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Is growth among privately held construction firms peaking?

09/23/2013 05:12 pm ET | Updated Nov 23, 2013

Residential builders and remodelers make up one of the fastest-growing groups of privately held companies, according to industry data from Sageworks, a financial information company. But is the strong performance peaking or just getting started, given the outlook on interest rates, hiring and credit?

Privately held companies in residential building construction (NAICS 2361) had average sales growth of 17.5 percent for the 12 months ended Aug. 31, based on financial statements in Sageworks' database. The category includes general contractors, builders and design-build firms for both single-family and multi-family buildings, so it covers new construction as well as remodeling for a wide range of housing.

"Aside from the strong sales growth, these companies have a relatively healthy 4.6% net profit margin, rare for an industry that typically sees razor thin, or even negative, margins," said Sageworks analyst Tim McPeak.

The increases among builders, along with sales growth at private home furnishings retailers and reports of soaring heavy-duty pickup truck sales, reflect the continued housing recovery, which some economists expect will continue.

"I have seen some uptick in the number of single housing units being built by the clients I deal with, but my clients that do multifamily are exponentially off the charts with new work," says Scott Cresswell, a partner with The Bonadio Group, a CPA and consulting firm that has seven offices across western and upstate New York.

Indeed, sales volume has been strong enough that some construction firms are facing a shortage of skilled workers.

"Among my clients, I'm seeing an absolutely crazy labor shortage, especially in that market where people are building stick-frame homes, because there are not a lot of carpenters out there," Cresswell said, noting his construction clients are mostly in New York and elsewhere in the Northeast.

Some workers are seeing bigger paychecks tied to overtime work, but most firms don't seem to be facing upward wage pressure, according to Cresswell. That may be partly due to the fact that many construction workers are simply relieved to be back at work after the housing market's collapse, he added.

Sageworks analyst Tim McPeak said data on privately held companies don't yet indicate that labor shortages or rising costs for some materials are eating into profits. Instead, the biggest "dangling sword" appears to be interest rates, he said.

Cresswell said some of the recent spending in the housing market is driven by people trying to move quickly before interest rates rise. "If the Fed's going to do something to make those rates go up, which it sounds like it's going to do, I think that's going to curtail the growth that people have been seeing," he said.

McPeak said trends in interest rates and sales among construction firms will be important to watch in coming months.

Even before the Federal Reserve surprised market-watchers last week by delaying plans to ease its monetary stimulus, the National Association of Realtors chief economist reported signs of a big drop in potential buyer traffic during August.

"Interest rates are built off expectations, and the expectation of everyone is we're going to start to see rates rise," McPeak said.