Of the 1 million-plus housing starts going on this year, almost none of them happens without a heavy lift from upfront capital investment. Once a permit gets pulled, a mini-drama starts unfolding for each residential unit, as time, money, labor, materials, and tasks to be done right converge and conspire to erode a builder's ability to make a profit.
Summertimes are when these mini-dramas heat up, especially after Spring selling gets traction. Now, a race is on. Builders need to get through their construction cycles, complete and settle so that they can take down their next financial "draw," deploy people, queue up more materials, finish more houses, settle, and repeat.
If builders, especially the ones for whom project financing is lifeblood, don't keep pace with the four-week forward-motion demands of this process--if the mini-drama on a new residential unit turns into a melodrama or a tragedy--businesses can go off the rails pretty fast and pretty meaningfully.
Half of the new single-family homes built in the U.S. are done by companies who build fewer than 100 homes. These companies know that there's no way around the stress-test of project lending that requires Swiss clockwork payments in order to access the next draw on the loan, so construction needs to go as planned, factoring for weather disturbances, unforeseen issues, vacations, and other variables that impact getting the job done.
So it's an eye-opener to see a recent analysis from National Association of Home Builders economist Paul Emrath that notes that seven out of 10 builders reports that are shortages of people who do rough carpentry, and three out of four builders report a similar level of difficulty lining up rough carpentry subcontractors for projects. Most stunning of all, is that by and large, builders report that the pain point around labor shortages is more pronounced than it was at the height of the last decade's building bonanza. Emrath writes:
The incidence of shortages is surprisingly high given the rate of new home construction, which has only partially recovered from its 2008 downturn. In fact, the 9-trade shortage is now substantially higher than it was at the peak of the 2004-2005 boom, when annual starts were averaging around 2 million, compared to current rates of about 1 million. The last time builder-reported labor shortages were as widespread as now was just before 2001—during a prolonged period of strong GDP growth with overall unemployment as low as 4.0 percent.
The NAHB study confirms and corroborates work that BUILDER and its sister company Metrostudy have done to bring light to one of home building's most challenging issues, labor capacity constraint. Our analysis, done on behalf of Acme Brick, Johns Manville, Lubrizol, and MiTek--Berkshire Hathaway Companies, notes that seven in 10 builders say that labor is their No. 1 pain point. A two-part special report on the problems and perspectives on approaches to address it, from BUILDER deputy editor Les Shaver, is here and here.
Still, one can't help but think that this notion of becoming subcontractors' and laborers' "builder of choice" is a thinly-veiled way of referring to simply paying more money than the other guys, and paying it in a more timely way than the other guys. We know there are less tangible, more holistic factors that go into why trust, reliability, and durability bond some trade-to-builder relationships, but dollars probably trump most of those other intangibles.
Which gets us back to the mini-dramas. If you can't schedule work reliably, and if you're estimates are in flux because you may have to pay more of your trades more because it's particularly difficult to get one group or another lined up for when you need them, then your whole production budget is at risk, which puts your repayment schedule for your project financing into a risk situation, and not much good comes of that.
So, it's with interest that we note focus this week on other industries whose biggest affinity with home building is an equally dire need for fresh new reinforcements in labor capacity. Here, New York Times columnist Nelson D. Schwartz looks at Huntington Ingalls Industries' the Apprentice School in Newport News, Va., which trains young people in ship building. Schwartz writes:
Long regarded by parents, students and many educators as an off ramp from the college track, apprenticeships are getting a fresh look in many quarters. The idea has recently captured the attention of several presidential candidates from both parties, with employer-oriented apprentice programs increasingly seen as a way to appeal to anxious Americans looking for an alternative route to a secure middle-income job.
Last month, Hillary Rodham Clinton proposed a plan that would offer companies a $1,500 tax credit for each apprenticeship slot they fill. And in a speech laying out his economic plan on Tuesday, Senator Marco Rubio of Florida, a Republican primary contender, vowed to expand apprenticeships and vocational training if he makes it to the White House.
Rightfully, builders have long seen apprenticeships as a ramp-way into a livelihood that solves, not only for home building's labor shortage problem, but addresses the "student debt" tsunami, and, perhaps most importantly, adds fresh new ideas and perspectives to practices that are largely the domain of ancestral knowledge and belief. The industry and some of its players have championed apprenticeship as at least part of the answer. But what about progress?
In most industries, and home building would have to be included as one of them, apprenticeship is underutilized.
Why? What would it take for home building to match Germany's rate of 40 apprentices for every 1,000 jobs, vs. the current U.S. rate of three per 1,000?
Thoughts?
