Is now the time to run a construction business?
While running a business is difficult for everyone, there are certain business models that have proven to be withstanding of recessions. Unfortunately, for the owners and employees of construction businesses, they may be very profitable and have more jobs than they can handle when times are good. However, when recessions hit, the construction industry hits the skids and good jobs are hard to find.
I spoke to a friend of mine in the home remodel industry to get an idea of his experience in the business. He is the Co-founder of Colorado Remodels based in Denver and said "When the 2008 recession hit, business came to a stop almost overnight. Great workers were laid off and nobody made any money in the business."
Will this recession be a repeat of 2008 for the construction and engineering industry?
When diagnosing the construction industry and how likely it is that businesses will go out of business in the next recession, we first need to look at the economy as a whole and what the driving factors are in consumer spending, construction, engineering and the macro-economy.
The recession of 2008 was led primarily by a housing crisis. An over leveraged housing market led to abundant construction, an influx of property buyers and a decrease of equity in these properties. Because the economy built so many extra homes and commercial properties, when the bubble burst and millions of Americans defaulted on their mortgages, the housing industry and home construction in general hit the skids.
Whenever our next recession comes (possibly now), it will not be because of an over leveraged housing market. At least not to the extent it was in 2008. If we slide into a recession, interest rates will drop which is actually a benefit for the construction industry as many projects are financed with bank debt.
While the lowering of interest rates may be a benefit, the decrease in consumer and business income will negate that benefit. When businesses and families don't have the disposable cash flow to spend on remodels or construction, construction companies will be left with their hats in their hands.
Will small construction companies and home remodelers be hit as hard as mega corporations?
One of the unfortunate facts in our economy is that small businesses such as home remodelers that are trying to make a living in construction are often hit far worse than large, multi-national corporations. While the SBA does have lending programs available for small business owners, they are much harder to qualify for, slower to grant capital and require personal guarantees. The major corporations that build mega-towers and stadiums have access to the capital markets and stock exchange to keep them afloat in hard times, the local remodel company is much too small to have access to these funds and therefore ends up shutting their doors all too often.