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Last year, the inevitable happened. After more than 15 years of sustained growth in the housing industry, a slowdown arrived and gradually became a market correction.

The slowdown was particularly pronounced for production home builders whose buyers exited the market. It was less clear how the market turn would impact the other two legs of housing, namely, remodeling and custom home building.

So how did remodeling fare in 2007?

By all conventional measures, remodeling did slow, and will likely contract more during 2008. Harvard’s Joint Center for Housing Studies’ new predictive measure of remodeling activity, the LIRA, (short for Leading Indicator of Remodeling Activity) suggests that remodeling retrenched during the fourth quarter of 2007 and indicates an annualized decrease of more than 8 percent this year. Yet, when you talk with established remodelers, like those who participated in this year’s Qualified Remodeler Top 500, and ask them about their businesses, most seem to be taking the slowdown in stride. The numbers speak for themselves.

In 2007, the aggregate dollar volume of the Top 500 remodelers surged to $4.86 billion, up from $4.13 billion in 2006. Aggregate gross revenues were just as dramatic, coming in at $5.04 billion, up from $4.39 billion the year before.

In reporting their “challenges” and “opportunities” on their applications for the list, the prevailing response from Top 500 remodelers this year was one of concern about the market and the economy. But rather than pull back, they seemed to use this concern as motivation to push forward. “We are seeing the same and even higher levels of business, but we’re working harder to generate qualified leads and close new business,” seemed to summarize the sentiment.

So did the slowdown simply not hit in time to have a major impact on 2007 remodeling revenues? Will the full impact only be felt in calendar ’08 numbers? Well, for the first time since this magazine began publishing its “Leaders” list 30 years ago, we asked for a forecast of remodeling dollar volume for the year ahead. The result: More than 70 percent expect to report higher remodeling revenue in 2008.

It is, therefore, safe to say that firms listed on the 2008 Top 500 are doing their part to drive remodeling forward. Across the nation, operating in 48 states, these leading remodeling firms are bucking all of the negative news about housing and moving ahead even in places where the local economy is shrinking. They are staying focused on their respective businesses. They are investing in marketing and advertising to drive more leads. And, so far, it is paying off.

With the overall size of the remodeling market estimated to be approximately $290 billion annually, the nearly $5 billion contributed by the Top 500 remodelers last year seems relatively small. Indeed, when compared with production home builders, where the largest 400 account for over half of all activity, the share-of-market maintained by remodeling’s largest firms tells the story of a very diversified and vibrant industry where local and regional players dominate markets from coast-to-coast. This fact notwithstanding, the biggest remodelers are growing and slowly grabbing a bigger slice of the pie.

View No. of Top 500 Remodelers by State

Talking to the Top 500

The Top 500 remodelers to whom Qualified Remodeler spoke to sample the perspective of industry leaders were remarkably consistent in their views. None were as pessimistic about economic conditions as the prevailing news might make one believe, and they were all optimistic about an impending uptick in business. Here is what a few of those remodelers are thinking about the state of the industry:

No. 109 – Home ReBuilders Atlanta, Ga.
Design/build • $9.2 million

For Home ReBuilders, in Atlanta, Ga., there was a minor slowdown in business from October 2007 to March of this year as consumer confidence went down, but bookings in recent months reflect a “nice little bounce” and have created a healthy backlog, says William Bartlett, president of the design/build remodeling firm. The company reported $9.2 million in 2007 remodeling dollar volume.

“I follow the economy fairly closely,” Bartlett notes, “and consumer confidence really went in the tank and then it seemed to bottom out; people chose not to listen [to the news].” The core factors of the economy were not that bad, he says. “Interest rates were good and getting better, inventories were low, unemployment was low — all the indicators were that the economy should be just fine — the only reason for the slowdown was a lack of consumer confidence.”

Bartlett notes that summer is usually a bit quiet for his company — that’s just the way it is in Atlanta in July and August — but he expects business to pick up when the children go back to school. “Remodeling is not that cyclical, but we do see trends and undulations,” he says.

He also expects the market to further strengthen in 2009. “Everyone is going to hold their breath through the election,” he says. “I really think spring will be very good.”

