Tag Archives: Home improvement

JCHS: Strategies for Achieving Scale in the Residential Remodeling Industry

Strategies for Achieving Scale in the Residential Remodeling Industry

 by Abbe Will
Research Analyst
Since its inception nearly twenty years ago, the Remodeling Futures Program of the Joint Center for Housing Studies has been investigating trends in contractor size, concentration, performance, and survivorship to better understand the evolving structure of contractors serving the residential remodeling market. Unlike the national homebuilding industry, which saw significant achievements of scale and consolidation in recent decades, the professional remodeling industry continues to be highly fragmented, where the vast majority of remodeling companies are relatively small, single-location businesses that likely will not experience any significant growth over the course of the business’s life-cycle. Two thirds of remodelers are self-employed, and fully half of payroll establishments have total revenues of under $250,000. Yet our research suggests that there are significant benefits to be gained through larger scale businesses.The evidence for the benefits of scale in the remodeling industry is compelling. Comparing the revenue growth of larger-scale remodeling companies to the industry as a whole shows that larger-scale remodelers benefit from significantly stronger revenue growth. Where the average revenue of all residential remodeling contractors increased less than 18% in inflation-adjusted terms during the last industry upturn from 2002-2007, larger-scale firms with annual revenues of approximately $1 million or more increased their average revenue by over 30% during the same period. Additionally, larger-scale remodeling contractors benefit from higher revenues per employee, which implies that they enjoy greater labor productivity (Figure 1). While an admittedly crude measure of efficiency and productivity, the trend is obvious that larger remodeling businesses are seeing a benefit of scale.

Source: Unpublished tabulations of the 2007 Economic Census of Construction, U.S. Census Bureau.

Furthermore, there is evidence that larger-scale remodeling firms suffer significantly lower failure rates across the rocky business cycle (Figure 2). Remodelers with estimated receipts of $1 million or more during the last industry upturn in 2003–04 had a failure rate of only 2.7% that year, and their failure rate remained essentially unchanged during the cyclical downturn in 2009-10. These low and stable failure rates for the largest remodelers are in stark contrast to the roughly 20% failure rates of smaller remodeling businesses. With the efficiency gains that come along with achieving scale economies, larger remodeling companies seem much better equipped to ride out the volatile business cycles in the remodeling industry.

Source: JCHS estimates using U.S. Census Bureau tabulations of the 1989-2010 Business Information Tracking Series.

Although larger-scale remodeling firms enjoy significant benefits to scale, the industry has remained fragmented over time due to the many obstacles to gaining scale such as low barriers of entry, highly customized work, and difficulty attracting capital, to name a few. Understanding how remodeling companies are overcoming these major hurdles in their pursuit of scale economies should provide insights into how the industry is likely to continue evolving over the next several decades, as well as what opportunities exist for more widespread consolidation moving forward.

To this end, the Remodeling Futures Program has been conducting in-depth interviews with several dozen remodeling industry leaders including founders, presidents, and CEOs of larger-scale remodeling companies on the topic of benefits from scale and challenges and strategies for achieving scale. Key research questions for the project focus on exploring the major approaches used for gaining scale, challenges and opportunities unique to each type of strategy, and whether certain types of remodeling specialties or niches are more or less likely to attempt to establish a larger-scale or even national presence.

A key insight gained from these interviews is that successfully achieving scale in the remodeling industry has more typically occurred using strategies outside of the traditional model of organic expansion and acquisition. Common among remodeling companies that have been successful in establishing a larger-scale presence are strategies or approaches that involve strategic partnerships or arrangements, such as:

