This recession guide isn't some BS guide.
You won’t find generic advice like "watch your cash flow" or "work harder.”
In this guide, we are going to hit hard on the under-discussed, real topics that you need to be aware of when it comes to navigating a recession in the construction industry.
Let’s dig in. Our four-part guide should give you a strong foundation of information and equip you with the learnings you need to adapt.
Enjoy listening to podcasts? We have three episodes on the topic of the construction industry and recession. In these podcast episodes, we have awesome conversations with John Burns from John Burns Real Estate Consulting, Jamie Verdura from Verdura Construction, and BJ Maeder from American Spirit Custom Builders. Listen to the full podcasts on Spotify or Apple Podcasts.
You can find the podcast episodes below. Three perspectives on the market – Real Estate Consulting CEO, and two owners from a General Contracting and Subcontracting business.
Gas prices are up. Groceries cost more. You hear the same word getting tossed out over and over — recession.
But is the economy actually in a recession right now? The answer is highly debated.
A recession is defined as a temporary economic decline in which trade and industrial activity are reduced and spending grows faster than (GDP) gross domestic product for two successive quarters.
According to construction and real estate expert John Burns, CEO of John Burns Real Estate Consulting, those in the construction industry should be less concerned about the semantics of whether we are in a recession and more about employment vs. unemployment.
If someone is unemployed, they likely won’t have the money to purchase a home or spend money on a home remodeling project.
When it comes to the potential impacts of a recession, the decline in consumer spending is the root of financial decline for construction companies and contractors.
Currently, the housing and construction market is tipping over, thanks to record home prices and rising interest rates.
The old saying, “If you build it, they will come.” doesn’t necessarily ring true for the housing and construction market. Builders are losing confidence that buyers will be available for newly built homes in the current market conditions.
So, what is the outlook for builders and remodelers during a recession? Let’s take a look.
When it comes to a looming recession, home builders have been anticipating and preparing for it since the COVID-19 pandemic. However, most builders didn’t anticipate 5 ½% mortgage rates on top of a recession. This is where having a great balance sheet comes into play, since builders will have to drop prices to sell homes during a recession.
While home builders are prepared to take a hit during the recession, remodelers are ready to rock.
While supply chain issues are still present, remodelers are realizing they don’t have to order supplies as far out in advance as they did at the beginning of the COVID-19 pandemic. There may be a temporary lag in remodeling jobs due to the “for sale market”, John Burns Real Estate Consulting’s remodeling market forecast is still looking bullish despite a looming recession.
Rising mortgage rates could create a boom in the remodeling business that lasts for decades.
Think about it this way: How many people would give up their 3% mortgage rate for a nicer house when they could tap into their home equity and remodel?
So, what are the signs of a looming recession and how can we as the construction industry better prepare?
Take a drive around your town — you’ll probably see ‘for sale’ signs left and right.
Not only are these signs popping up more frequently, but they are staying up longer. Why? With mortgage rates now surging, affordability is taking a hit on the demand for housing.
This is a red flag that a recession may be imminent.
Another sign of a potential recession from a construction industry perspective is increased availability among subcontractors.
Subcontractors typically have a fairly heavy workload and project volume. Once new construction project jobs start slowing down, the effect is felt from top to bottom.
Inflation and persistent labor shortages can be a recipe for project postponement.
As materials and project quotes increase, clients may opt to roll the dice by postponing their construction projects to see if inflation will fall back down. On the other hand, some clients may stop their projects entirely.
Federal interest rate hikes are also a likely sign of a recession heading our way.
According to Associated Builders and Contractors Chief Economist Anirban Basu, “The Federal Reserve has engaged in eight interest rate tightening cycles since the early 1980s, six have ended in recession.”
Building permits are the leading indicator of housing market conditions.
To get a temperature on the housing market, you need to compare the number of jobs available to total construction. A slow in building permits indicates a cooling period for the housing market. Pair that with soaring mortgage rates, declining affordability, and supply-chain constraints and you have a pretty strong indication of a looming recession.
