Heating, ventilation and air conditioning (HVAC)
manufacturers are bracing for the cold spell to continue until
banks ease lending restrictions and the residential and
nonresidential construction markets warm up.
Lending practices and fluctuating appraisal values on
projects are making it more difficult to break ground,
according to John Sedine, president of Engineered Heating &
Cooling Inc., Walker, Mich., and chairman of the Arlington,
Va.-based Air Conditioning Contractors of America (ACCA), the
nation's largest association of HVAC contractors.
"Banks have tightened up lending practices and we have to
recover from the flywheel effect we have seen. A project has a
two- or three-year phase where it is developed and budgeted.
Then two things happened there was a drastic drop in appraisal
of property, and banks required more," he said. This meant that
a million-dollar project was re-appraised at $750,000, thus
making it no longer a viable investment for builders; and
banks, which previously required a 10-percent down-payment, now
require 20 to 30 percent before it will agree to a loan. It was
a double whammy for HVAC manufacturers, who use galvanized
sheet and coil to fabricate ductwork.
"I see Texas doing better, California is hard hit and
Florida is up and down. The market is not only defined by your
geographical area but by what segment of HVAC you serve,"
Sedine said. His company has fared well during the downturn
because it doesn't rely on single-family residential
construction, instead making ductwork for use in living
quarters for the elderly, office buildings and hotels.
Like others, Sedine is keeping inventories of coated steel
products as lean as possible. "We buy monthly because we don't
have a lot of room to keep it, but if last year was the top of
the mountain this year is like the bottom of the mountain," he
said. In gauging steel buys, Sedine looks at the order book and
relies on the service centers selling to him to monitor the
direction of steel prices. "We try and project what work we
have coming up, and when there is wind in the air the people we
buy from tell us 'now is the time to buy'," he said.
Sedine expects funds from the American Recovery and
Reinvestment Act (ARRA) to surface this year. "A number of jobs
were supposed to start last fall but got shut off," he
In Minnesota, Sheet Metal Connectors Inc. is starting to see
an uptick in its order book, partially due to some stimulus
money trickling in. The Minneapolis-based company is fully
vested on the commercial side of real estate. "Last year? It
was a tough year compared to the last 10 to 20 years-as tough
as I remember," Jim Meyers, the company's vice president of
sales, said. "This year will be a little bit better, due mostly
to government projects, libraries and some of the hospitals
adding additions and building some new buildings." There
appears to be underlying strength in Texas, Oklahoma, and North
and South Dakota, Meyers said.
With stimulus money on the cusp of being awarded, he expects
the upturn to gradually progress and continue until the end of
2011. "We have already seen some of it come in, but we don't
know when it is all going to get dropped. Projects are starting
to get bid and could be started soon," he said.
Meyers said he doesn't expect to see other commercial
endeavors break ground until residential construction returns.
"The big-box stores and school work will come after
residential," he said.
The recession has prompted customers to change their
business model, Meyers said. "Sheet metal contractors used to
make their own projects. They'd bid the job, fabricate and
install. But larger contractors have decided to close down
their shops and buy directly from the fabricator," he said,
noting that he was impressed by the resilience of the company's
medium- to large-sized customer base. "They were the hardest
hit because the big jobs weren't out there. I was surprised at
how well the bigger ones adapted and managed to stay in
Sheet Metal Connectors buys 60-inch galvanized coils on a
quarterly basis, and like others has trimmed the size of its
inventory to a one- to one-and-a-half-month supply. "We
consistently keep buying, but overall we buy quarterly. When
good buys come along we will purchase some extra and hedge our
buy that way," he said.
Georgia Berner, owner and chief executive officer of Berner
International Corp., New Castle, Pa., is seeing improved
business activity. "This year is shaping up to be a mild
improvement over last year, but I am looking for more of a
recovery in 2011," she said.
Like other companies, the recession encouraged Berner
International-which makes fresh air ventilation ductwork for
the energy recovery systems it provides for schools and
commercial projects-to be conservative in business practices.
"We tightened up tremendously. In addition to holding less
inventory, we've let attrition work and have not replaced
people," the chief executive said of the family owned business
that has been operating for more than half a century.
Berner hasn't seen any impact from ARRA funds, though. "We
hope to when buildings get money to be safe, healthy and energy
conscious. Light bulbs and highways are tangible items. Air
movement and the condition of the air is more difficult to
understand. But air circulation in a building has a great deal
to do with the cost," she said.
Berner's company markets its ability to provide cleaner air
and energy efficiency, which it sees as having strong potential
going forward. Schools and office buildings are becoming
increasingly educated about the need to provide well-ventilated
structures filled with good-quality air, she said. "We sell to
anyone who has a building and needs fresh air. People are
getting on the band wagon-at schools in particular-because the
air is making them sick. The recirculation of air is what is
causing asthma. People laughed when 'Sick Building Syndrome'
first came out."
But there is a growing trend of tenants recognizing how
modern systems aren't only energy efficient but also can
increase the quality of the air. "But the awareness is still
spotty," Berner said. "Schools are really catching on, but it
also varies state by state."
Consolidation, while prevalent among fan makers in the
industry, isn't being felt by Berner or her competitors, she