It’s an Ill Wind

Vince Bailey

December 2008

Alright, I admit it. For months now I’ve avoided the issue—but for good reason. It’s much like the first barely discernible symptoms at the onset of toothache or a cold or the flu. We have this perverse notion that talking about it will somehow validate or even invite the impending illness. So we stuff a sock in it, silently deny the whole thing and hope, however futilely, that it will just go away. It’s not rational, but it is typical human nature. Likewise, our propensity for ignoring the obvious decline in our industry will not lessen its painful effects. To the contrary, a healthy airing of the current circumstances might even get us thinking about ways to cope.

I’m no economist, so I won’t comment on causes or projected duration, except to say that recent political developments don’t seem to herald any speedy relief. But as an observer of the industry, I do see a number of trends in this downturn emerging that by now should be apparent to even the most oblivious among us—a head-in-the-sand naysayer such as myself included. The degree to which we are affected by a tightening of the market splits, predictably, two ways: geographically and by our unique portion or scope of work in the industry.

The most obvious example of this occurs at the division between residential and commercial construction. As we have seen, housing, at least single-family residential, has suffered the initial and perhaps most severe blows dealt by the current recession. Drywall businesses that specialize in residential work are downsizing in leaps and bounds, and some will inevitably be forced to close their doors before any upturn occurs in housing activity. The one glimmer of hope that remains for residential contractors comes with a recent upward trend in multifamily residential work. But even with this hopeful exception, the general shrinkage of the residential market has presented many "shack-hacks” with a grim set of prospects.

Those drywall contractors, however, who have developed a more diverse approach to the construction market will find survival—even a degree of success—more plausible. Commercial construction, although on the decline in general, offers a number of active pockets that have defied the downward trend and have actually demonstrated some positive growth. So while retail buildouts and tenant interior work have fallen off drastically, public-funded projects such as schools, libraries and transportation facilities are still cropping up. Recreation/amusement (casinos, theaters, sports facilities), energy-related development and health-care facilities are other vital pathways toward sustained activity.

In a sense, the geographical aspect of impact on the contractor derives from these selective paths of activity. Logically, as the focus on what type of indigenous construction occurs in a particular area varies, so does the impact of decline vary, almost in direct proportion. So we see, for instance, those geographical areas that are predisposed to energy exploration and development will enjoy sustained growth in construction, while areas that are manufacturing-intensive will tend to suffer in this regard.

What does this mean to estimators in the wall and ceiling business, and what kind of adjustments will you have to make in order to adapt? First, the market shrinkage will create more competition for the share you once comfortably maintained. You may find yourself stretching labor productions, shopping materials for better pricing, and slashing profit margins in an attempt to ward off increasingly aggressive competitors. In addition to increased aggression from your present competitors, you may experience an unexpected and unwelcome influx of "out-of-towners” who are fanning out from their normal zones of operation in an attempt to survive.

Conversely, you may find that you have to "fan out” yourself, moving into new geographic areas and new scope venues—out of your comfort zone and into uncharted waters just to pay the overhead. A shift in scope may entail something as simple as changing focus from single-family residential to multi-family, or something as daunting as deviating from the familiar repetition of tenant buildouts to the critical complexities associated with a new hospital wing.

But wait. If all of this gloomy talk has got you questioning your future in the construction business, don’t turn to desperation so easily. Adapting to a changing environment can be a positive thing if approached with a measure of rationality. There’s an upside of the downturn that we will explore next month.

Vince Bailey is an estimator/operations manager for San Juan Insulation and Drywall, Durango, Colo.