“If there’s 20k more jobs, 10k more building permits that are pulled, that’s more demand and supply, “John Burns shared, “If it’s the inverse, it’s not so good.”
Simply put, more jobs than permits is a sign of a healthy economy.
What will be different for stakeholders in construction this time around in what will likely be a 2022-2023 recession? Let’s talk about the newest game changers and unique conditions compared to The Great Recession.
John Burns outlined five of the newest, positive game-changers for a 2022-2023 recession. These conditions and products were not factors in previous recessions:
There is a ton of institutional and retail money organized and available to buy homes for yield, which are protected by an inflation hedge. Institutional and retail investors hit the scene in 2012. Had this been the case in 2010, the housing market likely would not have crashed as hard as it did.
New technology has lent to record low resale home listings. Thanks to home listing giants like Zillow, and Realtor.com, you can put a home on the market and get multiple offers within an hour.
You may have read “mortgage rates have improved” and scoffed. Yes, current mortgage rates are on the rise — but there are infinitely better than 2009 mortgage rates.
Thanks to the Dodd-Frank Act, there are very few crappy mortgage rates in the housing market, since the act prevents mortgage companies and pay-day lenders from exploiting consumers.
Recent polls and research have indicated that approximately 25% of Americans work from home exclusively and 20% of Americans work from home for at least half of their work hours. This means a total of 45% of Americans work from home in some capacity.
Working from home is an affordability solution that is not talked about enough. When affordability becomes an issue people can cut on expenses like gas and move to areas with a smaller cost of living while maintaining their job.
The government’s $30 trillion debt throws the fiscal deficit directly under the bus. Studies show that lower economic growth levels may be associated with rising debt to GDP levels. Activities like tax increases and spending cuts would not be expected, as they can slow the economy even more.
Build-to-rent is evolving the single-family rental market as companies purchase tracts of homes for rentals vs. competing with single-family one house at a time.
According to research from the National Rental Home Council and John Burns Real Estate Consulting, build-to-rent single-family homes accounted for 26% of rental homes in the fourth quarter of 2021.
With an enormous amount of capital associated with build-to-rent properties, builders are looking at this product type as a way to cruise through the downturn in home sales that come with a recession.
Now for the unpleasant part — what are the potential negative conditions the construction industry may face in the upcoming recession?
John Burns highlighted the top three negative conditions to prepare and look out for:
The Federal Reserve has announced that it plans to shrink its portfolio of mortgage-backed securities — meaning they are planning to step back from subsidizing home lending. A move that could risk crashing the housing market industry and incur intense political and financial blowback.
If the Federal Reserve were to take the risk in making this move, mortgage rates would subsequently continue to rise.
The number of homes under construction has reached an all-time record.
With soaring mortgage rates, properties are intentionally not being put up for sale in hopes that builders can hold out until rates improve. This creates a situation where there is more supply than demand, which can lead to home prices lowering. The same thing happened in 2008, which led into a recession.
We’ve talked a lot about how rates are rising in the housing industry, but there is also potential for retail and office distress as inflation pushes prices for goods higher and higher.
Let’s discuss macro trends and statistics that are affecting the current market for:
Due to rising mortgage rates, professional remodelers are already seeing a boom in projects. According to data from John Burns Real Estate and Consulting, nearly 60% of home remodelers are seeing an increase in project size, scope, and budget.
Again, how many people would give up their 3% mortgage for a nicer home when they could tap into their equity to remodel?
However, home equity isn’t the only reason remodelers are seeing an increase in projects.
Many people are spending the net proceeds of homes sold during the 2021 housing market frenzy. It’s also possible that people experienced an influx of money from stock prices and spending more time at home due to the Covid-19 pandemic. Remodeling projects for backyards and kitchens are especially experiencing an uptick as more people are looking into investing in areas of their homes that they have spent more of their time in, thanks to the pandemic.