No. 30 – Thomas Construction
Bridgeton, Mo.
Full service • $24.2 million

Stephen Townzen, president, of Thomas Construction in Bridgeton, Mo., says his company’s business so far this year has been close to the previous year’s level, but “it’s been a little more costly and difficult to maintain that; our lead cost has gone up a little bit and some of the sources that we’ve used in the past don’t work as well.

“It could be because of the economy or it could be a natural progression that things that once worked don’t work anymore. We get a lot of business from direct mail, and since inception of the don’t-call laws there’s been a lot more direct mail that competes for customers’ attention,” he notes.

Thomas Construction is a full-service remodeler reporting $24.2 million in 2007, but right now windows, siding and roofing are particularly strong.

As far as sunrooms, kitchens and baths go, Townzen notes that financing is becoming a problem for some homeowners.

“There’s been a downturn on the financing side of things; people can’t borrow as much from their home as they did just a few years ago. There used to be two or three companies where you get as much as 125 percent loan-to-value on a project and nobody really does that now. It’s affected our kitchens, baths and sunrooms the most,” Townzen says.

However, Townzen doesn’t see any reason for the downturn to continue significantly into 2009. “We’re not going about business as though the downturn will continue. We’re assuming things are going to be good next year, and we’re going to take the responsibility and try not to participate in any downturn,” he states.

“I think once the election is over, the news will be much more upbeat,” he adds.

Townzen says that he thinks competition is less of a factor than it has ever been. “It’s harder for the mid-size and smaller companies to get appointments these days, at least in the St. Louis market,” he says. “I think a lot of that is due to a lack of telemarketing. Smaller companies are going by the wayside, and the larger companies are having trouble getting appointments, so you just don’t run into them as much,” he adds

“If you’re good in this market at getting out there and getting direct-response leads and appointments, I think you will be out there by yourself. We still do a lot of canvassing and that’s historically not a very competitive lead, and we do some television advertising, which is not a very competitive lead, either,” he says.

Regarding competition from builders and small one-man operations that may have sprung up due to the downturn in new construction, Townzen says, “you’re not really in competition with them because you know how to do it so much better than they do; you should be able to overcome that type of competition.

“I still don’t think people buy on price,” he continues. “I think they buy on the quality of the presentation, the reputation of the company and the quality of the workmanship.”

No. 451 – Robert’s Remodeling and Construction Co. Inc.
Cuyahoga Falls, Ohio
Design/build • $2.1 million

Rob Cogdeill, CR, president of Robert’s Remodeling and Construction Co., Inc., in Cuyahoga Falls, Ohio, says he hasn’t noticed a significant slowdown in his market. In fact, it’s just the opposite for his business, he says.

Cogdeill does note that he’s heard from other contractors about a lack of work. “Even some of the guys who have been around for a while are not getting leads,” he says.

Robert’s Remodeling, a design/build firm starting its 14th year, is highly visible, with a new office and warehouse in a high-traffic location, Cogdeill notes, which is perhaps a factor in the company’s success. The company reported $2.1 million in remodeling revenues in 2007.

In addition to that, “I think it’s how we approach customers,” he says. “We have more repeat customers than ever before. I think we’ve become what most people would consider a trusted adviser, In the past few years I’ve actually talked people out of doing work and have just given them sound advice — walked away from them and pointed them in the right direction. Then we get a phone call a year or two later wanting to do some other work on a new piece of property.”

Cuyahoga Falls is about 35 miles south of Cleveland and just a few miles north of Akron, both of which have lost a lot of manufacturing jobs, but Cogdeill says that really isn’t the firm’s clientele. We’re not a windows, roofing and siding company; if they want that kind of work we point them in another direction, he says.

Instead, nearly three-quarters of the firm’s jobs involve room additions, kitchens and baths in older homes that have a “little more character and square footage,” Cogdeill says. Sixty-five to 70 percent of the jobs are in homes in the over 3,000-sq.-ft. range.

“We hear a lot from our customers that they’ve thought about moving; they’ve looked at what’s out there; and they’re just not happy with what they’re seeing. They know they can buy a home at a fair price, but they know they have to sell their home in order to purchase another home, and they’re just not willing to make that move,” Cogdeill says. They see the safer course as remodeling a kitchen or a basement, getting a return on that investment, and getting value from just using the renovated space, he notes.

