previous year. And the company’s backlog shot up 18% to 17,501 units.
KB Home, Los Angeles, CA, another of the nation’s top builders, reported that net orders in the fourth quarter rose 28% to 8,516—up from 6,629 net orders in the year-earlier quarter. KB Home said its backlog on November 30, 2004, had soared to the highest level in the company’s history, at $4.82 billion, up 57% from the same period a year earlier. Unit backlog on November 30, 2004, stood at 20,280 homes—a 38% increase from a year earlier.
It should be noted that market share is consolidating into the hands of large builders like those cited above. Pulte says that the market share of the nation’s top five builders jumped from just 2% in 1991 to more than 9% in 2003, as measured in new home starts. Measured in percentage of sales, the top five firms took 14% of the market in 2003—up from about 3% in 1991.
Contractors Cashing In
Ryan Inc. Central, a major grading contractor based in Janesville, WI, last year posted revenues of about $120 million, a 40% increase over 2003. Much of that work came from residential projects around Chicago and in the Mid-Atlantic region. Donald J. Hill, operations manager, declined to make any specific predictions for this year, but said, “We think things are looking pretty good for 2005.”
The company does all excavation, roadways, detention ponds, and golf courses associated with residential projects. Two recent projects have included golf courses that Ryan will complete. One project is a 400-home development in Hawthorne Woods, IL, and features a golf course designed by golf pro Arnold Palmer; the other project, located in Kenosha, WI, is a 300-home community with a golf course. The developers are Barry Shipman and former Chicago Bears lineman Jay Hilgenberg.
“We have relationships with hundreds of customers and prospective owners,” says Hill. “An engineer is a customer to us, and we’re all marketers at all times.” Ryan employs a full-time marketing staff. A safe operating record is a must when it comes to getting on bid lists, Hill says. To that end, the company hosts a week-long training seminar in which all employees are trained in Ryan’s business methods, including safety and management practices.
Also in the Midwest, the private-sector backlog has doubled in the past year—to $80 million—for McAninch Corp, West Des Moines, IA. A substantial portion of the increase stems from underground utility work, says Pat Ruelle, director of business development for McAninch. Two years ago the company had 17 or 18 pipe-laying crews; today the number is 24 crews that do storm, sanitary, and water lines.
Private-sector construction occupies most of the pipe crews at McAninch, Ruelle says. “For the most part, they’re big box sites,” he says, referring to the type of stores that major retailers build. The company recently finished grading for the Jordan Creek Town Center in West Des Moines, a 2-million-square-foot retail mall. And last fall, McAninch started work on a 150-acre office campus for Wells Fargo. Eventually some 14,000 persons will work at the campus.
The outlook? “We have many projects coming in the door to bid,” says Ruelle. “We anticipate that we will sustain the pace of 2004 this year. We have a tremendous capacity in grading work, and we’re looking to expand beyond Iowa.”
“In Iowa we only have an average of 160 days a year to work the earth,” says Tom Holtz, director of marketing at McAninch. The company hopes that winning some bids in publicly funded work will take its forces into other states—and that private work will follow. “In 2003 and 2004, we expanded into Missouri and North Carolina, and we’re bidding in Texas, Oklahoma, Nebraska, and Kansas,” says Holtz.
“In any area that we’re doing highway work, we’re also interested in private work,” Holtz explains. “We like to go anywhere the major developers take us.”
McAninch has used Global Positioning Systems (GPS) in some form since 1999, and is a beta site for Caterpillar/Trimble to test such systems. GPS systems greatly speed up project starts, because McAninch does not have to wait for grade stakes, says Tim Tometich, GPS project manager. “It also increases our production, because we know exactly where the cuts and fills are from the start,” says Tometich. “We don’t have to move dirt twice—and we don’t have to wait for survey crews. You just load the plans into the on-board computer on the machines, and away you go!”
At Gradex Inc., Indianapolis, IN, president Tom Dapp says last year roughly half of his firm’s $55 million in revenues—or $26 million—came from private sector grading work. “Most of that was industrial warehousing and logistics construction,” says Dapp. “There was a smattering of residential, some schools, and some shopping centers.
“Local design engineers indicate that they’re busy,” says Dapp. “So if they’re busy now, we’re going to be busy six months from now.”
Most of Gradex’s private-sector work is won through bidding, and Dapp is critical of some private owners and developers. “Private-sector work is not very profitable and it’s rampant with the risks of not getting paid,” he says. “The more the owners can operate on the contractor’s money, the less interest they have to pay. We just discontinue working for the ones that are slow-pay or no-pay.”
Meanwhile, Ruelle at McAninch, a union company, says his firm can compete with non-union companies through improved efficiency, the use of emerging technologies, and by running late model equipment. “We buy the best tools, hire the best people and expect the most results,” says Ruelle.