Macro trends in the construction market are a huge topic right now. One of the key conversations is whether home builders are over-building or under-building.
From a shelter perspective, the market is undersupplied by 1.7 million homes. “But that’s at normal prices and normal rents,” John Burns shared, “We don’t have normal prices and normal rent. I think if you put those all on the market right now, they wouldn’t get occupied at today’s prices and rents and things would fall.”
Just because homes are undersupplied does not mean there is a demand for housing. With today’s home prices and mortgage rates, there is no guarantee that fulfilling the supply for homes would result in home sales. In fact, it’s more than likely that it wouldn’t.
The oversupply in homes could be a saving grace during the recession this time around compared to the 2006 and 2008 recessions, where an undersupply in homes created huge problems.
As we discussed above, build-to-rent can be a huge game changer in a recession.
“Build-to-rent is the latest and greatest”, John Burns said, “It’s apartment communities for people who want something less dense. I think there is so much opportunity.”
With the housing market slowing down due to rising mortgage rates, build-to-rent offers home builders another avenue for revenue heading into a recession, as the rent forecast is still reporting bullish.
Across the country, rent control has been a prominent topic of discussion. However, a recession will likely kill rent control. Rent is more likely to continue to rise, as:
Despite this, there are potential problems that may be on the board for build-to-rent.
“We’ve done more than 900 studies on build-to-rent,” John Burns shared, “I'm a huge believer in it but that doesn't mean there aren’t going to be problems.”
Rent prices can go down when there are a lot of empty homes in one area available for rent. Areas with build-to-rent homes may face this issue, as there will be a massive increase of homes that need to be occupied. However, historical data for decreases in rent indicates that a potential drop in rent would not be significant.
Ready or not — the warning signs of a recession are brewing.
How will a recession impact construction companies? What are recession pain points you need to keep a pulse on? Keep reading to learn more.
Let’s discuss some impacts of a recession that can be felt on a company level in the construction industry.
In part III of this guide, we will dive into steps you can take as a construction business owner to navigate through some of these challenges and “recession-proof” your business.
Economists are predicting a tougher bid environment for contractors in the event of a recession. Again, this is highly attributed to clients putting projects on hold to gauge market situations and prices, causing general contractors and subcontractors to submit lower bids to try to get jobs rolling.
Fewer jobs and rising inflation will turn up the heat on competing for project security.
With fewer projects in the pipeline, construction companies’ cash flow is put in a chokehold. This forces contractors to take on projects at a lower price point to maintain some level of cash flow to float them through the recession.
At a small business level, a recession could bring on job loss, as smaller companies lack the manpower to diversify. With projects being taken on at a lower price point, some workers may abandon the industry to avoid a pay decrease.
However, there is a glimmer of opportunity for contractors and larger companies that can actually benefit when it comes to labor during a job recession:
Larger companies that have the manpower to keep taking on projects and diversify their portfolio always need good talent. As other companies begin to shutter their windows and hunker down, the labor pool starts to reshuffle, and you’ll have the opportunity to hire quality workers.
Right now, every industry is feeling the burn when it comes to the supply chain.
The common denominator in supply chain and material issues is the lack of truck drivers. A freight recession is potentially on the horizon due to an unmet demand for truck drivers.
This is making it extremely difficult for construction businesses to get the supplies they need. And when supplies are available, the big fish construction companies get their hands on it first, leaving the little guys in the dust who can’t compete with the ridiculously high prices caused by demand.
Now that you’re caught up on the warning signs, the statistics, and the impact a recession will potentially have on the construction industry, let’s talk about the most important part — dealing with it.
When most people in the construction industry think of the word, “recession”, they immediately think about how their company is going to survive. And that’s really where we are going to differ with this guide. Our focus isn’t about just coming out on the other end in one piece — it’s about conquering a recession and coming out better and stronger.
