State of the Industry by Matt Cole
Another Summer is coming to a close on Cape Cod – traffic is less congested, temperatures are gently easing, and the beaches and restaurants are suddenly quieter. So much is as you would expect. And yet, so much – that cannot necessarily be seen – is so different.
We are 7 years into a strong bull market in real estate and construction on Cape Cod. We saw the recovery take hold on Cape in the second half of 2011. For several years – from 2009 through 2014 and into 2015 – we were spoiled with virtually flat pricing from our suppliers, predictable business conditions and a healthy supply of work. The local and regional regulatory environments were dynamic and they were the target of our disdain. Today we find ourselves surrounded by a turbulent, unpredictable environment where federal regulations, material cost escalation, rising interest rates and an under-sized regional labor market have created challenges for us. Thankfully our team is up for the challenge and has mitigated these risks skillfully.
The first and most consistent change that we deal with is the update to our local and state regulations. Thankfully there are several positive changes to zoning that are sweeping the Cape. The awareness for the need of additional housing to support the workforce that supports our seasonal economy is at an all-time high. Zoning changes that allow for greater densities where it makes sense and that allow for accessory dwelling units (ADU’s) are showing up on Town Warrants all over the Cape. ADU’s are a great tool, one small tactic in what needs to be a multi-faceted solution to our housing issue – they provide an additional (small) housing unit while also providing rental income to the property owner. This could allow a young adult to move out of their parent’s basement and could allow an elderly person to afford to stay in their home longer given the rental income.
The state building code transitioned to the 9th edition officially this past January. With the new building code comes more stringent requirements for construction projects – requirements that make housing more expensive to construct. New homes must now be built so tight that they are required to have mechanical ventilation to bring in enough fresh air to keep occupants healthy as just one example. The building code changes, thankfully, are communicated many months in advance, involve a process in which we – through our trade association – have input and the transition also incorporates a multiple-month concurrency period where we are able to permit a project under either the old code or the new code (this concurrency period expired 12/31/17).
Trade negotiations between the US and other global trading partners are garnering significant coverage in the news recently. One material that is integral to the construction of so many things in our lives – steel – has caught much attention. China has been guilty of dumping steel into the US market for years. As consumers we have enjoyed lower cost cars, homes, office buildings, appliances and so on as a result of lower raw material cost. It has, however, damaged the domestic steel industry which this tariff seeks to slow or reverse. For the typical single-family home on Cape Cod, this will have some impact but is likely minimal. Fasteners, joist hangers, beams and columns are all critically important and necessary to build a home; however, do not represent a significant portion of the total cost of a home.
One of the more jarring regulatory changes was that dealt by the Fed’s with their Canadian soft wood tariff. There were many items affected by this tariff that are integral and significant components to building a home. From framing lumber to trim boards, several items affected by this were both predictable and anticipated. Locally, the effects of this phased in over several months as wholesalers and lumber dealers averaged in new, higher priced stock and prices crept up gradually and predictably. Framing lumber is now as costly as I have ever seen it, up 35-45% (on average) over a year ago.
Another, very unexpected curveball came out of the soft wood tariff. On Thursday, March 15th the United States Customs and Border Protection announced a 20.83% duty on all wood shingles and shakes from Canada, effective immediately and without any consideration for orders placed and paid for previously. What this meant is that any orders placed by our suppliers months prior, and paid for months prior, that had not yet crossed the Canadian border, would be subject to this additional duty. On March 20th we received notice of this and, on the very same day, placed the largest single-day order of cedar shingles in our 47 year history, placed at multiple different suppliers, leveraging our relationships to purchase their inventory at pre-tariff prices. That may be the last time we have access to white cedar shingle stock at pre-duty prices. There are a couple unfortunate aspects to this – the lack of warning, the lack of domestic producers with any scale (there are virtually none), the impact to US foresters that provide raw product (logs) to Canadian shingle producers and the fact that the vast majority of homes on Cape Cod are clad in shingles which are now significantly more expensive.
When the recession hit in 2008, many left the building industry and many left Cape Cod to find employment elsewhere. Mercifully, the peak to trough change locally was but a fraction of what was experienced elsewhere in the US. Throughout that time we labored on, nose to the grindstone and kept our employees busy enough to avoid layoffs. This strategy and investment allowed us to keep our scale and stay ahead of the competition when the recovery started in 2011. Through 2014 we grew our employee count considerably to meet the needs of our projects. We then hit significant headwinds as a result of the diminished labor pool. Since 2014 we have remained virtually the same size company, the result of a very tight labor market. I have been quoting a figure close to 0% for the unemployment rate for trained carpenters (and perhaps all construction tradespersons) on Cape Cod since that time.
We have mitigated these challenges several different ways – we have recruited aggressively, we have tapped subcontractor partners in greater ways than previously, we have purchased various tools and equipment which save us on-site labor, we do more off-site fabrication, we have increased focus on employee retention and we have made tremendous investments in our staff to make them more skilled and more efficient. We have a first class employee benefits program that offers paid time off, healthcare insurance, disability insurance, life insurance, dental insurance, annual safety-toe boot allowance, tool repair and continued education. It is training and continued education where we have made the greatest investment. We have recently completed a 3-year training program that took hundreds of thousands of dollars of investment, paired it with some matching funds from the state and allowed us to educate our employees while also creating the foundation for a program that will continue annually going forward. We have already started to see the fruits of this labor with more promotions and more rapid increases in skill sets than we have seen previously. Our employees are our most important asset; investment in them is one of the most sound foundations we can build for our future.
In the end, perhaps there is nothing new under the sun. Tariffs and trade wars are not new; labor supply on this island will always be tighter than it is elsewhere and the regulatory environment will always be dynamic. The party of the last several years is over and we must remain cognizant and dynamic operating in these very dynamic times. We thank you for your ongoing support of our business and, just as we have for 47 years, we have the plans and investment in place to be here for decades to come to serve you and your family.