Air regulations, fuel, insurance all boost cost of business
Tom Brown, owner of the Sierra Pacific West engineering and contracting firm, says the California Air Resources Board regulations that will take effect next year may cost his business $55 million.
Brown, who took part in a recent roundtable discussion on the health of the real estate and construction industry along with other Daily Transcript Top Influentials, said as soon as April 2009, his and countless other firms will be required to make an emission accounting for every stationary piece of motorized equipment all the way down to a 25 horsepower generator.
"By 2010 we need to start retrofitting the entire fleet and we've got 145 pieces of equipment," said Brown.
Ray Carpenter, a principal with R.E. Staite Engineering, who has been active on San Diego's waterfront for a generation, said not only can you not bid jobs on the Long Beach waterfront without what has been designated as Tier III air standard equipment, "Caterpillar doesn't even make a Tier III engine."
Carpenter added that proposed stricter air pollution standards on trucks could make it even more difficult on contractors.
Charles Black, CB Urban Development CEO, agreed that the environmental regulations with regards to the CARB regulations have simply gone too far.
"There isn't any balance anymore. You have to take economic damage into account," Black said.
Brown, who said the CARB regulations are likely to be repeated across the country, warned that the regulations are threatening to drive the equipment and the jobs into Mexico.
In order to comply with the new regulations, Brown said he may have to rent or lease new equipment from major dealers that have compliant equipment. However, such rentals will be expensive. And, as in the case of the Tier III engine, the equipment might not even be available.
Diesel fuel is the mother's milk of the construction industry. But at $5 a gallon and perhaps headed higher, and job prices locked in, margins may be impossibly squeezed.
"In some cases there's no profit to extract from," Brown said.
This market hasn't been easy for roofers, either. David Susi, president of RSI Roofing of San Diego is fortunate in that he is in the commercial side of the business, which hasn't seen the enormous shakeout that has occurred in residential. Still, there's plenty to keep him up nights -- and most of it has to do with the price of oil.
"Everything petroleum-based (such as roofing materials) has seen a huge upswing in cost. Instead of every few months, we're getting pricing bulletins every 12 to 14 days now," Susi said.
He added that with credit so tight today, COD (cash on delivery) is becoming the norm rather than the exception when materials are delivered.
Susi said oil isn't the only crisis facing his industry. Insurance costs have gotten so high that some contractors have actually decided to "go bare," he said.
"Some medium-size companies may not be able to pony up the $30,000 a month," Susi said.
It also doesn't help Susi's business or his industry when the name of the game is underbidding everyone else.
"The dumbest guy in the industry is dictating my price," Susi added.
While just about everything else has increased in price, median single-family home prices in San Diego County -- at $417,000, according to the San Diego Association of Realtors -- are about $150,000 less than they were two years ago.
Rick Hoffman, president and COO of Coldwell Banker Residential Brokerage San Diego/Inland Empire, said he doesn't believe home prices will drop much more.
"We believe pricing is near its final resting place," Hoffman said. "I feel we're bumping along the bottom and I'm not being Pollyanna about it."
That may be, but Hoffman also conceded that while his business has tripled in Temecula during the past year, at least 60 percent of those sales are REO (Real Estate Owned or bank owned) properties.
Hoffman, who said it is now possible to get a five-bedroom home in Temecula for slightly less than $300,000, said he is seeing seven and eight offers on some short sale properties as well.
Hoffman also said he is pleased that the lending standards are becoming more stringent.
"It's OK to have to qualify for a house," Hoffman said.
