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What’s in Store for the Construction Market?

As was the case with many of the presenters at VMA’s Market Outlook Workshop held in August 2016, Randy Giggard of FMI Consulting noted that availability of labor at all levels is a major concern in the construction business.

“The shortage of skilled labor at all levels is no surprise,” he said. “While the construction industry first recognized the declining supply of construction labor as early as the mid-1980s, the problem has increased since the recession.” During the recession, many in the industry found careers in other sectors and have no desire to come back to the construction field. Additionally, baby boomers are retiring at an astounding rate and fewer young workers are entering the industry, both in the field and in management.

To help deal with the shortage of people and drive productivity, many companies institute more technology like cellphones and cameras to be used as collaborative tools. “But, the benefits are not clear,” said Giggard.

Trends

Giggard noted that an important trend for valve manufacturers to recognize is the emerging shift in the power structure between contractors and engineers. He called it a merging of design and construction. “Shifting specification influence may have some impact on flow control,” he said. “Prior to the recession, you were working with architects and engineers, but as we got to the recession and there was such tight funding and lowering budgets, owners had to find out who was the cost expert, and that was the contractors.” As a result, owners were bringing contractors into the fold and they are making recommendations that get worked through the engineers. As suppliers, this is important. It is changing the power balance between contractors (more) and engineers (less). “Unless you’re working through the big EPCs, you need to be thinking about that because the contractors have a lot more influence,” advised Giggard.

Another cost and quality control shift is that contractors are becoming increasingly like manufacturers. “We’re seeing increased pressure for pre-fabrication and modularization,” said Giggard. “There are better quality controls in the factories, so units are made there and being transported to the jobsite. That affects suppliers of all components, including valves.”

The price of natural gas is bringing a lot of manufacturing jobs back into the country. “Add to this the expansion of the Panama Canal, and it makes it more attractive to do major manufacturing here than it has for a long time,” said Giggard. “A big tire manufacturer is building here, and all of the tires will be sold elsewhere.” Commercial building is a growing market and is reasonably healthy, although Giggard pointed out it is still a buyer’s market.

The NRCI (non-residential construction index) comes out on a quarterly basis. It is comprised of a panel of 260 respondents (owners and contractors). “It’s the big oil and EPC companies and major project owners and they have been somewhat positive toward growth since the end of 2015,” Giggard said.

In the responses to the recent survey for the NRCI, the following were listed as the top reasons for economic uncertainty affecting construction:

  1. Skilled talent availability – 24.9%
  2. Growing political polarization – 21.4%
  3. Future funding sources for projects – 18.5%
  4. Health care policy – 16.0%

The top reasons for optimism were listed as:

  1. Businesses starting to build again – 17.2%
  2. Expanding backlog leading to future business – 15.2%
  3. Low inflation – 14.5%
  4. Most markets are growing – 13.2%
  5. Strong balance sheets (financial security) – 12.5%

The Numbers

Giggard pointed to the current differences in construction in Canada and the United States. “It’s one big open border, but with two very distinct cultures and significant current differences in the construction field,” he said.

While industrial production has dropped off in Canada, in the U.S., “We are about back where we should be in terms of construction,” said Giggard, which is “close to GDP.” He pointed out that commercial construction correlates to population growth and whether that growth is strong enough to stretch the resources of the people who are currently supplying to that market.

Absolute growth is occurring in what he calls the “megapolitans” (see map below) and Florida, California and Texas, which account for 46% of total U.S. population growth to 2030.

Megapolitans

Multi-family Residential

Construction put-in-place rose 24% in 2015 and will rise another 12% in 2016 to $64.2 billion. Rents are rising as the population shifts to the city and forgoes homeownership for now. Children of baby boomers are forming fewer households. Potential homebuyers are deferring purchasing decisions, and credit is harder to get, even for highly creditworthy borrowers. Thus, multi-family vacancies remain around 7.0%, with most new capacity being absorbed quickly.

Lodging

Lodging growth is cyclical, according to Giggard. While Chicago is pretty well built, other markets are continuing to grow so it’s important to track occupancy rates and RevPAR (revenue per room) measures that are easily tracked. Giggard’s latest forecast expects growth to slow to 15%, after reaching 31% in 2015. Room starts are increasing and occupancy rates and hotel profits are up for six consecutive years. For suppliers, lodging has done well, but he warned it’s important to pay close attention to the particular geographic market.

Office

Office space itself is largely driven by technology firms, so the extent to which those industries are doing well or not specifically impacts office construction. “It has made a pretty good comeback after the recession,” said Giggard. There has been about 9% growth in 2016, but he forecasts a slowdown to 7% going forward.

Commercial

According to the definition from the U.S. Department of Commerce, this is specifically about retail, restaurants, bars and service establishments like auto garages, auto sales and other small businesses. Growth here is driven largely by consumer spending and consumer confidence, which rose 2.2 points to 96.2 in March 2016 according to the Conference Board.

This sector ended 2015 with growth of 7% and Giggard’s forecast calls for another 7% growth for 2016. The Internet of Things (IoT) will be increasingly disruptive for commercial business, presenting both opportunities for new businesses and threats to traditional brick and mortar markets. Continued growth in residential construction will help retail stores. Market drivers for this sector are increased retail sales, income is up, home prices are up, housing starts are up and housing permits are up.

However, there is a big impact on retail by internet sales and this will have a significant impact over time on the commercial sector.

Health Care

This sector has been impacted over the last several years by public policy and uncertainty. But now, health care owners know where it stands now, so plans can be made.

Health care construction registered $40.0 billion for 2015 and is forecast to grow to $41.8 billion in 2016. Building is trending toward more ambulatory care centers and toward rebuilding existing facilities to use modern hospital design and allow for greater use of technology.

Education

This is a market where the public funding was constrained, but it is starting to come back. “New investments made in this sector are often green and technology improvements,” said Giggard. “And a big trend is pre-fab and modular construction. Not “portables” but real mods that can be put together to build schools.”

Manufacturing

The Department of Commerce defines this as automotive, food and beverage, chemicals, pharmaceuticals, steel and big process plants.

According to Giggard, manufacturing construction took a heavy hit during the recession, but it has more than caught up with a huge 44% growth for the year 2015 and a more modest 9% growth expected for 2016. The strong dollar may delay more manufacturers from relocating to the U.S. for now but lower natural gas prices will help manufacturing energy inputs.

Giggard projects this should be a pretty healthy sector going forward and a lot of that comes not so much in refineries but in automotive, food and beverage, and some electronics. He expect this sector to move from it current growth of 9% to 7% growth by 2020.

Conclusion

“We have to find different ways of building to make do with the smaller worker to square footage ratio,” said Giggard. “Generally, though, commercial construction is healthy.”

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