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CEO Roundtable: Construction

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Springfield Business Journal Editorial Vice President Eric Olson talks construction with Matt Bailey, co-owner of BP Builders LLC; Carol Anne Haake, CEO of Integrity Development and Construction LLC; Sean Thouvenot, vice president of Branco Enterprises Inc.; and Crystal Webster, CEO of Morelock Builders & Associates Inc.

Eric Olson: Looking back at this past year, at the economic conditions that we’ve all been faced with, in terms of construction and development, how has it impacted your business?
Sean Thouvenot: It’s been crazy busy for us.
Olson: Busier than the year prior?
Thouvenot: Oh yeah. We’re approaching 40% more than last year. Right now, we’ve got a $112 million backlog, which is almost twice what we did last year. It’s mostly the Springfield area. Probably 30% of it’s outside of Springfield area.
Matt Bailey: We’re probably somewhere in that 20%-25% increase over last year. Probably what’s big for us is we don’t typically do as much residential as we had 20 years ago, and I’m doing more residential now than I’ve ever done.
Thouvenot: Are you also seeing multifamily?
Bailey: We do both. Multifamily has remained strong throughout. It did have, for us, a little pause when prices really started escalating.
Crystal Webster: We’re up to about 25%. The economics, as you discussed earlier, it’s a push-me, pull-me environment right now because there is huge demand, big on housing, but, of course, the cost is also a factor that comes into play. We have sold everything we have and are nearing completion as we finish our next development. We do more entry-level homes for the first-time buyer. And it’s been really unprecedented.
Bailey: I remember what (Morelock’s) houses used to sell for versus what their entry-level sales are now. It’s interesting to see that with this price escalation we’ve had.
Webster: When Wayne [Morelock] starting building these, they were in the $90,000 price range. And the last one that we sold in Rogersville was $219,900.
Bailey: It’s incredible.
Webster: We would argue that the margin isn’t particularly better than it was when they were $90,000.
Thouvenot: Your materials, your insurance. It’s not just your people.
Webster: The lumber package is almost the purchase price of the first home that I’ve sold.
Carol Anne Haake: Where we really saw the effect was with the pandemic. That’s where we really saw the struggle economically. We had situations where we couldn’t have architects travel to see us. And so, then that would slow things down tremendously. That increased just productivity costs because we couldn’t get architects who had to come sign off on our inspections. It also forces supply chain, the increase in price due to supply/demand fluctuations. But since then, I think it’s starting to level out from what I can tell.

Volume up
Olson: With the pricing increases, I’m a little surprised to hear the increase in volume. How do you guys rationalize that?
Thouvenot: On the commercial side, they’re taking advantage of cheap money right now. The benefit of that far outweighs the cost.
Olson: The Fed is doing their job.
Thouvenot: Through the whole pandemic and everything, we had one job paused. That’s it.
Olson: Any delays?
Thouvenot: Material delays. That’s where we were seeing our biggest issue.
Webster: The material delays have been a huge issue. And it seems like in oddball scopes, for example, bathtubs. On a multifamily project we were delayed literally months.
Thouvenot: And paint. Who would have thought we’d ever be short of paint? You freeze up the place in Texas that makes most of the paint, the city shuts down and there you are.
Bailey: Metal studs. We’re traveling to pick up metal studs now.
Thouvenot: Steel is up, year to year, 111%. And just from June to today, it was up 60%. And you just can’t get it. Steel and copper. And fuel is up 82%. I just filled my diesel pickup, and it was $90. A year ago, it was $40.
Webster: And still lumber. You can read all you want about the lumber futures are back to pre-pandemic level, but our experience in getting material to the job is absolutely not that.
Thouvenot: Lumber is up year-to-year, last time I looked, 57%. It’s down 16% from last month, but it’s still not down pre-pandemic. It’s not. Lumber futures are in the tank right now, which is going to give you guys in the residential a big shot in the arm briefly – until they can’t keep up again.
Bailey: Subflooring, pre-pandemic, we paid $25 to $29 a sheet, and I paid $89 a sheet on a house just recently. That’s my whole lumber package in the whole house just for the subfloor.
Thouvenot: There was a company that came out of Kansas City, a supply company, that bought everything in town here, everything. So they’ve started putting people on restrictions on how much they can buy.
Olson: How long do you think this will maintain?
Thouvenot: Until production catches back up.
Webster: I think winter, don’t you? On the lumber side.
Thouvenot: I think it’s going to do this and drop right back down as far as being able to get it on lumber, especially treated stuff.
Bailey: Right now, it’s just such a shortage. There’s no one in Springfield that stocks it.
Olson: How are you guys handling that on the client side?
Thouvenot: Switching design.
Bailey: Exactly.
Webster: Value engineering.
Haake: Switching the design and really focusing on clients who are wanting to start development immediately versus long term.

