[Cover Story] Signs of Life?

Features - Cover Story

The depressed housing market has taken its toll on the pest control industry, but PMPs are cautiously optimistic about 2013.

November 30, 2012
Kristen Hampshire

Located in the heart of the country’s bleakest real estate economies, Tim Hulett says he can’t remember seeing so many for-sale and for-lease signs in his home county of Palm Beach, Fla. Never in his 40-year career has the president of Hulett Environmental Services watched such a housing bubble — dozens of cranes building luxury high-rise condos along the beach — or experienced such a dramatic burst. And things still aren’t pretty.

“Florida was one of the most blighted areas, one of the top states with the most foreclosures,” reports Hulett, relating how inflated prices in Palm Beach County took a real blow when the economy tanked in December 2007. In 2006 and before that, people were migrating to Florida with money to invest in real estate. “They were also looking for pest control services,” Hulett adds.

That business stopped abruptly. And over a period of time in 2009 and 2010, Hulett phased out the company’s pretreat department.

“We put more resources and effort into growing the (general) pest control department, which in turn you get spin-off business, like lawn care,” he says. It also has helped that the unfortunate Asian white fly moved in as the termite market faltered. That replaced some business. “The termite market has not returned substantially, but it has increased,” Hulett says. “It’s not flat anymore, at least not the last two years.”

Despite the housing crisis, Hulett has continued to grow by zooming in on other markets, such as the Broward/Dade area.

As for termite pre-treats, those are as good as gone for Hulett. “The only homes that are selling here are the very expensive ones for those who can afford them, and the steals,” Hulett reports. Forget residential new construction, and the sale of “average Joe” homes. “The middle market is basically not moving, and it’s probably about one-tenth of what it was in its prime.

“We are just kind of standing by to see what happens,” he says.

What’s happening in housing matters very much for pest control businesses. New home construction halts snuffed out pre-treat business. Stagnant home sales stifled wood-destroying insect report business and subsequent termite treatment services. Operators that relied primarily on these markets as revenue-generators have suffered greatly. “When you combine a specialization in services with a real softness in new building, which stopped completely in some places, that puts a tremendous amount of pressure on those highly niched aspects of the pest control industry,” says Jeff Liebel, founding partner, CounterPoint Consulting.

Meanwhile, the glut of distressed housing on the market awaiting bank foreclosure only closed out more potential customers.

But there’s good news — or at least bright spots reported by numbers from the National Association of Realtors (NAR). “Home sales have daintily picked up,” says Walter Molony, NAR spokesperson. NAR expects 4.62 million existing home sales this year, up from 4.26 million in 2011. That’s an 8.6 percent gain.

And an endangered species, the construction crane, is back again in Florida and other hard-hit states like Arizona. (See the Top 10 Turnaround Markets below, on the right.) “There are now cranes returning to Miami,” says Bert Putterman, president, Oliver Exterminating Corp., with offices in Florida, Arizona and Puerto Rico. He remembers counting 60 of them when he first moved to South Florida. And in 2010, there was just one, at the St. Regis Bal Harbour Hotel. “That’s it.”

Tides are turning, ever so slightly, and enough so that pest management professionals who adopt creative market strategies will continue to thrive.

A Market to Service.
When people buy homes, they purchase a lot of other things, too. “There are related industries, goods and services, that benefit,” Molony says. In pest control, there are home inspections initiated by buyers who want to be sure their potential investments are safe. There are inspections requested by sellers who want to mitigate any buyer hesitation — take care of any problems before they become red flags on a home inspection report. And there’s all the treatment business that results from these inspections. Smart players like Oliver Exterminating are focused on building relationships with those buyers during inspections so their company becomes the service provider of choice after the “sold” sign is removed from the yard.

