The Word Out West: Volume Is Up (Generally)

What's Hot West of the Mississippi? High-Rise Housing. And What's Not? Job Margins and Some Labor Availability Concerns

Mark L. Johnson / June 2014

Austin: Jerry Smith at Baker Drywall–Austin says volume is up by 20 to 25 percent. But out-of-state competition has doubled, he says.

Dallas: Construction is busy in Big D. But margins, says Marek Brothers Systems’ John Hinson, are very competitive.

Denver: Gregg Miller at Denver Drywall says Denver volume levels are good. But have fun finding workers. “Interview 100 guys, and you’ll find five qualified to do the work,” he says.

Honolulu: High-rise housing is hot, says V&C Drywall’s Vince Nihipali Sr. But military construction is down by 40 to 50 percent, and union wages are rising.

Houston: Due to the oil industry boom, “Houston’s on fire,” says Baker Drywall’s Smith. “It’s the hot market right now,” says Marek Brothers Systems’ John Hinson.

Los Angeles: Volume is up with lots of tenant improvement and retail projects. “But we’re continuing to see low margins,” says Travis Winsor of The Raymond Group.

Phoenix: High-rise housing has more than doubled this year over last, according to Canyon Plastering & Drywall’s Mike Hoffarth, but he says bid levels are still too cheap.

San Jose: “Solid” is how Craig Daley of Daley’s Drywall & Taping describes the market. He says, however, that tight margins still factor into bidding.

Seattle: This year’s market is down by 20 to 25 percent over last, says Kurt Mehrer of Mehrer Drywall. He says an uptick may come by year-end.


You’ve got to love America’s West—its vastness, its variety, its renown. In 2014, you’ll watch its cities grow. Business is good. New buildings are appearing in many places—from Houston to Phoenix, Dallas to Los Angeles, San Francisco to Honolulu. This year, versus last year, Western drywall contractors report increased volumes in high-rise multifamily, retail and education projects.
    
“They’ve started to build offices again,” says Jerry Smith, president at Baker Drywall–Austin. Smith says volume in Austin is up 20 to 25 percent this year over last year. “With new office buildings you have TI [tenant improvement] work coming. It’s a good sign.”
    
Los Angeles has a “higher level of activity,” according to Travis Winsor, CEO of The Raymond Group. He notes tenant improvement, retail projects and new downtown LA infrastructure all under way.
    
In Honolulu, Vince Nihipali Sr., president of V&C Drywall, says numerous high-end and mid-level high-rise condominiums projects are under way on the city’s west side. “The third and fourth quarter should be busy,” he says.
    
In many ways, Smith speaks for most Western contractors when he says, “There’s been a resurgence in the workflow.”

Margins Still Fairly Slim
It’s been a long time coming. The heyday markets of 2005 and 2006 are nearly a decade behind us. Since that time, the drywall and ceiling industry has endured years of shallow volumes and profits being in the doldrums. Not every market tanked, but most did. Are we past that now? Is the West our bellwether of better times to come throughout the nation? Can we finally count on earning some decent dough? No. Maybe. Probably not yet.
    
Yes, the bid process is humming in the West. More than one drywall contractor contacted for this article apologized for not being able to take even a five-minute call. They had imminent bid deadlines and had to stay focused on their work.
    
And, yes, more bids will likely lead to more work. But here’s the rub: A Western U.S. contractor who fills his plate with work may also find his incremental profits consumed by the need to invest proceeds into production. He has more work, but he needs more workers.
    
“I’m seeing a little upswing [in margin], but it’s job dependent,” Smith says. “Retail is still pretty cheap. School work is still pretty cheap. A lot of work is still going cheap.”
    
Today’s crew members command a higher wage than they did in 2005. In some markets, such as Denver, qualified help is severely undersupplied. It all comes with a cost.
    
But even if a drywall contractor wants to bid higher, he may struggled to execute a higher price in the end. Competitors left and right fight for their share of the growing construction pie.
    
“There’s still too much capacity among us drywall contractors,” says Craig Daley, president of Daley’s Drywall & Taping and also president of AWCI, speaking of the San Jose and San Francisco markets. “We’re still bidding ourselves down. The margins are still fairly slim.”

Houston: “Going ballistic”
Texas building projects are numerous, especially in Houston. California has work under way, albeit with plenty of competition vying for that work. From a volume perspective, Arizona and Colorado look good, too.
    
“Houston is the one that’s going ballistic,” says John Hinson, division president at Marek Brothers Systems. Marek has multiple offices, but Hinson’s home base in Dallas runs jobs throughout the state of Texas and in Oklahoma and Arkansas. “Oklahoma City is probably slowing down the most,” he says of his marketplace.
    
This year, the drywall market is down in Seattle, according to Kurt Mehrer, president of Mehrer Drywall. “It was better last year,” Mehrer says. “We had projects start up for Amazon and Microsoft, and they’re ongoing. But the volume this year is down by 25 percent, maybe 20 percent.” Still, Mehrer sees the Seattle economy improving later this year.
    
