For the past 20 years, the most lucrative remodeling segment has been, not surprisingly, the high end -- that is, the wealthiest tenth of the population. Most contractors selling to this market have used the design/build approach to customize their product to the clients' needs. Before design/build, the high-end client usually hired an architect, then put the project out for bid.
Today, the latest studies show the top 9% of the population in income are responsible for 52% of the remodeling market, a testament to the success of design/build. High-end design/build contractors show rapidly increasing volume at 67% markups or higher. So where does it go from here? Changes in the housing and construction market make it likely that some adjusted form of design/build will spread to the next level of income demographic, the so-called lower-upper and upper-middle markets -- which cover the top 70% to 90% in income.
For instance, 10 years ago, tract home builders building subdivisions offered four models and few options. Today, the large builders are building subdivisions with houses in the $800,000 range, with many options that allow the prospective buyer to customize the house as part of the price. Some of those options -- basements with 9-foot ceilings and roughed-in plumbing for finishing later or three car garages, part of which can be converted to a family room -- set the stage for future remodels.
A number of other trends will drive design/build. One is that people are living in their homes about twice as long as they used to. Another is the movement of people, many affluent, into cities, spawning a demand for additions and interior alterations. A third is the increased demand by baby boomers for second homes. Second homes mean home offices, additions, kitchen and bath change-outs.
New Types of Business
After some initial resistance, many contractors are having great success with pre-designed projects, especially "pull out and put back" kitchens and baths, as well as decks, sunrooms, basement refinishes, and home offices. They have discovered that the ability to sell pre-designed projects means offering good, better, and best options, with choices of specific products at each level.
I think what will happen is that some high end design/build companies will start getting calls from the kind of customer who's not their normal client. They will then develop pre-designed projects in three or four categories and train a lead carpenter to run this division.
Two factors will streamline the process: technology and pre-designed projects. CAD programs like Chief Architect, Soft Plan, and 20/20 make it possible for a technology-oriented contractor, salesperson, or estimator to develop plans that show potential clients lots of design alternatives. Because many or most of the customers in this income range are looking for basic projects, this will meet their needs.
The real change in the marketplace that will serve the upper-middle market through the top-end segment will involve the Internet. For the past two years, HomeBuilder.com and Realtor.com have been reporting that between 45% and 55% of their customers research houses and neighborhoods on the Internet before talking to a builder or real estate agent.
When those Internet-savvy house hunters decide what they like, they call a real estate agent to handle the transaction. Those customers only look at seven houses before purchase, compared to 15 for the average buyer. And 80% of them are satisfied with the decision while only 62% who didn't use the Internet are happy.
It's not hard to imagine the Internet being used in much the same way to market pre-designed projects, such as kitchens, baths, decks, and home offices.