Five-Year Failure Rates for Remodeling Contractors Exceeded 50% During Downturn

Abbe Will
Research Analyst

Newly available data from the U.S Census Bureau confirms that the severe drop in home improvement spending that accompanied the housing market crash and Great Recession put a great many remodeling contractors out of business. Although remodeling businesses of all sizes experienced very large failure rates, smaller-scale businesses, which are most typical of the industry, were considerably more likely to fail during the downturn.

Utilizing the longitudinal nature of the Census Bureau’s Business Information Tracking Series (BITS), it is possible to calculate failure and survivorship rates of construction businesses with payrolls during the last economic downturn from 2007-2012. According to custom tabulations commissioned by the Remodeling Futures Program, fully half (51.0%) of general residential remodeling businesses in 2007 were no longer operating by 2012. New housing construction businesses suffered similar exoduses: 52.6% for single-family builders and 52.2% for multifamily builders. Specialty contractors, however, such as roofing, electrical, and plumbing and HVAC specialists experienced much lower five-year failure rates ranging from 33.1% for plumbing/HVAC specialists to 39.1% for roofing companies. These lower failure rates are not surprising since the specialty trades also include contractors that serve the non-residential construction sector, which did not suffer the same steep declines as the residential market.

Business size is a significant indicator of failure or survival. An astounding seven in ten residential remodeler establishments with $100,000 or less in business receipts in 2007 were no longer in operation by 2012 (Figure 1). The failure rate, while still high, drops sharply to one in four for the largest remodelers in 2007 with $5 million or more in receipts. Businesses surviving the industry downturn were in fact larger: 61.1% had receipts of $250,000 or more in 2007, while almost the exact same share of remodelers that did not survive (62.1%) had revenues of less than $250,000.

Source: US Census Bureau, 1989-2012 Business Information Tracking Series.

Interestingly, of the general remodelers that were able to remain in business during the steep industry slump, over 45% did so even as their business receipts dropped by 25% or more (Figure 2). Another 16% experienced lesser declines in revenue from 2007-2012, but declines nonetheless. Surely, the relatively larger scale of surviving remodeling companies provided important cushions for riding out the cycle. The rest of remodelers that remained in business over this period, about 40%, were able to successfully scale back, restructure, or otherwise take advantage of reduced competition to actually increase their revenues during the worst industry downturn on record. The vast majority of these remodeling contracting businesses saw receipts increase by 5% or more from 2007-2012.

Source: US Census Bureau, 1989-2012 Business Information Tracking Series.

These multi-year failure and survivorship rates mask the full dynamics of business openings and closings, however. In 2003, heading into the housing and home improvement boom years, about 18% of residential remodeling establishments were new businesses. In 2007, at the peak of the market, this share stood at 16%. During the trough years of this past business cycle, the share of remodeling businesses that were start-ups barely budged at 15-16% in 2008, 2009, and 2011. One-year failure rates during the same periods have ranged from a low of 12.9% in 2004 to 19.8% in 2009 and 14.4% at last measure in 2012. Indeed, in any given year and at all points in the business cycle, the remodeling industry experiences substantial churn of business entrances and exits.

It is important to note that the BITS database is of payroll businesses only and as such does not track movement from payroll to non-payroll, or self-employed, businesses, which is likely a common occurrence for many smaller contracting companies serving the remodeling industry. According to Joint Center tabulations of the 2007 Economic Census of the construction industry, nearly a quarter of general residential remodelers had less than $100,000 in receipts and the average business of this size had 0.93 payroll employees, indicating that some of these firms were without employees for at least a portion of the survey year. Another 27% of general remodelers had revenues of $100,000-$249,000 in 2007 and only 1.64 employees on average.

Certainly, some part of the calculated “failure” rates cited above is due to payroll businesses moving to self-employed status rather than actually going out of business. Indeed, the term “failure” is used only as shorthand to mean the establishment ceases to exist in the BITS database and not necessarily that the business failed to generate enough revenue to cover expenses. In addition to conversion to self-employment, other non-failure reasons for a business to cease to exist in the BITS file could include retirement of the proprietor or sale of the business to another entity.