Construction

Construction

The construction industry has been hit hard in the recent recession, and materials and products manufacturers and distributors are feeling the strain.

State of the Industry

  • The construction industry has endured nearly five years of declines and hardships, and the outlook for the residential construction market – and, most recently, the commercial construction market – remains bleak.
  • The most recent housing “bubble” was created by a dramatic increase in housing demand as banks lowered lending standards in an attempt to boost revenue. As interest rates increased, many borrowers were unable to make required payments and defaulted.
  • Many small home builders have been wiped out, except for niche players in markets that fared better during the recession and firms that offer value-added services to customers.
  • Many companies have downsized operations dramatically, and are operating at levels between 30 percent and 60 percent of prior peak volumes.
  • Major home builders are interested in hiring non-union workers and using one-stop shops where they can purchase all supplies at once to reduce costs.
  • Home improvement industry has not declined as sharply as the construction industry over the past five years as the home improvement consumer confidence is slightly on the rise.
  • Permitting is more expensive and complicated because of increased government regulations and green building standards.
     

6- to 12-month Outlook

  • After three years of decline, the industry began a slow recovery in 2012 with modest revenue growth.
  • Expect continued pressure on prices as consumers and builders demand low-cost, high-value products.
  • Rental vacancy rates are expected to decrease in 2012, signaling industry demand and a potential need for new property.
  • Interest rates / 10 year treasury yields expected to increase in 2012, which could be a potential threat to industry growth. Cost of construction fluctuates with interest expense.
  • High levels of competition are expected to continue, as businesses fight for market share and barriers to entry remain relatively low.
  • Competition from imports of construction tools is expected to continue to grow in 2012.
  • New home starts have experienced a slight increase in 2012. However, total housing starts are still  well below 2007 levels.
  • Housing demand may improve as consumer confidence and disposable income strengthen. However, a slow recovery in disposable income could be a threat to housing sales, impacting the construction materials sector.
  • Fluctuations in steel prices, a major raw material, could be a threat to profitability in the industry to the extent price increases cannot be passed on to customers.
  • Investment activity in residential development is expected to experience some improvement in 2012.
  • Green building is a key growth area.