Winsor says the volume of construction activity in Los Angeles and San Diego is improving this year over last year. “But, we’re conti nuing to see low margins,” he says. “Competition is very tight.”
    
In Northern California, in San Jose and San Francisco, drywall contractors are seeing fewer school and public works projects. Private tenant improvement projects in Silicon Valley are holding steady in number, and multifamily in the Bay Area is busy.
    
Texas truly has an admirably diversified construction marketplace. One drywall contractor said the work never really went away from the Lone Star State; it just dipped, and now it has come roaring back.
    
For example, in Dallas and Fort Worth, where government construction has become relatively slow, multifamily high-rises are hot. Hinson says that “multifamily, multi-use developments”—project that are part retail, part office, part apartment complex, part hospitality—“are popping up everywhere.”
    
Hinson says colleges and universities in his market are building. For years, they’ve been building dormitories, apartments and housing for students, which he says are revenue-generators for these institutions. Now, he says, they’ll start building classroom additions and expanded conference facilities.

“Let’s Raise Prices”
But what’s the story with the low margins out West?
    
“Guys come in and bid cheap to get the jobs and end up losing money,” says Nihipali, speaking of Honolulu and other Hawaiian cities. “If you have that mentality for a couple of years when it’s slow, then instead of one or two guys bidding cheap, you have many—and all needing to turn volume.”
    
Smith says his Austin competition has doubled. “What we saw was from out of state,” he says. “There’s a big company from California, one from the Midwest, one from Florida. These companies come in to bid, pick up a job and springboard from it to open a satellite office.”
    
However, Nihipali thinks there’s more than just competition behind the current slate of low-margin projects. He says general contractors have changed their stakes in the game. They’ve changed the rules, so to speak. But how?
    
“Years ago when they came up with a design for a condominium, it was all design-built. They’d put a 100-percent design out to bid,” Nihipali says. “Now, the general contractors and developers—but especially the generals—come out with a 60-percent drawing for a condo. The drawing doesn’t have the full details. The contractors bid, the numbers come in cheap, and the generals sign someone up right there on the spot and knock everybody else out of the game.”
    
In other words, margins are tight because there’s often not enough data to bid intelligently—or so it seems in Honolulu.
    
“I believe some potential is going to present itself in the marketplace,” says Winsor, commenting on the construction volume potential of Los Angeles, San Diego and the rest of Southern California. “However, I have significant concerns about whether or not there will be sufficient margins available to sustain the volume. It doesn’t make sense to sign up a bunch of work, take the risk and put strain on the organization for little or no profit.”
    
Others echo the same sentiment.
    
“Let’s put it this way: There’s more work now to bid, and stuff is happening. They’re breaking ground and moving forward,” says Mike Hoffarth, vice president and project manager/estimator at Canyon Plastering & Drywall, about Phoenix, whose hot sector is high-rise housing. “But the pricing is still as bad as it’s been in years.”
    
“It’s crazy,” Hoffarth adds. “Most business people would say, ‘There’s more than enough work for all of us. Let’s raise prices. We can all get work, and we can make a little bit better profit on it.’ But, I’m not seeing that. They’re still bidding it at these really cheap, competitive prices, and that’s frustrating.”

Materials Availability and Prices

Austin
Sources say to look for a modest upturn in material prices, but not anything significant. Availability is not a problem.

Denver
Availability of materials is good. Prices are moving up—though slowly.

Honolulu
One shipper to the islands recently announced a freight increase of 7 percent. As for materials availability, there appear to be no problems—other than a shortage of drywall screws, one source says.

Los Angeles
Drywall contractors describe building materials availability here as “adequate.” Prices on some materials are heading upward, particularly on commodity items.

Phoenix
One contractor says this about materials availability: “We haven’t had that problem for years.”

San Jose
“Capacity output is good,” says one contractor. And, distributors are all fairly competitive on materials’ prices.

Seattle
No real problems with price increases and availability, sources say.

What About Labor?
Let’s consider five cities:

Dallas
John Hinson at Marek Brothers Systems says the available legal labor is shrinking. He says the shortage is trade-dependent—“the high-end licensed trades, as opposed to the commodity trades, such as concrete workers and [drywallers].”

Denver
Gregg Miller, vice president at Denver Drywall (which is fulfilling work contracts while it liquidates its assets), says that “there’s no labor to be found” in Denver. He says a large VA hospital project has employed many tradesmen and is setting the government union wage for the market, which is “60 percent more than the average wage in Denver.”

Los Angeles
Travis Winsor of The Raymond Group says the current labor supply in Southern California is “stable at this time.” He adds, “If some large projects go forward, we anticipate a labor shortage in the next 12 to 18 months,” noting that the supply of carpenters and drywall finishers will likely be impacted the most.

San Jose and San Fransisco
“We’re not having any manpower shortages,” says Craig Daley of Daley’s Drywall & Taping. “We’re able to keep all the good guys busy, because there’s still unemployment.”

Mark L. Johnson is an industry writer and marketing consultant.