A Note from the Editor: This is the first of a two-part series! First, as you’ll read in this article, Phil Rosebrook, Jr. grades the predictions he made for 2021. Then, in this article, you can read his expert predictions for 2022
Although 2021 was more normal than 2020, it was still quite unusual. It is challenging to predict the future when the present is so unpredictable. This past year did see a return to normal in many areas, yet it was quite difficult in others. Different states, countries, and provinces had their own COVID and political strategies that have influenced the macro-environment much more than understandable business trends. As a simple example of this un-predictable year and rollercoaster we have been riding, I recall a Tuesday morning in late January 2021 at the Portland International Airport. I remember looking in both directions in the concourse and not seeing a single person – no travelers and no employees – just me. Contrast that with early December 2021, when every flight was full, and the airports were packed with travelers. A lot has changed.
I recall an article that my father appreciated that compared change to the flow of water. It used to be that the stream of change would flow and occasionally eddy and slow behind rocks and around bends. We live in a world now where that stream of change has become a raging river – with no slowing! This change has been driven by things in our control, as well as completely outside influences. Our job is to create calm within our business as we navigate the rapids and enjoy the ride.
As I sat down to write this article, I read a newsletter from an author of a trusted financial newsletter. The author states that predicting the future is a fool’s errand. This statement made me wonder if my task here is futile. That being said, I am convicted to forge on with my annual industry expectations for 2022, using research, experience, and analysis. The good news is that perhaps the newsletter’s author allows me some margin for error. Although there is risk in predicting the future, it is a healthy exercise to implement for your business. Doing this puts your business in a position to leverage these potential changes to improve your business’ value.
Before jumping into my thoughts of this year, I wanted to offer several salient points that were learned from this past year:
- Regardless of how complicated things are, they will return to equilibrium.
- Great employees are difficult to find, so creating a great work environment and intentionally taking care of your team members is essential.
- Restoration is a vital business, and even when the world shuts down, restoration professionals need to go to work.
- When the government gets involved and money is created to solve problems, it produces many other unintended consequences – including material and labor supply shortages and price hikes.
- Know your costs and take care of your business
– this will allow you to adjust your business plan and practices, as your reality changes and shifts over time. - Cleaning for health is essential, and restorers have a unique skill set to solve unique problems
- Restoration is consolidating rapidly. Create a successful business so you can compete with the new competition or be the desired target of an acquisition.
As per my usual practice, I will critique and grade my restoration industry trend predictions from last year before making my predictions for 2022. This critique is necessary to establish credibility for my thoughts on the coming year. When I think about the critical issues that impacted restoration last year, I believe that I still have some credibility, but you can be the judge of that. Keep in mind as you read these, that the prediction portion was originally written in very early 2021.
2021 Trend Review
Prediction #1: Insurance Companies Move Toward Underwriting Profit
An underwriting profit means that an insurance company makes a profit on the ratio of premiums in to claims out. This pressure will come from unknown risks that are difficult to quantify combined with an equally unpredictable investing market.
Grade For This Prediction – C.
There are many reasons why this was a poor prediction, but it turns out that the insurance industry achieved an underwriting profit in both 2020 and 2021, which is the substantial reason for the low grade. Cars stayed safely parked at home, COVID litigation was still working through the courts and the preliminary judgments have been favorable, and reinsurance companies covered much of the catastrophe claims. Insurance companies continue to take serious steps to minimize claims costs, and restoration margins continue to be squeezed. An example is this new trend of using the new construction price list for larger structure fires. The continued pressure on pricing is why I gave myself a ‘C’ rather than an ‘F’ for this prediction. However, the recommended steps for your business were right on. I also predicted that you would see much higher premiums for your business and personal policies. This prediction was unfortunately true as most companies have seen substantial price increases. If you look at my detailed thoughts on the insurance company’s actions, you will find that many of the cost reduction strategies I predicted are still relevant.
Prediction #2: Labor Shortages
Labor shortages continue to make my top trends for at least the third year, but it is not as acute as last year. The COVID shutdown reduced much of the labor supply pressure. The stability of restoration has increased the awareness of the industry as an essential service and demonstrated that the industry work is vital and will continue in uncertain times. However, with the overall lack of available workers, your business must have a plan to find new staff and retain your current workforce. The first area of pressure for labor is in the skilled trades. Low-interest rates and rising home prices have increased the demand for construction services. That makes locating subcontractors and in-house labor very difficult. The second area of labor shortage pressure is for quality management staff. People with the skillset to be marketers, estimators, department managers, and financial administrators are still difficult to locate and, in some markets, are expecting compensation more than their commensurate value in your business.