Gauging futures
Olson: According to the Associated Builders and Contractors, construction input pricing is up on the year 23%. But in the month of July, it was only up 0.6%. Did we turn the corner or is it an anomaly?
Thouvenot: I think it’s going to level off for a while until the shortage hits again because just the manufacturing and the production getting materials to us right now, the lead times are what’s going to be the biggest problem here lately. They’re making it, but you’re in line.
Haake: I believe the infrastructure bill is going to have significant impact on our industry as well. If you’re going to put that kind of money into building infrastructure, one of the biggest issues I see is in labor. Where are we going to get the labor to keep up with the amount of demand for building projects?

Workforce challenge
Olson: Are you able to fill the jobs that you have right now?
Thouvenot: In June, there was 10.1 million open applications in the construction industry.
Bailey: We probably all have one.
Webster: A year ago, we were there and we made a hard decision to pretty seriously increase our starting wage.
Thouvenot: You have to. You’ve got Amazon hiring and it’s not hot, it’s not cold, it’s not raining, it’s not muddy.
Webster: Boy, that’s hard to compete with.
Haake: I do believe that the change in unemployment benefits that I’m hearing may come may encourage more workers back into the workforce because there are currently some policies in place to encourage workforce development and education. Once that happens, then you’re ready to start to educate skilled workers, project managers, administrators across the board.
Thouvenot: But that also goes back to the starting wage. If we’re starting people at a wage that’s the same as somebody who would stay at home, then that’s our problem.
Haake: Absolutely. We need to somehow figure out that fine balance between minimum wage, the unemployment benefits and the end cost for our developer. I think that the issue needs to be addressed of how we are able to stay in our own businesses with the higher minimum wage costs and how that’s passed down to the end user. I’m all for paying people as much as we can. How do we make it work within our industry to make it to where we can survive?
Olson: Crystal, you were saying Morelock did that in the past year. Was it an across-the-board percent increase?
Webster: It was essentially field positions. We increased the starting wage pretty significantly. An entry-level person who has a limited skill set, might have been tempted at some point to stay home on unemployment. And at this point in our company, that is no longer an issue. And it’s tough to figure out how to afford it, but the flip side is we can’t afford not to. Our productivity would drop significantly.
Thouvenot: What everybody needs to realize that’s wanting more money for not having the skills that they need is the productivity has to be there because they’re not going to pay a bunch of construction workers to stand around and take twice as long to do something. In 1993, Branco started our carpentry apprenticeship program, federally accredited by the U.S. Department of Labor. We were the first ones in Missouri, that I’m aware of, that wasn’t union labor-affiliated. My right-hand man, the general superintendent, is a graduate of that. Several of our superintendents are graduates of it. We’re willing to do the training. The mentoring part of it is another thing because you used to be able to take a farm kid or a kid whose dad worked in the trades, who he got in the truck and went with him to do whatever, they had some work ethic about them and some basic knowledge of skills. Now, you can’t teach them everything you need in the apprenticeship program; you need the mentoring program while they’re in the field.