Turnaround Towns

Realtor.com compiled a top 10 turnaround town report by using a formula based on price appreciation, changes in inventory, median age of inventory, searches by Realtor.com visitors and unemployment data. This report is based off of third quarter 2011 data. Six of the top 10 are Florida markets. Realtor.com says that Florida’s success is tied to foreign buyers, whose investments in homes there have increased from 10 percent in 2007 to 31 percent in 2011. Realtor.com’s top 10 turnaround towns are:

  1. Miami, Fla.
  2. Orlando, Fla.
  3. Fort Myers-Cape Coral, Fla.
  4. Fort Lauderdale, Fla.
  5. Sarasota-Bradenton, Fla.
  6. Lakeland-Winter Haven, Fla.
  7. Phoenix – Mesa, Ariz.
  8. Boise City, Idaho
  9. Fort Wayne, Ind.
  10. Ann Arbor, Mich.

“We deal with wood-destroying insect reports as personal relationships, and when we do those we demand that the buyer be present,” Putterman says. “What we are doing is selling them our service and offering them more opportunities than the standard company that only does the report and hopes to get a little termite work out of it.”

Five years ago, most of these reports were conducted for sellers, Putterman says. “We are doing them for buyers to give them information about the property they can work with,” he explains. “And, at that time, we give them other information they can work with so they can make a qualified decision or negotiate the sale of the property.”

The more buyers, the more WDI reports. So housing plays a vital role in the service calls a pest management business may or may not get, at least for inspection services. And the same story is true with pre-treat services for new home construction.

So what’s going on with the housing market these days? Stepping back to take in a national economic view, Molony shares that housing historically leads the nation out of recession because of those ancillary purchases, including buying pest control services. “When you have an increase in housing activity, there is a rational, reasonable expected increase in all of the related services,” he says.

But this recession is a different animal because of the number of distressed homes that proliferated on the market and the scores of bad loans that were extended to unqualified buyers. Also, the current sort-of rebound is unusual because usually, housing and rentals don’t share the same ups and downs. Today, both markets are up, which is good for service companies.

“Young people are going out and renting their first apartment or buying a first home, and so the rental demand increases, causing vacancy rates to decline and rent prices to rise,” Molony says. “That encourages some renters who were on the lines to get into home ownership.”

Molony says pent-up demand for housing and rentals is resulting in a “big buildup.” So we’re seeing an increase in home sales activity, a rise in rental demand and higher turnover in rental. “So you have the same kind of expected increase for the need for pest control services there,” Molony says.

Are PCOs seeing this increase impact their bottom lines? Sort of. Stacy O’Reilly, president, Plunkett’s Pest Control, Minneapolis, Minn., says the housing market in the upper Midwest never bottomed out like other regions. Still, for O’Reilly, not growing in the real estate inspection segment the past few years was unusual.

“We noticed a drop-off in home service work,” O’Reilly says. “I’d say in the past 18 months it has picked up and become more healthy again.”

Overall, this has not affected the growth of Plunkett’s. Two years ago, O’Reilly says the company grew a couple of percentage points less than expected. “This year, we are growing a couple more percentage points than we had probably hoped, but nothing dramatic in either direction,” she says.

Russ Ives, president, Rose Pest Solutions, says his Detroit, Mich., real estate market is challenged and the region has faced a population exodus with the shuttering of manufacturing plants.

“We have a lot of houses that aren’t inhabited right now,” he says, adding that he sees some stability in the distressed home market. But that’s really affecting companies that service this portion of the residential market.

Molony says out of the 75 million owner-occupied homes in the United States, a projected 11 million are upside-down in their mortgages, meaning they owe more to the bank than the property is worth. “We are projecting that within two years, that will be down to 7 million,” he says. “That will be a gradual healing for people who have been in an under-water situation, and this is good for the broader economy, barring any unforeseen economic shock.”

Molony adds, “We can only talk about what we know.”

The commercial side of pest control is less impacted by these conditions, Ives points out. Three-quarters of his business is commercial. Ives has never been dependent on residential property transfers, and his business is thriving for it.

The same goes for Ryan Bradbury, president, Viking Termite & Pest Control in Bridgewater, N.J. The business grew 18 percent in 2011 and will match that pace this year. As long as the restaurants in his area are full at dinnertime, he knows that residents have extra money to spend. “And if someone really has pest pressure, they are not afraid to get it taken care of by a professional,” he says.

