Ports in a Storm

This spring, as cherry blossoms brightened the nation's capital, Congress debated plans to stem a spreading financial crisis and rescue homeowners from ballooning mortgage debt and plummeting home values. But just a couple of miles up the Potomac, Washington, D.C., custom builder Jim Gibson reports no damage to his own business from the turmoil in the housing market. “I know it's pretty bleak out there for a lot of people,” says Gibson, who builds high-end remodels and new homes that range in price from $2 million to more than $5 million, “but we are busier than ever. I'm actually turning work down.”

Gibson sees effects of the downturn, but none of them has negatively affected his work. “I've had more framers calling me, more excavators, people who traditionally do both residential and commercial,” he says. But Gibson's standard cast of subcontractors, who serve the same well-heeled clientele as he, seem similarly insulated from the shock that has hit spec and production builders. “So far our market—or my niche in it—is very resilient,” he says. With a full schedule of work under contract or under construction, “We're good through 2008. We're not slowing down at all.” And the road looks clear beyond that. “In the past 30 days I've spoken to five or six serious clients.” That puts his horizon well into 2009, by which time he expects the market as a whole to begin to recover. “I just spent some serious money on renovating our office space,” Gibson says. “I'm more concerned with my outside investments than I am with my business.”

Up in Vermont, worries about the economy press in a bit more on Tim Frost, whose market is both outside the Beltway bubble and somewhat more middle class than Gibson's. With a general decline in activity in his market, Frost says that his primary concern these days is “looking ahead and trying to anticipate how things are going to play out in the economy.” But after months of bad news, Frost is not waiting for the other shoe to drop. “We're trying to be proactive in our marketing,” he says, “working our circle of influence, which is previous clients. We're trying to keep in touch with those folks on a regular basis.” Frost has stepped up the pace of his communications, checking on how finished projects are holding up and inviting former clients out to lunch. “We're also rolling out a new program. We're going to do some informational seminars on the remodeling process.”

Hard times are a new experience for Frost, but in a way he has been preparing for them since he founded his company in 1988. “Since then it's been pretty much straight up without any real slowdown,” he says. In such a sunny business climate, he might have done well even without a sophisticated marketing program. But years of effort devoted to building his company's brand—professional company graphics, regular mailings, projects published in national magazines, a nice Web site—are paying off now, as a tightening market creates a flight to quality. “It takes years of repeated actions to create that [reputation],” Frost says. “We're doing a kitchen for a woman now, and she received her first postcard 10 years ago. For people who were just waiting for stuff to come in the door, it's a little too late.”

Sun Belt cities, which grew by leaps and bounds during the recent building boom, have felt some of the sharpest effects of the current downturn. Scottsdale, Ariz., custom builder Dave Reese expects a significant decline in his company's volume from last year. Still, says Reese, “We're not crying the blues by any means. We're pretty comfortable here.” Timing and foresight help. In January 2007, Reese had 10 spec houses in design or under construction. “Currently we have none under construction,” he says. “We have one spec for sale.” And while activity in spec houses is down dramatically, the market for Reese's $2 million-to-$8 million custom projects remains relatively strong. “Luckily, in our market, we're in developments that require lengthy approval processes”—on the order of nine months—“and that gives us a very definable backlog.” With a healthy number of projects in the pipeline, Reese says, “We feel like we're in pretty good shape for 18 months or even two years.”

The slowdown has its upside, too. “We're getting extremely competitive pricing from suppliers and subs, and we're getting very high-quality workers,” says Reese, who has taken the opportunity to apply some market discipline to his own company. “We're in a little of a cost-savings mode from an internal standpoint,” he says. “We're down a handful of people, and we're pursuing leads a bit more aggressively.” His volume will be in the $20 million range this year, down from a record of $26.5 million in 2007. “And that, frankly, was a little too much. We were running. Part of the shrinkage that we're seeing was intentional.” On the whole, Reese says, “recessions or slowdowns can be cleansing.” And, he points out, they eventually end. In anticipation of that moment, he has half a dozen spec houses in design. “We're trying to keep our powder dry and throw some on the market when the time is right.”

No tour of the current building recession would be complete without a visit to hard-hit Florida, where custom builder Jay Fechtel paints a sobering picture. “We're in the Tampa Bay market,” he says, “and we had kind of a perfect storm here after the hurricanes [of 2004].” First came the direct destruction, then homeowner's insurance became unaffordable or unavailable, then property tax rates spiked. “And when the market turned down, you put all that together and it's a pretty bad prescription. There are some brutal markets down here, like the condo market. The activity for inventory product is horrendous. If you have an existing house, no one's interested.” Fechtel owns a development approved for 12 high-end houses. “I could go ahead and start construction,” he says, “but I'm hesitant to do that without some sense that the buyers are going to be there.”

“At the same time,” Fechtel adds, “I've got custom homes to start.” And while house projects in Fechtel's pipeline are at about half of the usual number, his custom home clientele has stepped in to fill the gap in an unexpected way. “What has ramped up is the specialty additions,” says Fechtel. “I used to tell folks when they'd call on these, even former clients, that I just don't do them. But even before the market turned—just to help a client out—we built one, then another, and we found that they actually could fit our business model and make sense.” Fechtel's recent and current projects include a guesthouse with a great room, an RV garage with living quarters above, a 10-car garage, and a high-end horse barn. These “boutique additions” have short lead times, are easy to design and spec, and stress clients and crews less than multi-million-dollar, multi-year house projects. Plus, Fechtel adds, “the gross profit per month, an economic driver for us, is about the same as the larger homes, as long as you keep them moving.”

Fechtel has adjusted to lean times in other ways, by using his in-house finish crew to frame smaller projects rather than subcontracting the work and by watching his costs. But niche additions have taken up a lot of the slack in his schedule and given him some much appreciated breathing room while the residential construction economy finds its feet. Like the other builders we spoke with, Fechtel is finding that a solid base of custom home clients can be a welcome refuge in difficult times—even when they're not building custom homes.