Cue the Comeback

The U.S. housing market is coming back with a bang. That's music to the ears of firms that supply the sector.

Written by Jim Sutherland

In early 2008, with the Calgary real estate market slumping, Wendy Fedoruk decided to replace some investment properties that she had sold on the rise, only to discover local prices were still too high for rents to cover costs. So, she bought a plane ticket to Phoenix, where she ended up buying some distressed real estate. “I was a little too early,” says Fedoruk, “but the deals were good enough that I still did OK.”

Fedoruk eventually launched a company called US Property 101, transitioning away from renting out and managing her own homes in Phoenix and instead focusing on providing consulting services to other Canadians looking to invest in distressed U.S. properties. When prices in Phoenix took off in early 2012—the average house price rose by 11% between January and August—Fedoruk shifted most of her real estate activity to still depressed Atlanta, increasing her focus on training other Canadian investors who wanted in. “Everything’s been moving so fast,” she says.

With Canada’s economy slowing and our housing sector particularly vulnerable after several years of unexpectedly strong growth, a rebound in the U.S. housing market opens up opportunities for Canadian entrepreneurs involved in any housing related business, including real estate consultants and developers, commodities brokers and retailers, and manufacturers of building supplies and home-improvement products. The signs are certainly there: the Washington, D.C.-based National Association of Home Builders recently reported that the confidence level among its members reached its highest point since 2006 in November; and Atlanta-based The Home Depot posted an unexpected 4.6% year-over-year increase in sales in October, prompting the home-improvement retail giant to raise its 2012 sales growth projections.

The consensus view is for the U.S. housing market to show only a gradual recovery in prices, but there are outliers: a report from Barclays Capital projects annual increases of 5% to 7% over the next several years. Steady price growth of any sort will have a dramatic effect on the construction sector, in which activity fell to as low as one-third of normal levels during the recession; unsold inventory is now at its lowest level in a decade. Housing starts are currently running 35% above year-ago levels, with a similar pace forecast for 2013. For the first time since 2005, housing will have added rather than detracted from the U.S. national economy this year.

A red-hot renovation market will bode well for firms that save contractors time

To date, most of the rewards of the rebounding U.S. housing market have gone to those who, like Fedoruk, took advantage of the glut of distressed and underpriced properties. But, in a mending economy, opportunities will multiply and diversify. Developers such as Edmonton’s MK International Real Estate, Toronto’s Tricom Capital Group and Vancouver’s Onni Group of Companies and Bosa Developments already have taken note, recently initiating significant multi-family developments in Phoenix, Dallas, Chicago and Seattle, respectively. The launch earlier this year of Bosa’s 41-storey condo project was greeted with incredulity by some in the Seattle media. “You have to be ahead of the curve,” president Nat Bosa responded.

Canadian development companies clearly have the competitive advantage of momentum. While the U.S. multi-family property market was immersed in a Rip Van Winkle slumber, Vancouver and Toronto enjoyed massive condo booms. Now, some of those developers, along with the army of technicians, consultants and marketers who support them, are poised to capitalize on a half-decade’s worth of evolutionary progress. Vancouver’s Rennie Marketing Systems recently sold out a project in Seattle, and soon could have more projects on the go south of the border. “We’ve looked at sites with two or three developers,” says principal Bob Rennie.

The Canadian forestry industry also is feeling the effects of the rebound, along with its suppliers and transporters. Prices for most types of lumber rose by 20% to 40% in 2012. And while projected 2013 U.S. housing starts will amount to only about half of the 2006 peak, so many mills have closed in the meantime that some materials could be in short supply. In addition, with an export tax, set as high as 15% under the 2006 softwood lumber agreement likely to disappear (the formula is linked to prices), Canadian producers stand to reap disproportionate rewards.

“I’m optimistic, but it’s maybe too early to tell,” says Geoff Lakeman of Nanaimo, B.C.-based Resonance Software, a software supplier that helps mills manage labour costs with its WorkSight system. But even if the Canadian forestry industry doesn’t bounce back as quickly as some hope, Lakeman thinks the U.S. rebound will create opportunities to expand his company’s stateside clientele, which already accounts for 60% to 70% of business.

A jump in construction and renovation activity south of the border clearly stands to benefit any company supplying those sectors. Vancouver-based BuildDirect was one of the first companies to sell building supplies online successfully. Jeff Booth, who launched the company in 1999 with friend Rob Banks, believes BuildDirect is well positioned take full advantage of the U.S. housing market recovery: the company already has eight warehouses spread across the U.S. and is developing three more. For 2012, revenue is expected to grow 70%, and Booth projects a further doubling in 2013. “Some of our current growth is due to the fact we’ve been successful in diversifying away from our original specialization in flooring,” Booth says. “But the U.S. housing rebound is playing a major role.”

Brampton, Ont.-based paint manufacturer Aqueduct Paint Technologies is in a similar position. Aqueduct is beginning to ship a new, one-coat interior paint branded as EVO, and chose to launch it at the 2012 National Hardware Show in Las Vegas. “Canada is our backyard, but our goal has always been to focus on the U.S. market,” says Aqueduct’s Tony Margani. Margani believes his product would have been well received during the slump, when every penny counted; but a product that can save contractors time will sell that much better in a red-hot renovation market, when every minute counts as well.

Of course, the rising U.S. real estate fortunes will lead not only to more housing investment but to higher consumer spending in general, as employment rises, net worth increases and the wealth effect kicks in. That, in turn, creates opportunities for Canadians selling all sorts of things south of the border. It’s a virtuous circle—and, with luck, it will be some time before this circle becomes a bubble and pops all over again.

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