Friday, Sept. 8, 2006 | If you want to know how a home building company is holding up in an uncertain housing market, just peek in its break room. That’s been the most apparent symbol of belt-tightening seen by Travis Carter, an intern in the land acquisition department at home builder Lennar Corp., since he started working there just six months ago.
“We used to have amazing food in our break room for free,” Carter said. “Starbucks every morning with choice of five different creamers.” He also remembers the Greek food and other catered meals the staff would enjoy for lunch meetings.
Now, he said, it’s pizza once a month and Folgers instant coffee in the break room.
Lennar isn’t the only home builder trying to keep its balance in a teetering housing market. A run-up in housing prices and demand followed by a recent cooling has prompted construction companies and others in the building industry to adjust their once-soaring budgets. After many in the industry saw years of double-digit revenue increases, some are now scaling back their land holdings and number of projects, which has often meant laying-off employees. Others have tightened their belts on expenses and tried to decrease their overhead costs.
And the slowdown is expected to continue – the majority of economists in a Wall Street Journal survey released Thursday predicted no change or a decline in home prices for 2007.
Sales for new home construction have been declining. More than 12,000 new residential units (including homes and condos, excluding condo conversions) were sold in 2004, according to MarketPointe Realty Advisors. That level decreased about one-third to slightly more than 8,000 units sold in 2005. And in the first half of 2006, about 3,500 units sold.
The first two quarters’ sales usually account for about 60 percent of the year’s total sales, said Michael Colby, MarketPointe economist. If that trend holds for this year, the number of sales in new home construction would be about 5,850 – down about 25 percent from 2005.
With sales going down, companies have scaled back their plans for new projects. Building permits for new residential units in San Diego County have been declining for a few years. In 2003, there were 18,314 permits. Last year’s permits numbered 15,258, while the permits issued so far in 2006 have been about 7,800, according to the Construction Industry Research Board, based in Burbank.
When executives at San Diego homebuilder Hallmark Communities noticed an estimated 40 percent decrease in traffic – the number of people out looking for homes – between the second and fourth quarter 2005, they knew they’d have to reevaluate their plans.
They laid-off half their staff in two waves of cutbacks earlier this year, going from 40 to 20 employees.
“We’ve been watching our expenses much more closely,” said Hallmark CEO Mike Hall.
Hall said the slowdown in the housing market forced the company to think critically about their projects on the table and decide which ones were worth continuing. That led to the dramatic staffing decrease. Hall said the company has stabilized after the cuts, and has started to rehire for some positions.
The effects of the cooling market haven’t been felt only in the construction industry. Many analysts are concerned that the job growth in construction, real estate sales and mortgage brokering while the market was booming will mean corresponding job losses as the market cools further – something that could further tug on the economy as a whole.
Despite the decline in real estate transactions, the number of licensed real estate agents in California has continued to grow. In July, there were 508,196 licensees. That’s one real estate agent for every 52 adults in California.
An economic outlook released Wednesday by Alan Gin, an economist at the Burnham-Moores Center for Real Estate at the University of San Diego, predicted a year-end slowdown for the local San Diego economy due, in part, to a deceleration in employment rates. Some of this will come from the construction industry, Gin said, but predicts more job losses on the buying and selling end of the housing market.
“During this big boom, a lot of people went into real estate,” Gin said. “I think there’s likely to be a shakeout there.”
Like Gin, a number of experts expect that many of the recent agent licensees will be pushed out of the industry for lack of work. Those numbers won’t show up until the agents decide not to renew their licenses in a few years.
Despite the cutbacks, general employment levels in the construction industry haven’t dropped. In fact, the average number of employees in the industry so far this year has been 94,229, up compared to 89,486 in the first seven months of 2005, according to the state Employment and Development Department. Many factors play into those numbers than simply the bottom lines of construction companies, including impacts from the rainy season in the first months of 2005 and variability in project timing.
But as a general trend, the construction industry doesn’t seem to be losing steam, Gin said.
“There’s been kind of a shift,” Gin said. “Construction in residential is down, but commercial construction has increased.”
In addition to downsizing personnel levels, Hall said Hallmark has been trying to lower overhead costs like phones, rent and new copy machines, as well.
Cutbacks on those overhead costs are hitting the San Diego division of Lennar Corp., said Jennifer Bonasia, the company’s director of homebuilding for the region. But the company has kept pace with its business plan for the year, she said – a rarity in the slow market.
“We have not laid-off people,” she said. “We’ve laid-off lunch meetings, company functions. Trimming the fat and saving every penny.”
Even Lennar’s annual trip to Disneyland went by the wayside in efforts to cut costs. But Bonasia said the employees’ participation in the company provides for better morale than taking them to a theme park.
“They all know what’s happening in the market, what’s happening with the other builders around town,” she said. “They know they’re involved in making the difference. We acknowledge that, and they acknowledge one another.”
After 24 years in business, this isn’t the first time Hall or the Hallmark company has seen a slowdown in the market and adjusted to new pressures, he said.
“We’ve cut back each time,” he said. “Different ways, different times – sometimes a cutback in personnel and purchase of new projects.”
The reduction in the residential work force is “definitely something the industry is concerned with,” said Paul Tryon, chairman of the Building Industry Association in San Diego.
There are no guarantees in the housing industry, Tryon said. Companies always have to expect the unexpected, especially in periods of such strong sales activity and rapid price appreciation as the industry experienced at the beginning of the decade.
“That can’t be sustained forever,” Tryon said. “We’re in a market that ensures that your business plan changes.” Companies may have to make some adjustments in their numbers of personnel or their plans for buyer incentives, he said.
“It’s a cyclical industry and it happens all the time,” said Ben Bartolotto, research director for the Construction Industry Research Board in Burbank. “There’s nothing that happened that hasn’t happened at sometime in the past.”
Russ Valone, a market analyst with MarketPointe Realty Advisors, said some companies found themselves overstaffed as the market started cooling.
“Some guys, and not everybody, got a little aggressive and increased the size of their phases,” he said. “Now, everybody’s much more cognizant of the inventory levels.”
As the building industry shifts its focus from meeting high levels of demand to tightening its budgets, Tryon said the industry is biding its time until the cycle turns upward again.
“We’re all at a little bit of a ‘wait and see’ phase,” he said.