(l-r) Randy Knutson, Brad Ballard, Jim Vrchota, Travis Buege and Greg Backes
In our second story focusing on industries in 2018, we highlight two related industries, Building Material Dealers and Construction Managers/Contractors. Our goal is to bring you useful information and research for those industries.
Read our first story on food manufacturers and wholesalers here.
Randy Knutson and Greg Backes, of Kendell Lumber of Winona and Rollingstone, and Brad Ballard and Travis Buege, construction managers with Gordian’s Knot, will tell you the outlook for building is good.
Merchants Bank Commercial Banker Jim Vrchota will tell you that he and many other commercial bankers across Merchants Bank’s footprint especially enjoy working with these industries.
“Our bankers especially enjoy helping businesses in these sectors because their success is based on the same elements as ours – exceptional service, competitive products and strong relationships,” Vrchota said.
But what do the numbers say? Let’s take a closer look:
Building Material Dealers
Data from Hoovers and First Research says this about the future for Building Material Dealers:
- “The value of US residential construction spending, which impacts contractor demand for building materials, rose 4.3% in January 2018 compared to the same period in 2017.”
- “US retail sales for building material and garden equipment and supplies dealers, a potential measure of building material supply demand, increased 6.0% in the first two months of 2018 compared to the same period in 2017.”
- “Total US wholesale sales of durable goods, a potential measure of demand for building materials, rose 9.7% in January 2018 compared to the same period in 2017.”
And this about predicted growth through 2022:
“The value of US private and public building construction, which is a driver for building material supply sales, is forecast to grow at an annual compounded rate of 6% between 2018 and 2022.”
Residential Construction Contractors/Construction Managers
Data from Hoovers and First Research say this about the future for Residential Construction Contractors:
- “US personal income, which drives consumer spending on home construction, rose 3.8% in January 2018 compared to the same month in 2017.”
- “The value of US residential construction spending, an indicator of the health of the residential construction market, rose 4.3% in January 2018 compared to the same period in 2017.”
And this about predicted growth through 2022:
“The value of US new residential home construction and renovation is forecast to grow at an annual compounded rate of 7% between 2018 and 2022.”
Demand is Cyclical
The numbers show the industry is enthusiastic, but it is a cautious enthusiasm tempered by experience for those who have worked through downturns.
As Hoovers and First Research points out — “Demand for new residential buildings can change rapidly, depending on the economy and interest rates: from 1986 to 1991, annual US home construction dropped 40%; from 1995 to 2005, it increased 75%; and from 2006 to 2011, it fell 65%.”
Both Knutson and Backes and Ballard and Buege understand that first-hand. They point out that one of the reasons they are doing well now is because they are survivors. They said the number of dealers in their market has shrunk since 2008, as did the number of contractors. A result is businesses like Kendell absorbed the customers of other dealers, and the need for Gordian’s Knot’s service has increased because there is less competition and demand is picking up.
Compared to 2008, for example, Kendell is above where they were in terms of business, according to Knutson and Backes. The same is true for the residential construction contractor/construction manager business, according to Ballard and Buege of Gordian’s Knot.
“The same house we built last year cost 15% more this year to build and it will continue to grow,” Ballard said.
Another threat is the cost of materials. A lumber tariff on Canadian lumber has driven prices, and steel prices have also risen because of recent tariffs, according to Knutson.
Hoovers and First Research notes that the average margins for “lumber companies selling commodity products primarily to contractors can range from 5 to 20%. Home Depot and Lowe’s, which sell mainly to consumers, have gross margins of about 35%.”
That increases the need for efficiency, and one of the best ways to be efficient for dealers is to provide quality materials where contractors don’t have to come back for better materials or deal with complaints from end use customers down the road, Knutson and Backes pointed out. Ballard and Buege noted Kendell’s top materials save them time because they don’t have to sift for quality.
Another threat is material allocations from producers, according to Knutson. He said it is simply that there may not be enough to go around at times because some of the larger big box stores have ordered the biggest part of the material supplies because of natural disasters.
It’s also difficult to find people to work. The 34-year-old Buege is a bit of an anomaly in the industry where he said the average worker is 55. He said people across the industry are faced with the challenge of finding dedicated and accomplished workers.
“The cost of trade labor has gone up,” Buege said. “But the cost of building is still manageable. The economy is good and people have equity in their current homes.”
While there are things to pay attention to, Gordian’s Knot and Kendell agree they are generally optimistic about the future.
“Everybody is pretty confident in the economy,” Backes said.
It Comes Down to the Relationships
Kendell and Gordian’s Knot both are long-time customers of Merchants. Kendell has been in business since 1957 and Ballard started Gordian’s Knot in 2004.
“Ours is a relationship business,” Backes said.
“We answer our phones and we call people back. If we can’t help them, we get them to someone who can,” Ballard said. “We grow through the service we provide.”
That service and willingness to understand and support their businesses is why both Kendell and Gordian’s Knot partner with Merchants Bank.
“It’s the quality and service experience. There’s a value there that’s hard to put a price on,” Backes said.
Vrchota said it’s that “Start to Finish” attitude that is pervasive with Merchants and is one of the reasons Merchants stands apart from others. Another is how Merchants can help them with their financial needs, especially in a business that is seasonal.
Typically, with suppliers, a bank can partner with them in a number of ways, Vrchota explained. Often, it is with a line of credit so money is available when the business needs it, or with equipment or real estate financing.
With contractors/construction managers, a line of credit is often in place, and there is an emphasis on helping them with financing for construction projects.
“Those are the basics,” Vrchota said, adding that the end use customers may also look to Merchants for construction financing and then hire professionals like Gordian’s Knot. “But every business is different in some way, so it is worthwhile to work with a banker that is knowledgeable, adaptable and will take an interest in your business, like our bankers here.”