In essence, that need vs. want aspect of pest control may be the very lifeline that has protected so many pest control businesses while other service industries have suffered. Housing aside, unemployment rate aside, there are still bugs out there. And there are still homeowners who want those bugs gone — and businesses that must mitigate pest problems for safety and sanitary reasons.

“Overall, the pest control market is surprisingly resilient,” says Gary Curl, industry analyst and owner of Specialty Products Consultants. “Total revenues are not as high as they were in 2005 and 2006, but there is still a significant amount of revenue being generated in the industry. And, at the end of the day, people still don’t want to have cockroaches, ants or bed bugs in their homes.”

Diversification saves. Faring well in a tough housing market requires diversification.

The housing market has mainly affected niche pest control businesses that solely focused on churning out inspection reports. “There were companies five years ago that were doing wood-destroying insect reports by the hundreds,” Putterman says.

And if that’s all those companies were doing, then business went real bad real fast.

The same goes for pre-treat services for new home construction. Pest control companies that dabbled in that work or had a technician or two focused on those services adjusted their business models to accommodate the changing market. But pre-treat specialists weren’t getting any phone calls.

Specializing in only those housing-related services burned businesses. “If you look at the South, where a lot of new homebuilding was going on, there was a whole part of the pest control industry that provided services for new builds, and that fractured off,” Liebel says. “I think the single-service oriented operations in the pest control industry got hit very hard.”

So the lesson throughout the housing crisis has been that diversification in customer mix and service offerings rules. And the ability to adapt and change with the times is a determining factor in a company’s success. This has always been a truth in business.

“A lot of people like to complain about how the housing markets ruin their businesses, but in fact, it has had very little affect on our business,” Putterman says, specifically addressing the Arizona office. “There is always change, and companies that don’t react to those changes have a lot of difficulty.”

In Arizona, Putterman says more money is spent per capita on pest control than any other state in the country thanks to pest pressure from the Senora Desert. “People purchase pest control out of need, not as an economic option,” he says.

Arizona was hugely hit by the housing crash. It changed the demographics of the state because people working in construction left to find other jobs in other states, Putterman says. “There were pockets of the state where housing was nearly abandoned.” And, the resale market collapsed to the point where the majority of sales during a two-year period were short sales or foreclosures.

“The pest control construction pre-treat was on the wane for a number of years, and now it is basically gone,” Putterman says. “It has been turned over to the hands of everyday operators rather than pretreat specialists.”

Today, being an everyday operator is a very good thing. And thinking outside of the box is critical.

“We figured out how to re-address the real estate market so we don’t lose our market share,” Putterman adds. “Now, we do more wood reports than we did three years ago.” Oliver Exterminating performs these reports for buyers (and there’s more of them today), and keeps the relationship going after the report is delivered.

Now, in Arizona, Putterman says there is some building, mostly infill construction in the core of metro Phoenix. “That’s great for us because it fits into our existing demographic,” he says. “That’s low risk, high profit, high reward.”

As for 2013, NAR’s Molony says the focus is for sales to increase another 7 or 8 percent to roughly 4.97 million and a continued gain in home prices. “We are now looking at home prices rising at normal rates, and we have not seen that kind of performance for the past six years,” he said “That is good for the broader economy.”

But this still isn’t “normal,” Curl points out, suggesting that the sales number would need to increase to 5.2 to 5.5 million, which realistically could take until 2015 or 2017. And for the most part, termite work is flat, he reports. “Despite all the cheerleading you see around housing numbers, it’s still a very challenging market.”

Pest control businesses with diverse customer and service mixes are likely feeling that much less than other service industries, though. “I wouldn’t say our industry is recession-proof, but it is recession resistant,” Curl says.

Hulett says this fact makes him downright thankful.

“No matter how tough it gets,” he says, “we all do pretty well.”


The author is a frequent contributor to PCT magazine. She can be reached at khampshire@giemedia.com.