  • Strategic Alliances: When expanding to new markets, building brand awareness and trust takes a significant investment of time and money, so securing strategic alliances or partnerships with long-standing, nationally known manufacturing and retail brands to sell, furnish, and install products and projects is very effective for gaining entry into new markets with instant name recognition and credibility with consumers, who, given the same quality and price, will choose the brand with which they are already most familiar. Strategic alliances ultimately provide a contractor with a high volume of quality leads in new markets.
  • Franchising: Franchising is a well-established scaling strategy in many industries that allows a business to quickly expand its brand recognition and reach without the challenges of managing each independently-owned and operated franchise location. Franchising in the remodeling industry seems to be more successful with single focus or specialty businesses, such as painting and insurance restoration services that are easier to standardize and streamline.
  • Outside Investment: Pursuing outside investment through private equity partnerships, for example, provides a company with an influx of working financial capital for expanding into new markets, developing additional lines of business or products, or restructuring operations or management to better foster growth. Though a highly effective way to scale a remodeling company toward a national presence, this strategy of securing outside investment has not been more common because investors are deterred by the relatively high-risk nature of such a volatile and fragmented industry.

Since the remodeling industry is so diverse, with business segments and market niches that cover the full spectrum from full-service and design/build firms to specialty replacements and handyman services, there is no one-size-fits-all approach to achieving scale. Companies often employ multiple business strategies and arrangements either consecutively or concurrently. Some of the biggest benefits of scale reported by industry leaders include improved buying power, lower costs, efficiency of centralized accounting and management, and improved use of technology systems, as well as geographic diversity (i.e., not being dependent on the economic strength of one market or region), greater ability to explore new business opportunities, greater consumer recognition and trust, and being able to provide growth opportunities to key team members. The many issues surrounding this topic of strategies, benefits and challenges of achieving scale in the residential remodeling industry will be explored in greater detail in an upcoming Joint Center working paper.

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LIRA: Home Improvement Upturn Expected to Begin Tapering in 2014

Home Improvement Upturn Expected to Begin Tapering in 2014

 by Abbe Will
Research Analyst
The home remodeling market continues to improve, with strong gains expected for the remainder of 2013 and the beginning of 2014, according to our latest Leading Indicator of Remodeling Activity (LIRA).  While the LIRA continues to project annual improvement spending increasing at a double-digit pace in the near term, a slowdown of this growth can be expected by the middle of 2014.The soft patch that homebuilding has seen in recent months, coupled with rising financing costs, is expected to be reflected as slower growth in home improvement spending beginning around the middle of next year. However, even with this projected tapering, remodeling activity should remain at healthy levels.

In the near term, homeowner spending on improvements is expected to see its strongest growth since the height of the housing boom.  Existing home sales are still growing at a double-digit pace, and rising house prices are helping homeowners rebuild equity lost during the housing crash.(Click chart to enlarge.)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

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LIRA Is Building Momentum in the First Quarter 2013

Momentum Building for Home Improvement Activity

Spending by homeowners on improvement projects is expected to accelerate as the year progresses, according to our latest Leading Indicator of Remodeling Activity (LIRA).  On top of the almost 10% growth reflected in U.S. Census Bureau figures for 2012, the LIRA projects strong gains in homeowner remodeling spending continuing throughout 2013, with some moderation in the pace of growth toward the end of the year.
Existing home sales were up almost 9% last year, and house prices are increasing in most markets across the country. This has increased the home equity levels for most homeowners, encouraging them to reinvest in their homes.The strong growth that we’ve seen recently is putting pressure on the current capacity of the home improvement industry. Contractors and subcontractors are having more difficulty finding skilled labor, and building materials costs are unusually volatile for this stage of a recovery.

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

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JCHS: Nonprofits Play Key Role in Repairing U.S. Homes

