Jon Ryan says keeping his Twin Cities heating and cooling company on course this year has been like navigating an ocean liner through iceberg-strewn seas.
This spring, there was more work than many companies could handle, but a shortage of labor and materials. Within months, interest rates doubled and home building plunged.
Ryan is president and owner of Genz-Ryan, a market-leading HVAC company founded more than 70 years ago by his father. For years, the company's bread and butter was installing furnaces and air conditioners in new houses.
Not anymore. He recently shuttered the new-construction division of Genz-Ryan, wiping out the work of 40 people. The company will focus on service and installations.
"It's been like trying to turn the Titanic," he said, referring to the well-known ship that sank after hitting an iceberg. "Only about one-third of what you can see is above water. It's what you can't see that worries me."
After a pandemic-fueled building boom that left builders and their subcontractors overwhelmed and exhausted, a sudden contraction is reshaping the industry.
"We are seeing prudence exercised by many segments of the homebuilding industry in response to the slowing pace over the past several months," said James Vagle, CEO of Housing First Minnesota.
The situation is especially perplexing for companies that were in business during the 2008 housing crash, which sent skilled workers fleeing to other industries. While they're well aware that the region is still in need of tens of thousands of new houses and apartments, they also realize that demand can quickly ebb and flow.
"Builders and trade partners are being cautious as many have gone through cycle slowdowns in construction before," Vagle said. "The challenge is that the demand for homes did not vanish, it's just sitting on the sidelines. Builders know eventually they are going to have to ramp back up again in order to supply our region with much needed housing."
To be sure, no one anticipates the kind of housing crash that triggered the Great Recession in 2008. That downturn was caused by risk lending and an oversupply of new houses, which is not the case today.
That recession happened when Ryan wasn't yet in charge and about 90% of the company's customers were home builders. Though they lost about two-thirds of their business, the company was less diversified than it was today, so exiting the new-build business wasn't an option.
"Our business mix wouldn't have allowed us to make that decision," Ryan said. He added, "And I was a lot younger and had the energy to be able to handle a downturn."
Today, Ryan says that because so many people are spending so much more time in their homes, including remote work, they're using their furnace and air conditioning a lot more. That equipment and their components need more service and replacement.
And, he said, because people are staying put longer, focusing on servicing existing clients makes a lot more sense than it did during the last recession.
Because fewer people are moving, there have been few sellers and even fewer buyers but prices keep rising. Last week, the S&P Case-Shiller Home Price Index showed that home prices in the Twin Cities during September were more than 6% higher than last year at the same time. That gain was smaller than earlier this year, but in line with historical averages.
For builders, it was a record-breaking spring and many are still building houses that were purchased earlier this year. More recently, building permits have tumbled. During November, builders pulled half as many permits as they did the year before, according to new data released last week by Housing First Minnesota.
That shift has left many builders, subcontractors and their suppliers only cautiously optimistic about 2023.
It's a paradox that has the nation's largest builders and suppliers looking for ways to control costs. Executives at Builders FirstSource, the Dallas-based leading supplier of building products, recently told investors they're executing what they call a "downturn playbook," which includes freezing or reducing jobs.
Several publicly traded home builders, including Pulte Homes, which has a major presence in the Twin Cities, are canceling options on land purchases and scaling back development plans.
Michael Ramme, vice president of land acquisition for Centra, a Coon Rapids-based developer, said that as national builders "pump the brakes" there are opportunities for companies that aren't beholden to shareholders to acquire land more affordably than last summer. He said it's getting easier to hire subcontractors.
"There are subs who now need the work; two years ago they wouldn't even look at you," Ramme said. "The tables have turned."
At Genz-Ryan, that change in fortune forced a reckoning. Ryan said he reached the decision to close the construction division even though it was getting easier to hire workers and obtain supplies.
The final straw, Ryan said, was the realization that so many homeowners are locked into the lowest mortgage rates in a generation. That means they're unlikely to move because, if they buy again, they would contend with sharply higher rates. Those frozen homeowners could be a drag on homebuilding for the next several years.
"It was really about rising interest rates; that changed everything," Ryan said. "But I felt like this was the right time for us to make the decision."
Some of those 40 employees that lost their jobs stayed with the company and were reassigned in its service division, Ryan said. Others were able to quickly find other jobs.
As much as Ryan was concerned about his ability to keep crews busy during the housing downturn, he saw the decision as an opportunity to aggressively grow the service and replacement business.
He wants the company, known for its advertising with the catchphrase "I love those guys," to remain a local standout at a time when private-equity firms are buying heating and cooling firms and consolidating them under national brands.
Ryan said that he's in the process of turning the former new-construction showroom and selection center into the Jack Ryan Academy, which is named after his father. He'll use that space to train workers.
Making the decision to eliminate the new-construction division of his company was like a "gut punch," he said. But he added it's the right decision given the ongoing challenges facing the industry.
"The study of economics is the science of trying to satisfy unlimited wants with limited resources," Ryan said. "This really came down to a handful of decisions."
