2012 State of the Industry
by Jonathan McGaha | 11 January 2012 12:00 am
Panelists
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Bernard Markstein |
Brad Robeson |
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Chuck Haselbacher |
Mike Epstein |
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Pat Marcouiller |
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Metal Architecture: Big picture. What kind of growth or lack of growth do you expect to see next year in your business? Will there be particular bright spots?
Bernard Markstein: The outlook for commercial construction is positive. Overall, we forecast construction spending to increase 4.4 percent. Breaking it down to major categories, new residential construction will rise 3.9 percent off of a low base, with multifamily construction doing the best; nonresidential building construction will be up 5.3 percent; and heavy engineering (non-building) construction will do the best, advancing 5.9 percent.
The bright spots within these categories are:
- Residential construction- multifamily (apartment) construction
- Nonresidential building construction- manufacturing and office construction
- Heavy engineering construction- power construction
Brad Robeson: We are optimistic that there will be several areas of increased activity in the coming year. While state fiscal constraints will result in a digression in the amount of growth witnessed in the public work sector over the past two years, there are indicators that private design-build work will begin to accelerate, especially in the areas of industrial manufacturing and warehouse distribution. A combination of factors, such as increased import-export activity in support of the global market, as well as a surge in business related to the rise in natural gas production, will contribute to steady growth in the building construction arena.
Chuck Haselbacher: We expect 2012 to be similar to 2011. There has been moderate growth in demand this past year and we see that continuing in the coming year. However, we do not see strong demand returning until 2013 or later.
Energy and agriculture have been good growing markets in 2011 and we expect that to continue in 2012.
Mike Epstein: Since the metal roofing industry relies heavily on new construction projects, from the architectural metal standpoint, I anticipate moderate growth. The architectural index is essentially flat, and the private sector is still not participating in new construction projects to a level that represents significant growth.
Bright spots will still include institutional, hospital/medical and government projects. We are still hearing about educational projects and military base projects even though the money for the stimulus and recovery act is spent. Additionally, more of our contractors participating in private negotiated work express a higher confidence level based on bigger backlogs.
Pat Marcouiller: I expect the metal wall panel segment to grow at a rate slightly above commercial construction. Bright spots will include the institutional segment, particularly schools and universities, hospital/medical and government projects.
MA: For the last couple of years, the industry has been focused on retrofit work. How do you see that trend moving over the next 12 to 18 months? Will it continue to sustain us, or can we look to other types of projects for increased activity?
Markstein: I do expect retrofit work to be an important area in the coming year, but to a lesser degree than has been the case over the past few years. There is just so much that you can retrofit before it is more sensible and economical to build new. As I indicated previously, we can expect improvement in most areas of new commercial construction.
Robeson: While many of our customers engaged in the retrofit market throughout the economic downturn, it is likely that interest in pursuit of these projects will wane in favor of new construction projects that are core to our metal building systems business. However, in certain regions and markets, retrofit demand will continue to grow, especially for projects requiring a higher degree of energy efficiency than offered by the current structure. It is also likely we will see a growth in demand for retrofit projects in concert with photovoltaic solutions, as “solar” energy panels are ideally suited to be used in tandem with metal roofing applications.
Haselbacher: Retrofit has been a good market in 2011, and we see continued interest in rehabilitating existing structures rather than larger capital investments for new buildings. While this is a good niche market, it can’t support the manufacturing infrastructure that we have in place for producing complete building products.
Epstein: The retrofit trend will definitely continue for metal roofing. There will be a growth in opportunities over the next decade based on a number of factors: promotion from the metal industry, a higher level of confidence from the design trade and influencer (architect, consultant, building owner) with respect to performance, and the impact of life cycle performance from the resurgence of metal roofing during the ’80s.
This will not be enough to sustain us considering the participating contractor base is still somewhat limited, and the current demand will not utilize a significant amount of capacity industry wide. Most likely, new construction activity will need to increase for the industry to return to more robust production levels especially since the manufacturing footprint on an industry level is still expanding in capacity.
Marcouiller: The metal wall panel market is highly concentrated in new commercial construction. I do not see that changing over the next few years.
MA: What are the major threats you see to the growth and profitability of the industry today?
Markstein: It is an old refrain and an obvious one, but the health of the general economy determines stumble in the economy will hurt the industry. The foremost threat is the problems in the European Union. At the moment, those problems seem to be contained, but they certainly are not solved. A major default in Europe would hurt not only the EU, but the U.S. as well. A serious recession in Europe would send us into recession due to a significant drop in exports and the fallout for U.S. banks.
Gridlock in Washington is hurting the economy. It’s hard to see how it can get worse, but the politicians always seem to find a way. The dust up over the extension of the payroll tax reduction and unemployment benefits is just the latest example.
Beyond that, there is always the old favorite-a spike in oil prices. That saps consumer spending, which is just now showing some improvement. We also have to keep our eye on the housing market. It appears to be slowly recovering, however we know that there will be more foreclosures in the next several months, adding to the headwinds that the industry already faces. Stay tuned.
