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Built to Last

Author: Bonnie Durrance
September, 2009 Issue

NorthBay biz explores the current state of Northern California Builders Exchanges and reports on what North Bay factions are doing to fly in the face of a down economy.

To step into the headquarters of the North Coast Builders Exchange (NCBE) in Santa Rosa is to experience an instant inhalation of prosperity. Hardwood floors and marble counters gleam in a wide-open, earth-toned space with clean, sharp lines and a long, arching skylight overhead. Behind the smiling receptionist, in the place where a hotel might have cubbies for keys and mail, rows of large, white circles present what seems an odd decorative feature. Then the eye registers that the circles are actually tubes—of a size that could fit sets of architects’ plans—and that virtually all are empty.

These tubes would normally be filled with blueprints, says NCBE’s CEO Keith Woods, who, with the professional manner befitting the style of the place, strolls over to a set of vast glass doors and points to a neat line of office spaces within. Normally, he continues, these offices would be filled with builders and architects and blueprint pages spilling all over the place. Now, like the tubes, they are empty. The feeling of prosperity fades.

“Everything has slowed down,” says Woods. “Period.” He compares the current situation to falling dominoes set in motion by the collapse of subprime mortgages, followed by job losses and foreclosures causing distressed properties to flood the market. When people have lost or are nervous about losing their jobs, he explains, they’re not in the market to try to sell their homes and buy upward, and so the demand for new home construction slows. “I can’t speak for Marin or Napa,” he says, “but nothing moves quickly here [in Santa Rosa]. Small projects move slowly, big projects move beyond slowly. And so everything takes forever.”
Things in Napa, according to Solano-Napa Builders Exchange (SNBE) Executive Vice President Erna Stevenson, aren’t much better. In fact, she says, this is the worst slump she’s seen in her 26 years in construction. “We’re seeing a lot of contractors going out of business,” she says with genuine sorrow. “The industry has been hit so hard that the contractors are just trying to stay afloat. Many just can’t hang in there.”

In Marin, construction is historically limited because 85 percent of the county’s available land is protected as open space, federal or state parkland, water district or some other agricultural or environmental designation. But Klif Knoles, general manager of the Marin Builders Association (MBA), says his exchange is experiencing the hard times with about a 10 percent decrease in membership this year. “Our association continues to engage members to help them through tough business times,” he says, “by furthering their education on a variety of business and safety topics. Participation is down, however, because many contractors are out pounding the pavement for jobs.”

In Solano-Napa, the story is the same. “When I see the list of resignations we’ve seen in the last six months,” says Stevenson, “it just breaks my heart. I’ve known some of these contractors for years. And they’ll say, ‘We’re not unhappy with your services, but we’re looking at the bottom line, and we’re just surviving.’”

How can the building exchanges help?

Woods says his exchange, which serves the needs of the building industry with an array of services—an industry library, weekly newspaper, seminars and events, classes (including resources to assist in green building techniques) and group health and workers’ comp insurance programs—is doing its best to help members during these hard times. The exchange maintains an online electronic and onsite plan room where members can research jobs out-to-bid, a newspaper in which to advertise, social events, a Careers in Construction expo for young people and many other programs including a workforce development committee, a government affairs program, a PAC for political action and a scholarship committee that gives away $50,000 worth of scholarships to college students; still, membership is down. The exchange also offers seminars and workshops on safety, CPR, management training, legal issues and mechanics’ liens, but attendance is down.

Membership is also showing the stress of the times, he adds, and some members are slow to renew. “Our organization is down probably 8 to 10 percent from where we were a couple of years ago,” he says.

Woods explains that the builders exchanges and contractors associations are made up primarily of small businesses. There are a few large companies, but for the most part, it’s companies with between one and five employees that dominate builders exchanges.

The picture he sees is bleak—but not totally black. “I run into isolated pockets of success, and some people say they have more business than they know what to do with. And I say, ‘Great.’ But the typical small contractor looking for work is scrambling around, hoping for remodels, tenant improvements or repairs.”

Woods presents a confident air in the face of hard times. But he acknowledges that the exchange, with a budget of $4 million, a 22-member board of directors and 18 staff people, will have to respond to circumstances. “I’ve been very honest,” he says. “I’ve sat down with all the employees and said there could be cutbacks or furloughs. They don’t have to like it, but at least they know it.” To him, presenting the worst case scenario is a way to avoid uncertainty and dissent. “I respect and like our staff people so much, I don’t want to mislead them.”

But the facts are plain: “If the industry is suffering, how is a builders exchange bulletproof?” Almost as an afterthought, he says, “but I shudder to think where the construction industry would be without a builders exchange.”

Attrition in the builders exchange impacts the whole community, explains former president, John Bly, business development manager for Ghilotti Construction Company. He says the exchange, with its 1,750 members, is an important political presence in the community, contributing revenue and votes. “We really want to see a healthy community and to be problem solvers for the governments that are having such a tough time right now,” he says. “There’s an awful lot of effort to reach out to the cities so the exchange can participate and help in any way it can. We’re all in this together.”

Is retraining an answer?

