National Credit Crunch Puts the Squeeze On Electrical Industry

Oct. 24, 2008
All of the talk about credit crunches and the global economic recession is having a real-world impact on the electrical market, according to distributors and reps around the United States.

All of the talk about credit crunches and the global economic recession is having a real-world impact on the electrical market, according to distributors and reps around the United States.

Distributors and reps are already seeing some projects put on hold and cutbacks in contractor worker employment. Sources are seeing a softening in light commercial work such as strip malls, restaurants, gas stations and small offices. This softness is reflected in the consensus construction forecast from the American Institute of Architects (AIA) website, which blends together the most popular construction forecasts. It calls for nonresidential construction to decline 6.7 in 2009.

Many electrical distributors and reps believe that the total impact of the credit crunch on the economy has not yet been felt. “The real light commercial work — the strip malls and the build-outs inside of these strip malls that smaller contractors are doing — have finally caught up with what the residential demand was a couple years ago,” said Ron Haedt, principal, Electrorep Inc., Sausalito, Calif. “I think the ones that are suffering are really going to be the smaller contractors that have been doing work from job to job to job.”

Construction work on big projects has come to a crawl, he said, but he does not see projects being canceled. There has been a delay in some of these projects, but he thinks they will eventually move forward. “Our big contractors out here (in California) are still very, very busy,” said Haedt. “ I anticipate them continuing to be busy next year. We’re still seeing a lot of schools, a lot of hospitals. I don’t think it will be postponed or held. So there’s actually a shining star in that this business will continue.”

However, in other cities throughout the United States, proposed developments that were launched a few years ago are now crawling along or have completely halted. Greg Reynolds of Flynn-Reynolds, Lowell, Mass., said it’s hard to know if tighter credit is the cause of several jobs being put on hold or if people are responding to the overall perception that the economy is going to stall. Among the projects affected are Waterside Place, a 1.1 million-square-foot retail, hotel and residential project on the South Boston Waterfront; Hayward Place, a proposed $200 million condominium development downtown and Columbus Center, an $800 million mixed-use complex over the Massachusetts Turnpike.

He also said that Boston University, which had a major dormitory build-out planned, called for an immediate hiring freeze and a moratorium on all construction projects that are not already underway, in response to the nation’s financial crisis. Mohegan Sun, owned by the Mohegan Tribe, planned to double the size of its casino with a new high-rise hotel and new parking facilities but is postponing the expansion project for about one year due to worsening economic conditions, said Reynolds.

On the housing front, he said several residential contractors have cut their workforces by as much as two-thirds over the past eight months. On the bright side, he said it appears that Harvard University and MIT are still going strong with their capital improvements and have several jobs moving forward.

In New York, several major projects are also having trouble getting off the ground. According to an article in The New York Times, New York’s building boom will peak this year and the number of construction jobs is expected to fall by almost 30,000 by 2010. The article also said construction had already begun on the majority of the 15 office towers factored into the 2009 and 2010 estimates, but at least one-third of those projects are in doubt because of the economy and troubles on Wall Street.

Bernie Erickson of the Austin, Texas-based Facility Solutions Group said he doesn’t see any slowdown in his niche, which focuses on energy-efficient lighting retrofits. “The credit crunch appears to be increasing interest in ways to reduce fixed costs through efficiency projects. While capital projects seem to be going on hold, people still seem to feel they can fund measures that provide ongoing cost reductions,” he said.

While he sees contractors focused on the construction market feeling the crunch and cutting back, Erickson said those contractors working on energy projects are in contrast maxed out and are picking up some of these displaced workers. “We have added several such new installers in New Jersey to our contracting arm,” he said.

In Chicago, David Rosenstein, president of ConneXion, formerly Classic Electric Supply, Forest Park, Ill., said several jobs have been delayed or stopped. He believes capital will continue to be tight until at least after the first of the year. Rosenstein said he knows of a couple buildings downtown where the owners lost some earnest money and walked away from millions of dollars just because the deal was “under water.” “They couldn’t get the financing to go with it,” he said.

Rosenstein believes it’s important for distributors to establish relationships with other banks, even if they don’t plan to use additional lines of credit right now. “I think a lot of good distributors are networking with other banks because no one knows what is going to happen with every bank,” he said.

In North Carolina, Sam Johnson, president, Farmer Electrical Sales, Greensboro, N.C., said most contractors are finishing up ongoing jobs, but have few prospects for new work. “They are very concerned about 2009, with a few exceptions,” he said. “No layoffs at this point, as they try to hang-on to the key skilled people that they currently have. Skilled electrical labor is scarce, so they are extremely concerned about the lack of work moving forward, which might mean they would have to let some people go.

“The only projects we have seen postponed have been condo projects, where new funding might be an issue. Most larger commercial projects are still on track at this point, and some contractors have enough work to possibly ride though the slowdown, but they are in the minority. We are not expecting a positive year in 2009 in organic growth. Any growth will have to come at the expense of our competition and conversions.”

With construction slowing down, Electrorep’s Ron Haedt said some distributors in his market are shifting business to vertical markets, such as wind and solar. However, he believes that 2009 is going to be a very difficult business year. “All of us are going to have to reexamine where we’re going in the future,” he said.