New recruits
Olson: I understand that the average age in the construction industry is 43. I’d be curious to what it is at your firms. How are you attracting the next generation of construction workers? The biggest thing you can do to attract the young people is make it sexy, for lack of better word. Make it something they can be proud of. The next thing is that you have to have the things that their buddy who’s going to go to work for the business journal or whatever, they can sit in the air conditioning and type on a computer. The only selling point is you’ve got to have a higher wage to justify being outside in the cold and the heat and the snow and the mud. Another thing that these people need to be taught – that is part of my mentoring idea – is if you’re a construction worker, you’re going to be off because of rain, snow, sleet, you need to be banking X amount of dollars. You can’t live like you’re making this money all year long when there’s a month where you may sit at home for a couple of weeks. We’ve increased our paid vacation, holidays. We’ve provided insurance for our guys for years. We’re very family-friendly.
Haake: There’s a theory out there that the younger you approach individuals, the earlier on they decide what career they want. And that could be as early as second and third and fourth grade. So, one of the things that Integrity Development has been doing is investing in looking at some of the STEM programs to start to go into schools and introduce them to the industry. I believe it’s our responsibility now to not only invest in what’s happening tomorrow, but maybe start together as a team, as an industry and unite and say: What can we do for our industry 20 years from now to maybe change this road so that we do make it competitive, in a good way?
Bailey: I hear some architects talk that our industry, ultimately, will have to just change. It’s hard to force people to change. When I went and met with them at Drury, their thought is we will have to get more system-built, where it takes less labor.
Thouvenot: That’s where they’re disconnected.
Bailey: In our area, I don’t see it now. In bigger markets, you’ll see some of it.
Thouvenot: You’ll see more of the technology than you will here. But as far as still having it hands-on, until they build somebody that can do what a construction worker does, that’s a disconnect. And that’s a problem we have with our industry from others looking at it.
Bailey: I can see some of it, where houses will not be built like we build them. They’re going to be built panelized where they come out, and … it takes less labor.
Thouvenot: The designs follow that. And I’ve yet to meet an architect that wants their design to suffer because I panelized this.
Olson: Are worker ages an issue for you?
Thouvenot: We have an aging workforce.
Webster: We do.
Bailey: Skilled labor.
Webster: We do have a value equation for hiring, though. The young people that are applying, they want to learn a trade. They may not have had the opportunity for education beyond K-12, and they’re looking for a way to take care of themselves and raise a family. Applicants fall in two groups: ones that have been in the business, they’ve got a skillset that is appropriate for the marketplace that we’re trying to serve. And then you have others that are coming in and maybe they, again, grew up on a farm and used to help their dad fix the tractor. That group seems to me to have a lot of potential in that they do want to learn.
Thouvenot: It used to be a rural kid would be like: You mean all I have to work is 40 hours? And all I have to do is pour concrete? That’s easy. Think about how automated the farm has got. And every tractor’s got a cab and air conditioning.

Affordable housing
Olson: Affordable housing has been a big conversation with city leaders and developers just identifying it as a gap in our market. What is affordable housing to you? And then looking at the current inventory, do you think it is low?
Webster: Current inventory of suitable, affordable housing is low. There are major sections of the city where the inventory has fallen off the front edge of what most people would consider acceptable living quarters. I don’t think that individual developers and contractors can solve the problem absent funding mechanisms. The state of Missouri does a nice job with the (Missouri Housing Development Commission) program and puts a certain amount of inventory into communities that show a specific and demonstrated need. However, it’s a drop in the bucket compared to the actual needs that exist. A lot of it is new entrants to the market. And it is young people who are leaving the nest, possibly for the first time.
Thouvenot: What’s the average age of your average first-time homebuyer?
Webster: I would say young 30s.
Haake: My view is that the demand for affordable housing far outweighs the supply from what I’m seeing. How fast homes are selling.
Olson: Let’s say that that gap is true and exists. Is the solution in building more in Springfield proper? Do we start expanding the development area, to outlying areas?
Bailey: For development, that sounds the way to go, but then you look at infrastructure. How do the people in that market get to their jobs? So typically, you’d want to be in an area that has a transportation system.
Thouvenot: Go find a site in Springfield that you can build 100 houses that’s in the city right now. Entry-level houses.
Haake: I believe expanding to Rogersville, though, and Republic, Ozark, Nixa, those are close enough that I believe that the expansions could be helpful.
Webster: The farther you get away, the less market there is to absorb the product you put out. And it may be that you could save $5,000 a lot or $10,000 a lot in your development, but you still have a $60,000 lumber package that was $20,000 two years ago. It is really difficult when you get beyond the first tier of outlying communities for people to be able to afford the cost of the new product. The cost per square foot is challenging to digest unless the wages in the community are there to support it.

Excerpts by Executive Editor Christine Temple, ctemple@sbj.net.

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