Projections are grim in the short and medium turn, with some positives seen in remodeling for health and wellness in the home. By Robert Isler

A Remodeling Futures Conference presented by the Harvard Joint Center for Housing Studies (JCHS) provided virtual attendees with a veritable smorgasbord of solid information, examining the economic effects of COVID-19 from numerous vantage points.

During the nearly four-hour session on April 7, participants were treated to historical comparisons, current sobering findings, and models of the future by an array of experts in the field.

Let’s break it down into manageable nuggets.

Where We’ve Been

According to graphics shared by event host Kermit Baker, Project Director for Remodeling Futures at the JCHS, following the 2008-2009 Great Recession, the home remodeling industry experienced nine straight years of gains, averaging better than 5% a year.

Growth has slowed in the two most recent years, up 3.9% in both 2018 and 2019, but the trend remained positive. Then came COVID-19. There have been two economic downturns since 2000. In 2001, the effect on home remodeling was modest, with spending dipping by just 4%. The 2008-2009 recession was a very different story. Spending for remodeling dropped by almost 25%, with housing starts plummeting by more than 75% during that period.

Where We’re Headed

So how is our current situation shaping up in comparison? Moody’s Analytics created three models: a baseline as well as optimistic and pessimistic scenarios. Although completed on March 31, the initial consequences of COVID-19 were so overwhelming that we blew past the baseline model — which then became the optimistic one.

The “better” scenario had unemployment peaking at nearly 9% in Q2 (it’s already past 10%), GDP at minus-6%, with new infections beginning to level in May and abating by July. The moderate or more pessimistic model showed unemployment peaking at 13% (although latest projections from several sources expect it to exceed 15%), GDP dropping by 9%, and infections leveling in June and abating by September.

The two models varied widely in regard to the expected impact on remodeling spending, with the range from minus-6% to minus-22%.

Although more jobs have been lost in the past three weeks due to the pandemic than in the initial two years of the 2008-2009 recession, the good news is that many of those losses have been furloughs, which could reverse themselves as conditions improve. Expectations are that although the economic hit has been swift and very deep, the recovery will be faster than during the previous recession.

Effect on Remodeling by Region and Company Size

Coastal areas are projected to suffer larger declines than other regions. The Northeast is expected to decline by 15%, followed by the West at minus-13%, the Midwest at minus-11% and the South dropping by 7%. Not surprisingly, a recent study showed that smaller firms will likely be impacted far more severely than larger ones. Those with revenues below $500,000 are expected to register declines of 14% — double the minus-7% forecasted levels for firms with revenues in the $500,000 to $999,999 and $1 million+ ranges.

General Implications: The Bad and the Good for Remodeling

Negatives

  • Huge wealth losses.
  • The surge in unemployment makes even those employed anxious.
  • Construction restrictions.
  • Home sales/prices will take a modest hit, limiting home-improvement opportunities.
  • Indications are that some households will undertake smaller DIY projects instead of full remodels.

Positives

  • Much time at home leads to thoughts for future remodeling.
  • Cocooning sentiment likely to reemerge.
  • The slowdown should ease labor and material costs struggles.
  • Lower interest rates make financed projects more affordable.
  • Lower ticket projects/upgrades likely to experience smaller declines.

Challenges Unique to Home Improvement Industry

Abbe Will, Associate Project Director for Remodeling Futures, spoke of industry characteristics and consolidation trends in residential remodeling. She noted how highly fragmented the industry is, with the top 50 companies representing just 9% of the market. There is a high percentage of single-location businesses, with obstacles to scaling including a low barrier to entry, a volatile business cycle and difficulty attracting capital.

Not surprisingly, failure rates for general remodelers have consistently outpaced other businesses. For the latest period recorded, 2015-2016, failures among remodelers stood at 12.6% vs. 8.7% for all businesses. Those in the industry with payrolls below $50,000 are eight times as likely to fail as those exceeding $250,000. Three-quarters of the industry have sales below $500,000, with only the very top remodelers displaying the capability to meaningfully consolidate and generate strong growth.

What the Experts Say

Mischa Fischer, chief economist at Home Advisor, noted that as a consequence of the industry slowdown, some businesses will lower their prices for remodeling jobs. In a survey of home remodeling professionals, when asked to rate the impact of COVID-19 on their businesses from 1 (lowest impact) to 10 (highest impact), more than half selected 8 to 10, with 21% saying 10. When the same question was posed regarding the economy overall, 70% chose between 8 and 10, with 33% picking the highest number. His takeaway, which is somewhat encouraging, is that those in the industry are not as concerned about the prospects for their own businesses as they are for the general economy.

Nima Oftadeh, lead analyst for Google’s Home Services Division, spoke of the huge percentage of people working from home, and pondered whether that can change the concept of cocooning. He also noted that searches for financial renovation loans were up.

Grant Farnsworth of The Farnsworth Group conducted his latest quarterly survey in late March. Respondents included 500 general remodeling contractors. Among the findings:

  • For current projects, 28% were delayed, 23% were cancelled outright and 20% saw a reduction in the scope of the request.
  • When asked about revenue impact for the next 12 months, 52% expected a reduction, 25% an increase and 23% no change.
  • 61% of contractors expect industry delays in the one-to-three-month range.
  • The two top reasons for project delays/cancellations are that consumers aren’t comfortable with contractors in their homes during the pandemic and that contractors don’t want to venture into homes of consumers.
  • On the positive side, there has been an increase in bid requests for products related to health and safety in the home.

Outlook and Opportunities

According to combined sources, total projected industry size will reach $270 billion by 2023. Projected growth per year will be in the 2.7% range. Older households (ages 55 to 64 and 65+) will lead the way in pursuing remodeling projects.

Those businesses that focus on specialized offerings as a differentiator are more likely to survive and thrive. Designer use of technology to virtually share renderings with clients will likely accelerate, as millions of people forced to work from home due to COVID-19 have grown more accustomed to technological applications.

Finally, as unemployment skyrockets within other sectors and those left on the sidelines look elsewhere, there is an opportunity to address the skilled labor shortages within home remodeling.