Robeson: Historically, it has been the tendency of our industry to rely on a healthy economy and steel pricing to achieve profitable growth. I believe that as designers and fabricators of building solutions, we have a great deal to offer, and need not base our success on factors outside of our immediate control. Our biggest opportunities for profitable growth rest in our ability to successfully convert projects away from conventional building materials to steel. By promoting solutions that are fit for purpose and architecturally appealing, then focusing our sales efforts on the value of our offering, we can ultimately set a price that is both appealing to the end user and the manufacturing company. Adopting a less traditional approach to market development will enable us to overcome external circumstances that threaten the prosperity of our industry.
Haselbacher: Continued gridlock in Congress and lack of available financing for small businesses is limiting the growth of the nonresidential construction market.
Epstein: There is a higher level of confidence in utilizing metal from the design trade and influencer in lieu of more common products: membrane, glass and stone/masonry. But from a purely growth standpoint, it essentially boils down to the condition of the economy.
Profitability will be the biggest challenge. Raw material price increases and pricing volatility for metal are requiring more resources dedicated to managing effective purchasing and inventory control. At the same time the industry becomes more competitive with the addition of more regional and contractor-based manufacturing.
Marcouiller: Certainly the economic environment has had the greatest impact on overall market growth. Competition for existing business is extremely strong, particularly at the contractor level where the drive for work has resulted in very significant margin compression. Metal price increases and volatility continue to create significant challenges for manufacturers.
MA: If you could wave a magic wand, what would be the one thing you would want to change about the current business environment?
Markstein: That’s easy-increase demand. The problem is how do you get there without a magic wand? To some extent we just have to give it time to let the economy continue its healing process. But there are things we can do to help things along. Yes, the federal debt and deficit are too high. But with the unemployment rate still well north of 8 percent and the Federal Reserve with few reasonable options, fiscal stimulus is necessary. This means increasing the deficit in the short run. At the same time, we need to put in place the structure to reduce the deficit and bring down the debt relative to GDP a few years from now.
There are sensible ways to provide fiscal stimulus. Given current low interest rates and the underutilization of resources in construction as evidenced by the high level of unemployment in the industry, it makes sense to invest in infrastructure repairs and improvements. This represents investment in the future not current consumption. There are a whole host of needs in the country including repairs and upgrades to highways, bridges, rail, airports, the power grid, water treatment plants and on and on. While providing an immediate stimulus to the economy, the benefits will last for many years and help increase the nation’s potential for economic growth.
Here we are, more than 70 years after the Great Depression, and we still benefit from many of the facilities that were built as part of programs back then aimed at putting people back to work. Many of those projects were derided as wasteful spending at the time. We need to get beyond rhetoric and ideology and start rebuilding and improving our infrastructure. It’s time to invest in America.
Robeson: One of the most significant hindrances to our business is the lack of available financing for projects spanning multiple industries. Thus, if I could change one thing, it would be for the banks to increase the number of construction loans they are willing to facilitate. In my opinion, consumer confidence is up and there are many businesses that wish to proceed with construction projects, but are unable to do so as a result of the banks’ lack of support for these types of loans. If financing were more readily available, both our industry and the U.S. economy would benefit from increased construction activity and related commerce.
Haselbacher: Easier financing available to small and medium size business to fund capital expenditures for expansion of their businesses would be at the top of the list.
Epstein: There is a lot more confidence in the construction industry than a year ago. It is the same old story though; “good news” is harder to sell. A little help from the national media regarding positive strides in the economy would help!
Marcouiller: The key driver of success in the current business environment is the availability of funds.
MA: Are customers still interested in green buildings? If so, will this trend continue?
Markstein: Most definitely. If anything, the interest in green building is growing. The concept of exactly what is green building is still a bit amorphous, but concepts like reducing energy costs, controlling storm water runoff, and reducing water usage are all of interest to developers and businesses. Technological developments are occurring at a rapid pace. Businesses and consumers will pay reasonable upfront costs if they promise real returns.
Robeson: The interest and pursuit of energy-efficient solutions will continue to sustain. However, whether or not it accelerates will depend on our commitment to better collaborate on and package these options in service of building consumers. In general terms, our industry-like others-has taken a silo approach to marketing our green offerings, essentially focusing chiefly on what our specific products could bring to the LEED and ASHRAE table. In this approach, we have missed an opportunity to work outside our respective industry to better package a complete “green” building solution that combines multiple construction elements to form the ideal green building option. If we put forth a greater effort to collaborate and tailor our construction offerings into a more synergistic model, the potential for the green building market will far exceed its current scope.
Haselbacher: Customers continue to be interested in green solutions, but are becoming more focused on return on investment rather than simply being “green.” We expect this trend to continue to grow for nonresidential buildings.
Epstein: Green is here to stay. The initial knee-jerk reaction to green construction did not necessarily ensure a building owner would benefit from the intended gained efficiencies and long-term sustainability promised by the conceptual designs of green construction. Today, construction manufacturers and contractors are more influential in the design and implementation of green products and systems. The growing partnership between the influencers (building owner, architect, consultant), the manufacturers and contractors with respect to green construction is a sustainable model that will continue to add value to green design.