Let’s discuss how to navigate a recession in the construction industry like a badass.
We told you at the beginning of this guide — you won’t find canned, BS advice here.
Our 10-step guide to recession-proofing your construction business is built on the advice of REAL people who have worked and survived through the Great Recession.
You don’t need us to tell you that there is a skilled labor shortage. Your business is only as good as your team, so be prepared to make some adjustments to keep your best workers on board.
Here are a few tips and benefits to consider offering:
Here are some additional tips to consider to help you attract new talent:
Maintaining open communication with vendors is a great way to help combat supply issues.
Communication is key. Keeping communication lines open can help you keep a pulse on pricing, material availability, and quality so you can continue completing quality jobs on time.
Many successful construction business owners weathered the recessions in 2008 and 2010. And with a looming recession, they make great mentors.
If you’ve never been through a recession with your business, now is the time to seek out great mentors, coaches, and local allies. Build a strong network and learn from the businesses and people who have already been there and done that with the recession. These are your new battle buddies.
If you don’t understand something, seek counsel. “I’ve had a lot of mentors and a lot of counsel…it was totally worth it,” BJ Maeder shared.
If you need help, ask for help.
You know the type — clients that don’t pay on time, aren’t organized, or are just a pain in the ass to work with.
“It is the process of owning and growing a business that you outgrow your clients,” BJ Maeder admitted, “ When you’re niched down, you can’t deal with other bullshit. While you’re getting better and more refined, you can’t deal with the old bullshit. You have to seek out that next tier of clientele.”
With a looming recession, you may be thinking you need to take on any project that comes your way. You don’t. ”But if you end up in this situation, follow through with doing the job. Hell, do it better than you even planned on doing it. You can leverage the work you do with this project to get better, more high-quality clients.
Once you finish working with a difficult client, treat it as a learning lesson and go find better clients.
Profit doesn’t always have to come from job volume. Focus on increasing your cash stores to tide you over through the recession by attracting more high-quality clients.
Showcase your quality and craftsmanship by letting potential clients walk through your current in-progress projects. And keep your job sites clean! Not many trades have a tidy workspace that they would take pride in showing clients. Even clients that don’t understand construction equate cleanliness to quality work and professionalism.
Your work quality is your biggest selling point. Let your work speak for itself. People will tell others about your clean job sites.
During a recession, some people in the industry are going to sink, while others are going to swim. Be prepared for the fact that your subcontractors could go under.
If this happens, your best bet for success is to move toward self-performing work and hiring people in-house. This shouldn’t be a decision motivated by money but rather having people you can rely on and the ability to control work schedules for projects.
It’s super important to begin optimizing your cash flow now vs waiting for a recession to hit. Make sure you have good processes in place to ensure you get paid on time and protect yourself from non-payment.
According to Jamie Verdura, there are a few ways to do this:
The cost of doing business is high. Start taking stock of your expenses and where you may be able to trim the fat.
With gas prices on the rise, thinking of ways to make transportation more efficient is a great example that Jamie Verdura shares in the video above.
Are your drivers taking the most efficient route to job sites?
Consider using a route planner to decrease fuel usage and time spent on the road that could be better spent at the job site.
Having an answer and understanding of these questions can help you ensure your profit margins are where they need to be.
Make sure your team is on the same page in terms of cost efficiency. “If the bids are paying you good money and you’re getting $25 bucks per foot to frame, you should be able to make money at that,” Jamie stated, “But if you’re cutting everything twice and you’re misordering. And you don’t have the materials on site but your guys are there. Or, there’s not proper leadership and layout— that $25 bucks is garbage.”
Always treat customers with fairness and honesty. The best way to recession-proof your business is to price fair and keep birds even.
Don’t price gouge just because you can — it’ll come back to haunt you when times get harder. This is a great way to lose loyalty and burn bridges, which is the last thing you want to do while heading into a recession.