Woods says retraining contractors for alternative careers isn’t something the builders exchange intends to do. “Out of our 1,750 members, 1,300 are licensed contractors. These are people related directly to building. The rest are architects, engineers, suppliers, title companies or accountants who have construction clients.”

Stevenson echoes the thought. “What we’ve done for years is advocate for more career training to give people the skills they need to go into construction jobs. We haven’t thought about retraining.” She says she sees some contractors trying to adapt to the changing times by shifting the way they work. “We’re seeing residential contractors trying to get commercial work, and the reverse—and that’s not necessarily their area of expertise.”

Professionals aren’t the only ones trying to expand their skills. When faucets leak and windows jam and simple improvements just need to get done, some cash-strapped homeowners, rather than engaging a contractor, are opting to do it themselves. “I’ve talked to a couple of home improvement places, who’ve said they’re getting more customers in who are DIY types,” says Woods, “but they’re spending less than they used to. They want to do it themselves but with cheaper materials.”

Some unemployed construction workers are exercising their creativity, too, according to Knoles—but outside the rule of law. “Many contractors are lowering their prices just to try and attract business, only to find an unlicensed operator is undercutting them,” he says. He describes an underground construction industry valued in the range of tens of billions of dollars, then adds that efforts to educate the public on the dangers of hiring unlicensed operators seem to be falling on deaf ears. Right now, consumers who are happy to get the cheapest price feed the “underground” economy, he says. This illegal practice presents problems for the licensed contractors who play by the rules—and for homeowners as well.

Some want to change the system

Woods says local governments should help the building industry. “City councils, planning commissions and boards of supervisors need to speed up the process—fast-track things—because their delays will cost contractors even more and kill projects.”

Permitting fees are really, really high, Stevenson agrees. “I just heard about a residential house being built in the $400 to $500 thousand range, and the fees were $36,000!” For a commercial project, there would be additional traffic mitigation fees.

“Our members—and contractors, in general—are suffering,” says Knoles, “and the banks aren’t helping. They’re keeping financing options very tight.”

Woods says the government could help by fast-tracking building applications, or by reducing or cutting development fees, anything to encourage business in the local area. “That’s what the construction industry and the community need,” he says. But builders get no local help, and the local city councils are either anti-construction or anti-business. “They’re taking this community down a path that’s flat-out wrong,” he says, adding that the building industry and slow-growth folks present conflicting desires. “We have elected officials saying, ‘We want businesses to thrive and survive,’ but they put obstacles in front of us that are unbelievable, in my mind.”

Reducing construction fees isn’t high on the list for Chuck Regalia, director of community development in Santa Rosa, whose own department has suffered a 21 percent staff reduction. About half his department’s budget comes from user fees (which are generated by plan check, construction and entitlement permits) and the other half from the general fund—and both have been hard hit.

“It’s a tough time,” he says. “We’re at the lowest it’s ever been. In Santa Rosa, the prices have been pushed down so far that it costs more to build [a house] even if the land’s free.” Based on its last discussion, he continues, relaxing permit fees to help builders simply isn’t part of the council’s plan. “The council would like to see business turn around, but it hasn’t been their direction to relax priorities or postpone or eliminate fees,” he says.

“The city has reduced about $24 million out of the general fund over the last 18 months,” he says, “all the way from laying off people to postponing raises. And now the state’s talking about raiding the local city and county governments.” The picture is bleak, but there’s action in places. “We have construction going on,” he says, just less of it. “Instead of six new construction inspectors, we now have four building inspectors who are busy every day. Regarding entitlement permits, we currently have about 65 to 70 active applications.”

He says some cities might defer impact fees (which are earmarked for parks, schools, affordable housing, streets, traffic improvements and other community infrastructure projects, and which don’t impact the general fund) for a few months, but none would lift them entirely—and anyway, some people are still building. “As of the end of the fiscal year [June 30, 2009], we issued 184 new residential permits, 164 of which were for single family homes,” he says. “For the first six months of 2009, 84 permits for new residential units have been issued.”

A conundrum

A knotty problem for homebuilders is that prices have fallen so far that the sale value of a new home is less than the cost of building it. “In 2005, the average house in Santa Rosa cost around $600,000,” Regalia explains. “Now, the average is about half that, and it costs more than that to build it.” So, depending on the location, a builder who gets financing may not be able to sell his house and break even. “That’s what people I respect in the business are saying,” says Regalia. “If we didn’t have any fees, it’d be a little bit better, but not much.”

“The cost of new construction has been lowered by overall reductions in traditional construction costs, such as materials and labor,” says Craig Lawson, president of Pinnacle Homes in Santa Rosa. “However, new regulation and out-of-proportion building fees are offsetting gains, and with the market extremely depressed, the timing couldn’t be worse.”

“In the city of Santa Rosa, there’s a mandatory Green Building Ordinance, which I agree with: I think it’s the way houses should be built. We should make them more sustainable, reduce greenhouse gasses and reduce the home’s natural gas, electricity and water use. I’m very much in favor of that. But we also have to factor in making those changes in terms of our economic climate.”

