Wednesday, December 12, 2012

The Multi-Family Northern California Construction Tsunami

Lifted from the comments:
I am riding the multi-family construction tsunami in northern California (in what I am calling the new fertile crescent--from Fremont around San Jose, Santa Clara and up the peninsula to Redwood City). As a trade subcontractor we were nearly bankrupt a year ago with only one project on the books. Now we have 14 projects booked for $30+ million. Only things I have learned here at EPJ and at keep this in perspective for me and I have personally prepared myself. Our only struggle is how to take advantage of this huge influx of work without over investing in capital so that we can scale back when the crash comes. It seems several times a week, I have a conversation with someone in the industry who says "looks like the economy is finally getting better" and I have to remind them that we are just in another bubble.


  1. Glad to hear your business has taken off.

    To guard against "over investing in capital" keep a good sized cash reserve on hand (perhaps enough to make debt payments for 2 or 3 years), stay lean and mean by keeping leverage low (by leverage I mean Total Liabilities divided by Tangible Net Worth), and keep debt service coverage of at least 2:1(defined as cash flow divided by principal and interest payments on short and long-term debt). In your business - one with low barriers to entry and paper thin margins - this is crucial.

    You're already way ahead of your competition because you see the current upswing for what it truly is: another FED induced boom. What you want to do is position yourself to "unwind" things when the bubble bursts. As a Banker I talk and have talked to folks in a similar situation and they think the good times will roll on forever. They don't turn down any jobs, they borrow as much as the Bank will lend resulting in high leverage and low debt service coverage. When things start to go bad they quickly go out of business.

    On the other hand, I banked a grading and paving contractor several years ago. His company had substantial cash reserves, low leverage, and a high debt service coverage ratio. When the economy went off the tracks in late 2000 / early 2001 many of his competitors went out of business and he wound up doing just fine.

    I hope you circle back and read this comment. Hopefully it will help.

    Much success to you.

    1. Thank you for your insight, Derek. We have invested a lot in human resources in the past month. As a fellow human being, it will be painful to downsize when the time comes but at least there is no debt and interest to be carried unlike purchasing new equipment or opening new offices (both of which I've talked off the table). We are careful who we enter into contracts with. We are vetted and we do our own vetting. Our contracts are worded to shorten terms and limit retention withholdings when possible. If only I could predict exactly when it will all come crashing down....I guess I'll keep my eyes peeled at this site.

      To further elaborate on another aspect of this phenomena, despite the boom, competitors are already starting to fall: We are being asked to pick up contracts halfway through construction on several projects. Perhaps they bought the work cheap just to keep the lights on and now that labor wages have increased 50% due to the flood of demand (and the fact that most of the "supply" returned to Mexico 3 years ago and the cost and risk of coming back into the US is a deterring factor) they either can't perform the work or can't turn a profit.