Opinion

Construction and building product trends & forecast

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Last updated: 20th Oct 2011

The building products and construction Industry worldwide has likely reached bottom.

When the dust finally settles, the level of construction starts in 2011 is expected to advance 8% to $445.5 billion, following the 2% decline in 2010. The industry is composed of many components including heavy construction and civil engineering (highways, bridges, railway tracks, airports, etc.), real estate development (both residential as well as commercial), and specialized construction products (such as architectural products, electrical connections, decorative items, etc.). All these segments are showing differential growth patterns all over the world, which is evidence that the industry is turning the corner, slowly.

POSITIVE STATISTICS FOR THIS SECTOR
o The construction industry is 1/10th of the world’s GDP.
o The industry employs a huge number of people.
Approximately, 7% of the total employed work force
around the globe.
o The Construction Industry is the largest consumer of energy and consumes around 40% of the total energy produced in the world.

A significant trend in the industry is the use of information technology. Cutting edge technology is being adopted to raise the efficiency levels of the engineering and design stages, which results in projects being completed faster and at lower cost.
“Going Green” is now a reality and is firmly established in the design and construction process. According to McGraw Hill one-third of the workforce is now Green. Trades jobs (carpenters, HVAC/boilermakers, electricians, concrete/cement masons, and plumbers) are expected to see the greatest growth in green jobs; 15% of trades today are Green, and this is expected to increase to 25% in three years.

OPPORTUNITIES LOOKING AHEAD

Joint Ventures
As projects get bigger, on-time completion becomes more important to owners of construction firms. Costs for late completion, including penalties, rise disproportionately to actual construction costs. The larger scale and complexity of projects lead to more joint ventures among construction companies, which can pool their expertise and financial resources in bidding for contracts and in implementation.

Design-Build
The technological sophistication of many projects and the increasing use of design-build contracts encourage the integration of engineering and construction companies. Some companies have experienced higher revenue growth from design and engineering work than from construction, resulting in the former comprising the bulk of total company revenue, in some cases. While large companies like Bechtel and Fluor have long combined engineering and construction expertise, the combination of skills is becoming more important for small and midsized companies.
The increased acquisition of smaller construction companies has left a handful of dominant players in the industry. The acquiring firms are benefiting by expanding their range of services and gaining access to new markets. Firms such as Jacobs Engineering have made at least one major acquisition per year since 2007, allowing them to expand their capabilities in new areas.

Buildings for High-Growth Population Segments
Growth in certain population segments will present opportunities for the commercial construction industry. The US Census estimates that the number of people over age 65 will grow about 40 percent from 2010 to 2020, creating the need for retirement, assisted living, and hospital facilities. The need for schools will increase as the population of children ages 5 through 19 rises an estimated 7 percent during the same decade.
Generally Resilient Market Segments - Nonresidential construction spending can be positive, even when residential construction spending is negative. For example, during the recent real estate and mortgage crisis, private residential construction spending fell 12 percent between 2008 and 2009, while highway construction spending rose steadily over the same time period. Other projects like lodging, power plants, and public safety can also do well when other construction spending declines.
Government Projects - The nation's roads, bridges, tunnels, ports, levies, and other infrastructure need periodic maintenance, upgrades, and expansion. The US government is the single largest purchaser of outsourced services, such as engineering and construction services for infrastructure work. Long term government contracts are attractive opportunities for contractors.

To conclude, more and more investors should start buying building product and construction companies now that the industry has hit bottom. An investment at this time should provide strong long term equity performance as an improved economic outlook takes hold in the U.S. and abroad.


Darin Good
Managing Director
Headwaters MB

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