Cogdeill does note that he’s seen a few situations where homeowners are having difficulty financing remodeling work. It’s not that the homeowners don’t have good credit. “Homes aren’t appraising for what they once were and their credit-debt ratio might be close. A few years ago it might have been fine, but now banks are really tightening down,” he explains.

Homeowners, as a result, are having to scale back or cancel the remodeling job altogether.

On average, however, Cogdeill observes that remodelers who do quality work and have a solid reputation are busy. Those in trouble are those who may have had a shaky reputation and might have gotten into trouble regardless of the economy, he says.

No. 15 – Gardner/Fox
Bryn Mawr, Pa.
Design/build • $41 million

Mark Pennington, co-owner of Gardner/Fox Associates, Inc., in Bryn Mawr, Pa., forecasts the current year’s business as essentially the same as the previous year. The firm’s residential demand has remained strong, but light commercial work has decreased.

The design/build firm’s reported remodeling dollar volume for 2007 was $41.5 million.

On the light commercial side, Pennington reports intense competition on price and fewer opportunities in general. Key markets, such as medical, have slowed.

Residentially, he reports that some homeowners have put projects on hold during the design phase, but “all in all, we’re not seeing a big drop-off there by any stretch.”

Pennington attributes Gardner/Fox’s stability partly to its suburban Philadelphia location. “Philadelphia tends not to be subject to the wild real estate swings of other areas,” he says. “We’ve seen price appreciation, but it hasn’t been the wild increases that have occurred in hot markets in recent years.”

Elaborating on the market his firm serves, Pennington says, “We are in a very developed suburban area. There isn’t much room to put up new developments, so people are consequently looking to improve the house they’re in rather than move an hour out. Now, with gas prices being what they are, people are more apt to stay put and stay closer to where the jobs are, which tend to be in the city or close to the city. I think you if take the existing older housing stock combined with the desire to stay close to work, that really helps us in the market.”

Pennington describes Gardner/Fox’s residential work as “higher end but not ultra-high end” projects mostly in Philadelphia’s Main Line suburbs. He notes that he hasn’t had jobs fall through because of difficulty getting financing.

Asked about the difference between those remodelers holding their own and those in danger of going out of business, Pennington says “it could be just flat in the market they’re in and have nothing to do with the business owner; it’s just being in the wrong place at the wrong time.

“We’ve been fortunate that we’re in a pretty stable market and always have been,” he adds.

Pennington says that he doesn’t think the economy is as bad as the general impression that’s given in the mass media.

Remodeling, in particular, is a fragmented market with a number of vastly different markets, he says.

He thinks changing demographics and factors such as high gas prices will benefit the remodeling industry in the long term.

“We’re going to continue to see people living closer to work and cultural activities. There’s going to be a long-term change in the way Americans live. They’re going to want to live in older homes closer to metropolitan areas, and that’s going to be good for the United States and for the remodeling industry,” he says.

No. 143 – Sea Pointe Construction
Irvine, Calif.
Design build • $7.6 million

The remodeling business is soft right now in Andrew Shore’s market in California. “There is business out there,” says the president of Sea Pointe Construction, a design/build firm in Irvine, “but it’s fewer and further between. People seem to be more hesitant in making decisions, and the lack of financing is affecting the market.”

Sea Pointe recorded $7.6 million in installed remodeling work in 2007.

Home prices in Shore’s area are down by as much as 25 percent, he says. For a homeowner whose house was worth $900,000 a year or two ago and is now only worth $700,000, the question is whether to invest more money into a home whose price is falling. “That just works on the psyche of the client,” he says. “There’s no money left to refinance or do much of anything.”

“It’s a big market correction that was probably long overdue; it’s just painful when you’re in the middle of it,” Shore says.

As a consequence, jobs are being scaled back or they’re on a bigger scale, Shore says, so it’s a question of looking toward the high end. “There’s a lot of competition in the more modest jobs, and we do the high end very well so that’s not a big stretch for us.”

Shore says he saw the downturn coming more than two years ago and started doing more marketing. “We put a lot of effort into it, and that’s the reason we’re not down in sales,” he says.

“We’ve always tracked our leads and marketing statistics very closely, but now it’s a matter of getting everybody in the company focused on where we can get that next lead, where is that next sale coming from? It’s not just a couple of people focusing on marketing and lead generation; it’s the whole company. That is helping us greatly to weather this and actually do fairly well.” Shore says.