Nonprofits Play Key Role in Repairing U.S. Homes

Private sector spending on improvements and repairs to U.S. homes is approximately $300 billion a year. Yet as a new Joint Center working paper shows, each year nonprofit organizations and public agencies are also investing resources into the rehabilitation and repair of the homes of America’s most vulnerable households—including the elderly, disabled, and those with low-incomes—who might not otherwise be physically or financially able to undertake critical home remodeling and repair projects themselves. Major nonprofits such as Rebuilding TogetherHabitat for Humanity,Enterprise Community Partners, the Local Initiatives Support Corporation, and NeighborWorks America, as well as thousands of local community development organizations across the country, are filling a significant and growing need, largely unmet by the private sector, by investing considerable resources—financial, technical, and direct provision of services—to make homes safer, healthier, more energy efficient, and more accessible for disadvantaged households.The recent foreclosure crisis and sluggish economy undermined years of efforts to stabilize and improve distressed neighborhoods in cities across the country, only adding to the need for nonprofit and public sector involvement. Until this past cycle, housing inadequacy—a measure of the physical condition of housing units—had been on the decline in the United States, largely due to the success of govern­ment housing policies and the growing affluence of the pop­ulation. Since the housing market bust, however, this trend has reversed with the number of moderately or severely inadequate homes increasing by 7% between 2007 and 2011 to 2.4 million units. Certainly the severe housing and economic downturn had a measurable impact on the quality of the nation’s housing.While a comprehensive data source of home rehabilitation and repair activity by nonprofits and public agencies does not exist, this new Joint Center working paper provides some insight into the topic. Rebuilding Together, one of the nonprofits in the study, provides critical home rehabilitation and modification services to low-income homeowners through its extensive network of local affiliates. A member of the Joint Center’s Remodeling Futures Steering Committee, the organization provided support for an affiliate and homeowner survey that collected data on the various types of projects undertaken by their affiliates, as well as demographic and socioeconomic information about the homeowners served and their experience partnering with Rebuilding Together.

Recent spending on home repairs and replacements, as reported by participating households, suggests that many of the homes worked on by Rebuilding Together have seen significant under-investment over the years. While the average American homeowner spent $3,000 on home improvements and repairs in 2011, according to Joint Center analysis of the American Housing Survey, almost two-thirds of Rebuilding Together program participants reported having spent less than $500 on average in the past year—fully 80% less than the typical homeowner in the U.S. Indeed, according to estimates developed by Rebuilding Together affiliates and the Joint Center’s Remodeling Futures Program, the homes serviced by Rebuilding Together were so in need after years of deferred maintenance, that the average value of the rehabilitation and repair projects undertaken by Rebuilding Together was in excess of $6,000 per home, or twice the annual amount spent by the typical homeowner in the U.S.

Home improvement expenditures under the Rebuilding Together program in 2011 were heavily oriented toward exterior replacements and kitchen and bath improvements—projects that would produce the greatest gains in key program objectives such as health and safety concerns, accessibility, and savings in energy use. Typical projects included additions or replacements of steps, ramps, railings, grab bars, windows and doors, roofing, insulation, energy-saving appliances, as well as painting and plumbing and electrical repairs. In the end, Rebuilding Together participants reported significant improvements in health and safety concerns, improvements in accessibility, and energy use savings as a result of nonprofit involvement. 

Source: 2011 Harvard JCHS-Rebuilding Together Household Survey


While a more precise estimate is unavailable, hundreds of millions of dollars are spent each year by nonprofits such as Rebuilding Together, community organizations, and public agencies. Their contributions not only improve conditions for residents, they also help preserve badly-needed affordable housing opportunities, stabilize and revitalize deteriorating neighborhoods—of special importance in recent years—and encourage neighborhood stability by helping long-term residents of the community to remain safely in their homes.

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JCHS: Spending on Distressed Properties Boosts Remodeling

Spending on Distressed Properties Boosts Remodeling

 by Elizabeth
La Jeunesse
Research Assistant
In recent years, a sizable inventory of distressed residential properties in the U.S. housing market has begun to drive up spending on home improvements and repairs. According to a new Joint Center research note, the market for home improvement and repair spending to distressed properties in 2011 was approximately $9.8 billion. Around four-fifths of this estimate ($8.1 billion) was spent by households and investors on homes purchased after short sale, homeowner default, or bank foreclosure. One fifth of this estimate ($1.7 billion) was spent by banks and institutions to prepare REO (real estate owned) homes for sale.