Building fees as a percentage of a home’s cost have risen from 10 percent to nearly 20 percent as a result of the decline in the median price of a home. “That makes it economically unrealistic to develop projects—much less get a commercial lender to approve a loan,” says Lawson. “It’s a real paradox.”

Former Napa County Supervisor and former chair of Get a Grip on Growth, Ginny Simms, commented in an email exchange that, “when a community depends on residential building for its growth, it suffers much more when the economy goes down. That’s probably due to the fact that home building jobs are always more subject to economic conditions. Here, a comparison between Napa [slow and gradual] and American Canyon [very fast] is what I look at.”

Stevenson says American Canyon is trying to be proactive as far as recognizing a need for housing and allowing units to be built. “We’ve been working with the city of American Canyon to get projects,” she says, acknowledging the strong culture of the Agriculture Preserve in Napa County that resists growth. “We have to find that balance. I think there can be harmony between the Ag Preserve and construction.”

“Everything is so interrelated right now,” says Bly. “If the builders exchange and their membership isn’t in concert with what will be approved by city councils for new construction, it’s not a good situation. We’re either going to come together and work together in this difficult economic time, or construction won’t help the recovery as it should.” He sees the situation not as construction versus cities, but that both are parts of the whole issue. “One of the quickest ways to stimulate the local economy is through construction. And we need the jobs. Eventually, the tide will turn and you’ll see a much more unified effort to work together on these problems.”

The “cookie cutter” subdivisions of old are out, he continues, and he sees hope in builders adapting to the needs of the times, for example being more aware of environmental practices that reduce the carbon footprint and energy costs. He says that, because there’s simply not that much buildable land left, builders have to be creative and propose well-designed and well-engineered projects. “They have to be something that all facets of the population can be proud of.”

Lawson says energy-efficient building, bolstered by the Sonoma County Energy Independence Program [See “Financing a Greener World,” Aug. 2009], is a way for people choosing new houses to reduce their energy consumption and for others to retrofit their existing homes for maximum energy reduction. “It’s a way for people to make important ‘green home’ improvements,” he says. “By improving the house’s performance, the home becomes safer and more comfortable, durable and affordable to operate; it also increases the home’s resale value. This is a positive way for our community to reduce consumption and green house gases.

“The great part about this is that the numbers don’t lie,” he continues, noting that Pinnacle Homes has already established a Home Performance Energy Retrofit division. “Once consumers understand how effective and positive this program can be, we believe they’ll want to take advantage of the savings. I’m very excited about the home performance energy retrofit business, because it benefits everyone—the homeowner, the construction industry, the community as a whole and the environment.”

If there’s a silver lining, is it green?

Klif Knoles says his personal view is that this recession will weed out the unsustainable companies, strengthen the others and bring consumers back to the reality that we’ve been living way beyond our means. “It’ll be a true reality check.”

“People say, ‘Well, you know when we get through this, the good will survive.’ But it’s not necessarily true,” says Stevenson. “The good contractors go under and it’s just so hard to sit back and see that happening.”

But she sees a clear direction for healthy building in Napa’s new project, the Riverfront. “Napa City just finished the first mixed-use project in Napa,” she says. “It’s a beautiful project, absolutely beautiful, and a plus for downtown. It’s a mixed-use of retail, office and residential. We need to look at building more mixed-use projects so we can house the workers where the work is.”

Through a friend, NCBE’s Woods makes a practice of keeping in touch with architects to get a sense of projects that may be in the pipeline. He says architects are doing studies and looking at things, but they’re not drawing plans right now. “If they’re not working, there’s your domino again: No contractors working means, no title company jobs and no land surveyors. All these people won’t have anything to do if there aren’t projects in the mill.”

John Bly, whose company specializes in heavy public works projects—roads, bridges, the kind of things the stimulus is about to help—sees a larger picture characterized by change and with the potential, if all groups work together, for benefit for all. He says he’d like to see incentives for green practices, and he’d like to see cities on the cutting edge and really revolutionize how things are going. “It’s very complicated work, and we need to pull together.”


How to Recognize an Unlicensed Operator

By Klif Knoles

One of the most obvious sign of an underground operator is when they deal with cash or cash discounts and have little or no reputable advertising. This should be a red flag. Consumers should ask when dealing with a perceived contractor for their pocket license identification card or, if it’s a sales person, their identification card. If that’s all in order and the consumer has verified the accuracy on the website, they should ask to verify that they’re properly insured for workers compensation (required by law when they have employees, required of all roofing contractors regardless). They should show a certificate of insurance for liability. (This is not required but most reputable contractors carry this type of insurance as a “best practice.”)

Good references are not always the best, and the buyer must beware. In most cases, permits are required, and if you’re caught without them, damages can be double or triple the fees (or more). If consumers hire an underground or unlicensed operator, they may find themselves responsible for any injuries or damage caused by their actions. In the end, it’s simply not worth it. When I was in the construction business, there were two sayings I used to subscribe to: “There are those who know the price of everything but the value of nothing,” and the “bitterness of poor quality lingers long after the sweetness of a cheap price is forgotten.”


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