Again, the focus is not survival — it’s about continuing the growth and success of your construction business.
Three of the best ways to thrive as a construction business during a recession are:
Let’s talk about these strategies in more detail below.
An economic downturn can be an opportunity to come out stronger on the other side. Successful construction businesses look at a potential recession as an opportunity to learn and build a thriving, resilient, close-knit team.
Identify project opportunities that you can complete with the current equipment and manpower you have. Targeting these types of jobs can help you maximize potential profits, which is exactly what you need to prioritize doing in an economic downturn.
Don’t let your eyes get too big for your wallet. It may be tempting to take on larger construction projects, but if you don't have the resources to complete these jobs you’ll find yourself dealing with equipment and crew shortages. This can eat into the efficiency and profitability of your project.
Nine to twelve months ago, construction was booming. You have a backlog of committed projects yet to be fulfilled. This should tide you over during a recession, right? Wrong.
As the recession begins to descend, you WILL have some clients back out and cancel their projects. Others will postpone projects to try and gauge whether pricing will become more favorable. It’s almost a guarantee. You can’t rely on backlogs to pull you through a recession. You need to be proactive and have a plan to keep new projects coming in.
How do you do this? By taking any jobs you are capable of completing. Again, utilize your assets and crew members to complete projects.
Some niches may not need to diversify as much. For example, if your niche is high-end home construction, you will not see a drastic change in demand. But if your bread and butter is framing for track housing, you may see a slow-down in projects and need to diversify.
A recession doesn’t just affect construction business owners — it trickles all the way down to trades.
Whether this is your first recession in the business or a 2008-2010 flashback, these tips will help you stay agile and successful during an economic downturn.
Questioning whether or not to get your license? Just do it. As soon as possible.
Always get your license as soon as possible, even if you’re currently working for someone else and don’t need a license. If jobs start to dwindle, having a license not only makes you a more valuable employee but it also gives you the opportunity to go out on your own and make your own job opportunities independently.
Building and maintaining a network is important and can serve you well in a recession. Stay in touch with people you’ve worked with in the past and forge relationships with people in other trades. Let them know you’re available to take on jobs and to what capacity.
Hammr is a dedicated to actively elevating our industry's community for people working in the construction industry. Whether, that's sharing stories, lessons, and tips our Bred To Build Construction Podcast or Instagram, we're committed to bridging connections that help you find more success in your careers.
As a contractor, you’re playing offense when it comes to a recession. Be proactive about searching for and identifying job opportunities ahead of time. Talk to architects. Find out who their builders are and reach out to the builders. Don’t wait until a recession hits to be proactive. If you wait too long, it’s going to be harder to compete for jobs against other tradespeople in the same boat as you.
Surviving a recession is a team effort — so be a team player. But most importantly, realize that the business owner you work for is on your team too.
There may come a time when the business isn’t doing as well and your boss says something like, “Look, I can lay people off or everyone can take a pay cut and keep their jobs.”
You can help your employer and fellow crew members by being as efficient as possible and cutting costs. This can mean taking the most efficient route to a job site to use less fuel on the company car, not abusing work breaks, and more.
Those who succeed and thrive during a recession have an “adapt and conquer” mindset.
Large construction companies are always looking for talented work — and in a time where there are more workers than jobs, they can afford to be picky.
Diversifying your skills not only makes you a stronger contender on your resume but it also helps open up your job opportunities. Get ahead of the game and start focussing on building out your skillsets so you’ll be prepared come recession time.
With a potential recession in the future, Hammr is can become great resource for you to cut costs and gain control over your business.
With Hammr, contractors are saving time and money on their back-office operations by combining time tracking, payroll, insurance, and job-costing into a purpose-built platform.
Don’t go through this recession alone. Feel free to join our community and give our Bred To Build Construction Podcast a listen. You'll learn valuable industry insights, lessons, and advice on navigating your career and weathering the storm.