Grade For This Prediction – A.
One of the biggest growth limitations for my clients is the lack of available staff to fill needed positions. One surprise I have found in this area is that it is easier to fill many management positions than front-line staff. The entry wages are substantially higher than just one year ago. This increase in entry wages has been driven by low unemployment, high government benefits, and high demand for entry-level staff. In many cities, fast-food restaurants pay $15 per hour with signing bonuses. Skilled labor and trades are in high demand as well. The interesting thing about predictions is that labor shortage was my #1 issue in 2020 – which was covered up by the realities of COVID-19.
Prediction #3: M&A Consolidation
This past year had many significant acquisitions on a local, regional, and national scale, and I expect this trend to continue. I also expect changes to the tax code that may impact some of the acquisition sales (but that is currently speculation). The incoming administration has discussed capital gains, top income rates, and corporate tax changes. If the top tax rates take a significant portion of the sale, this could change the seller’s desire to sell for 3,4, or 5 times (or more) earnings. That being said, restoration is a complicated business, and the thought of receiving a significant paycheck in return for the removal of hassle and risk will continue to drive this trend. I expect to see large vertical integration or interest in the U.S. restoration market from players outside of North America as many large companies inside the U.S. are looking to expand their national footprint, and equity companies are investigating a potential foothold as well. There is no doubt that the significant move by Blackstone (SERVPRO) and First Services (Paul Davis and Global Restoration) will lead to other large purchases by major corporations. I also expect that you may see some of the larger companies merging or acquiring another major player in the next several years.
Grade For This Prediction – A.
This trend was right on and perhaps the biggest one in 2021. My prediction of companies outside the U.S. entering the market happened when John Lyng Group from Australia purchased Reconstruction Experts. I also see a flurry of last-minute acquisitions to finish the year. The predicted changes to the tax code did not materialize, but did impact the seller’s decisions.
Prediction #4: AGA Progress
Keep an eye on moves made by the Restoration Industry Association’s (RIA) Advocacy and Government Affairs movement. In the past year, they have created formal programs to address and change pricing, write position papers to address challenges with TPA’s and Third-Party Consultants, hire an Advocate to speak for and represent the industry’s interests, and much more. I expect more progress on the key issues that affect every restoration contractor.
Grade For This Prediction – B.
I am excited about the actions of the AGA and the work products. They have produced several position papers and have influenced pricing. These actions were a huge deal, especially with the crazy price increases. In most markets, Xactimate did an adequate job of keeping up with rapidly changing prices, and the AGA deserves credit for this cooperation. This prediction does not have a higher score because the other news in the industry and the world, such as COVID, inflation, weather, crime, labor, and more, have stolen most of the headlines. I look for more activity in 2022 and for this to pop up again.
Prediction #5: Mainstream Technology
This year will create a tipping point for technology that will change your business. Artificial intelligence and machine learning are moving very quickly and will be integrated into the systems and technology you are currently using. Some of this will be driven by the restoration industry and much more will come out of Insure-tech software that is driving change in the insurance world. This technology will affect everything from estimating, first notice of loss, loss prevention, documentation and images, reduction cycle time, and more. The hardest part of this transition will be identifying the winners and losers in this space as they race to meet the insurance world ahead of the curve in their transformation.
Grade For This Prediction–A.
The technology revolution has begun. I lowered my grade a little because my prediction was that the insure-tech industry would lead this change. Most of the technology changes I have noticed are being driven by restoration. Take a look at the great work being done by Encircle, KnowHow, Matterport, Kahi, Actionable Insights, Next Gear, Xcelerate, and more.
The past two years have shown that we need to be prepared for the unexpected. Barring unforeseen and unpredictable macro events, we will see a bit of a return to normal. My advice from last year remains the same for business owners: your job is to mitigate risk in your business. Create a nimble structure, develop and execute a solid strategic plan, improve gross profit, reduce debt, upgrade your team (through training, hiring, and getting rid of bad fits), manage your overhead, and create a deliberate company. Spend your strategic time focusing on the items you can control rather than on the uncontrollable things outside your business, community, and family.
Curious to know what Phil’s restoration industry trend predictions are for 2022? Head to this article to read his predictions.
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