0130_lajeunesse_figure1

Note: Bank-owned distressed properties include those sold by Fannie Mae, Freddie Mac, FHA or private banks.  Source: JCHS, N13-1, Home Improvement Spending on Distressed Properties

According to our estimates, from 2007 to 2011, annual spending to distressed properties saw an increase of nearly $6.7 billion. As a share of all home improvements and repairs by owners, spending on distressed properties grew from just 1% in 2007 to 4% in 2011. While much of this spending follows a period of under-investment as properties sat vacant through the foreclosure process, more recently additional funds are being spent to get these homes back into active stock.

According to a 2012 Federal Reserve White Paper, the flow of new REO homes should remain high in 2012 and 2013. If this prediction bears out, then the level of repair and improvement spending to distressed properties in the next two years should remain roughly similar to the nearly $10 billion levels reached in 2011.

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JCHS: U.S. Housing Stock Ready for Improvement

U.S. Housing Stock Ready for Improvement

The U.S. Housing Stock: Ready for Renewal

After languishing for several years, the U.S. remodeling industry appears to be pulling out of its downturn, and a renewal of the nation’s housing stock is underway, according to the Joint Center’s new remodeling report, The U.S. Housing Stock: Ready for Renewal.  Foreclosed properties are being rehabilitated, sustainable home improvements are gaining popularity, older homeowners are retrofitting their homes to accommodate their evolving needs, and the future market potential is immense, as the emerging echo boom  generation is projected to be the largest in our nation’s history.

As baby boomers move into retirement, they are increasing demand for aging-in-place retrofits.  A decade ago, homeowners over 55 accounted for less than one third of all home improvement spending. By 2011, this share had already grown to over 45 percent. And generations behind the baby boomers will help fuel future spending growth since echo boomers are projected to outnumber baby boomers by more than twelve million as they begin to enter their peak remodeling years over the next decade.

Additionally, the surge in distressed properties coming back onto the market is contributing to an increase in U.S. remodeling spending. After limited spending during the housing bust, renovating the more than one million distressed properties that were sold in 2011  contributed nearly $10 billion to home improvement spending.  With about three million more foreclosures and short sales in the pipeline, there is even more such spending ahead of us.

Average homeowner spending on remodeling was 20 percent higher in the Northeast and 10 percent lower in the South, compared to the national average in 2011. Since the 1990s,  however, the Sunbelt metro areas have generally seen stronger growth in home  improvement spending. As of 2011, metro areas with the highest per owner improvement spending included the rapidly growing Sunbelt metros of Austin, Las Vegas, and Phoenix, as well as traditionally stronger markets such as Boston, New York, San Francisco, and  Washington, D.C.

Spending on energy-efficiency upgrades, in particular, continued to expand through the remodeling downturn.  The share of total market spending on energy-related projects rose sharply from 23 percent in 2007 to 33 percent in 2011.  About a quarter of households undertaking home improvement projects in 2011 did so for energy efficiency purposes.

Read the full report on the JCHS website.

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JCHS: Remodeling Recovery Underway and Picking Up Steam

Remodeling Recovery Underway and Picking Up Steam

 by Abbe Will
Research Analyst

All signs point to a strong rebound for home improvement activity in 2013, according to our latest Leading Indicator of Remodeling Activity (LIRA).  Robust spending in the second half of 2012 suggests the remodeling recovery is already underway, and the LIRA projects annual homeowner improvement spending will see accelerating double-digit growth through the third quarter of 2013. This news comes just ahead of the release of our biennial remodeling report, The U.S. Housing Stock: Ready for Renewal, coming out next Wednesday, January 23.

It’s encouraging to see the residential sector finally contribute to growth in our economy. Through the first three quarters of 2012, investment in the residential sector was responsible for one out of every six dollars added to our GDP.  Moving forward, home improvement spending is expected to make an even larger contribution to GDP growth.
There are many external economic and political risks that could derail this remodeling recovery, but the solid momentum behind home building activity, existing home sales, low financing costs, and remodeling contractor sentiment all point to a solid start to the new year for home improvement spending. (Click chart to enlarge.)
 lira_2012_q4
For more information about the LIRA, including how it is calculated, visit the Joint Center website.

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