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.