Commercial plumbing is bright spot in 07 outlook

BY WILLIAM ATKINSON SPECIAL TO CONTRACTOR THE PAST YEAR and the new year are relatively easy to sum up for plumbing contractors: Residential and commercial had a terrific 2006. Commercial expects a great 2007. "I have heard nothing but good things from people in the industry about this past year, both on the commercial and residential sides," said Jo Wagner, president of CTO Inc, in Arlington, Texas,

BY WILLIAM ATKINSON
SPECIAL TO CONTRACTOR

THE PAST YEAR and the new year are relatively easy to sum up for plumbing contractors: Residential and commercial had a terrific 2006. Commercial expects a great 2007.

"I have heard nothing but good things from people in the industry about this past year, both on the commercial and residential sides," said Jo Wagner, president of CTO Inc, in Arlington, Texas, and president of the Plumbing-HeatingCooling Contractors — National Association. "In addition, it seems as though profits were up. In fact, I think it was one of the best years I've seen in the last 15."

Wagner said that she anticipates a strong 2007 for her commercial plumbing business. "We actually expect 2007 to be even better than 2006," she said.

Her view is shared by Don Devine, president/Bath & Kitchen Americas at American Standard, who said 2006 was another good year for commercial.

"We saw overall growth, and we expect to see another robust year in 2007," he said.

Matthew Erickson, vice president of C.J. Erickson Plumbing in Alsip, Ill., said that that his company had a strong year in nonresidential work. The firm is active in the Mechanical Contractors Association of America as well as PHCC-NA.

"There was plenty of work, and margins also increased a bit," Erickson said. "We expect the same situation in 2007 as we had in 2006, which is that there will be plenty of work."

It remains to be seen, he noted, if the margins on commercial work will remain as high as they were in 2006.

As strong as the commercial market is, however, residential new construction is not shaping up in a way that would make 2007 a banner year. Richard Reles, vice president/marketing for Global Faucets at Kohler, said the company didn't start to see much of a slowdown until the last quarter of 2006.

"However, we had already been significantly exceeding our growth plans for the year, so we were pleased with the way the year turned out," he said.

Reles said he views 2007 as a "corrective period" but is still looking for some growth.

"People are still working, and the big home builders are public companies, so they have to show growth, and they will come roaring back," he said. "In addition, a lot of them are sitting on five to seven years worth of land, and they need to develop it."

These are assets, Reles noted, and builders need to turn them. Furthermore, the nation's aging housing stock needs to be replaced.

American Standard saw residential new construction slowing in 2006.

"The data for the industry as a whole shows a roughly 30% drop, so that clearly was a negative to the industry [in 2006]," Devine said. "As we look forward to 2007 on the residential side, we expect the slowdown to continue for at least the first six months."

The reason, he said, is that the existing housing inventory needs to be worked off before any significant uptick takes place in the second half of 2007 and on into 2008.

Vasken Altounian, executive vice president/sales and marketing for Delta Faucet, is not as optimistic about the length and depth of the pullback on the residential side.

"For us, 2006 started rather strong, including new construction and retail," he said. "The second half has not been as good, primarily because of what is happening with new construction, so we will have a softer finish to the year."

He said the industry will have to deal with the residential construction situation for the foreseeable future because the bottom hasn't yet been determined.

"So far, it seems as though it is going to be deeper than most people anticipated," he cautioned. "Conventional wisdom suggests new construction will pick up again in 2008."

On the other hand, the residential service, repair and remodel sector of the plumbing market was very strong in 2006, Altounian said, and continues to exhibit strength. He said he expects 2007 to be softer than 2006, but not as soft as residential new construction.

"We haven't seen a substantial softness there yet, and premium business in particular has remained strong," he said.

Reles said that 2006 started out strong for Kohler on the retail side of its business but slowed down near the end of the year. "However, we don't feel the slowdown on the retail side will last very long at all," he added.

Roger Peugeot, president of Roger the Plumber, operates a service and repair business in Overland Park, Kan. He is an active member of Quality Service Contractors, an enhanced service group of PHCC. After a strong 2006, he expects more of the same in 2007.

"We have had an excellent year," he said. "We have even added new trucks to our fleet and hired new people."

The shifts in activity in the different sectors of the plumbing market have caused some interesting situations on the labor front. Most people applying for jobs at Roger the Plumber, Peugeot has found, are from the residential new construction side of the business.

"We are getting a lot of calls from people who are looking for jobs," he said. "This hasn't occurred in the last few years. Since residential construction has slowed, there isn't enough work for them."

While an increase in potential labor may be an opportunity for some service plumbers, Peugeot said that it isn't necessarily the case for his company.

"A lot of these people aren't the clean-cut, traditional technicians that people want in their homes," he said. "They are the ‘heavy-boot' guys who are used to working in the mud and not communicating much with customers. As such, they aren't the kind of people we're looking for."

While some residential new construction plumbers are seeking employment from service contractors, others may be finding even more opportunity in light commercial work, CTO's Wagner said. The fact that residential building has slowed down may help to solve this problem, she said.

"Currently, in the commercial sector, the biggest problem is lack of technicians for the workload," Wagner said. "Most of the contractors I've talked with say they could do even more work if they had more help.

"You can at least take a housing technician and move him into condo work."

Another trend in the plumbing market has been an attempt to "pirate" some work, both on the residential and the commercial sides of the business.

Contractors that have focused on new construction never had service departments that called on customers after the one-year warranty, Peugeot said. Now, with the slowdown in residential building, a number of these contractors are looking at providing service and repair work.

They are starting to compete with the full-time residential remodel and repair plumbers, Peugeot said. He added, however, said that service contractors who have built a reputation for high quality and customer service over the years will not suffer much from this new competition.

William N. Erickson, CEO of C.J. Erickson Plumbing, said experience tells him that every time the housing market takes a dip, it takes about nine months for his company to feel it.

"The reason is that the residential contractors who can't find work in that market start going into light commercial work and bidding against us," he said.

So, while 2007 looks like a strong year for commercial work, more contractors may enter that side of the business, thus increasing the competition.

Top 10 housing markets in 2007-08 (Areas showing most growth)

  1. McAllen-Mission, Texas
  2. El Paso, Texas
  3. Albuquerque, N.M.
  4. Salt Lake City
  5. Syracuse, N.Y.
  6. San Antonio, Texas
  7. Rochester, N.Y.
  8. Baton Rouge, La.
  9. Fort Worth-Arlington, Texas
  10. Birmingham, Ala.

Sources: National Association of Realtors, Moody's Economy.com, Fortune and CONTRACTOR