Marcouiller: Yes, we continue to see strong customer interest in green products and building practices, and we expect that interest will continue to grow.
MA: Technology is influencing every business, but construction seems always to lag a bit. What technology- from materials to information-do you think will have the biggest effect on our industry?
Markstein: As indicated in my answer about green trends, many of the advances are occurring around green building-energy conservation, water management, etc. Energy conservation, in particular, benefits both from advances in hardware and software. Granted, many in the construction industry are slow adopters, but the current economy puts the squeeze on profits forcing many builders to utilize new, cheaper technology. Most developers now use pre-assembled components in their projects. These components, which used to be built on-site, are produced in factories under controlled conditions where specifications, tolerances and quality can be better controlled and weather is not a factor. Look for this approach to increase in the future.
Haselbacher: Tools that assist owners in assessing the effectiveness of different construction products in reducing energy consumption are going to become more important in the decision process. These tools will show the value that our industry’s solutions mean in improved energy costs.
Epstein: Material technology will have less of an impact than information technology. The roofing industry is very mature from a materials standpoint.
Photovoltaic technology seems to be getting better and perhaps is the most recognizable improvement from a materials technology standpoint. Industry feedback supports the idea that PV manufacturers are developing more reliable systems. And access to the power grids appears to be getting better on a national basis.
Additionally, manufacturing technology is improving. Especially in the area of manufacturing equipment designed for the contractor.
The biggest impact will be the implementation of Building Information Modeling (BIM) and Revit across a broad range of users, primarily the architect/designer and manufacturing segment. BIM and Revit will create measurable efficiencies in construction by creating better communication along the construction chain. Additionally, we will see shortened lead times from design to construction due to faster communication and the elimination of mistakes, design and manufacturing errors.
MA: Presidential elections tend to dampen economic growth due to uncertainty. In 2012, we can add an even more fractured political landscape. How big do you think the impact of the political landscape will be on businesses in the metal industry?
Haselbacher: We believe that many business owners will delay capital expenditure decisions until they know the outcome of the November elections. We believe the effect will be to limit construction opportunities through much of 2012.
Epstein: The metal industry will not be affected any differently than the construction industry as a whole. Lending practices/policies and tax policies will dominate building owners’ decision processes to build, expand or renovate. Only time will tell if it will take a perceived improvement in one or both categories to improve the construction climate.
Building owners that might be considering renovation instead of larger expansion or new construction will wait and see.
With that said, many economic indicators influencing construction suggest a very high level of stability even though growth is limited. Stability will remain through the election cycle.
Marcouiller: The level of uncertainty that has driven the construction industry over the past several years will continue through the election cycle, and it will also be aligned with the economic outlook. The metal industry will not be any different.
MA: Paint a long-term picture. What will our industry look like in five to 10 years?
Markstein: I expect the economy to show increasing strength over the next five to 10 years. We have had several years of sub-par investment in our capital stock. We need to address that along with the needs of an expanding economy. Commercial construction, by addressing those needs, will benefit. Meanwhile, technological advances will mean more energy-efficient structures and better control of storm water runoff and water usage. The future looks bright for commercial construction.
Robeson: While the recession presented us with many challenges over the past few years, it also created a significant opportunity for us to evaluate the quality of our businesses and industry as a whole. As a result, we have enacted many changes focused on elevating our performance in support of enhanced customer service and satisfaction.
It is my belief that these changes, centered on the faster and more accurate delivery of metal building systems, will drive a shift in focus and expansion in flexibility that enables us to better service a variety of customer types spanning multiple industries. Ultimately, this will support a future state in our industry where exceptional service in steel building systems is the norm, which will create more business opportunities for our industry’s offerings than ever previously experienced. Thus, in 10 years time, I foresee metal building systems accounting for much more of the overall construction market with a reputation for quality, service and dependability more widely recognized in construction than ever before.
Haselbacher: Long term, we believe the outlook for the industry is very positive. Eventually, financial markets will begin lending again, and there is significant long-term pent-up demand. Our industry will be positioned well if we are prepared to market our sustainable energy-efficient solutions.
Epstein: We will continue to see a number of trends that will change our industry look. The trends include expansion of building envelope solution, expanded scope within contractor segments, contractor-based manufacturing and codes/testing influences.
As construction complexity grows, the building envelope solution concept-which is not new-is more attractive than ever. The desire to have more coordination, fewer contracts and fewer contractors on a project can be more efficient with respect to many aspects. For example, better communication at the design level drives well-written specifications to better field management at the construction level. New partnerships at the manufacturing level are developing at a much faster pace.
The trend to add scope to a subcontractor’s business, especially among the commercial roofing trade, has been prevalent for years. This trend aligns with the building envelope solution concept at the construction level. Today some commercial roofing contractors are among the best installers of metal roofing-both architectural and structural-and metal wall cladding across a wide range of wall panel products. As competition becomes fiercer, subcontractors will need to add scope to maintain a competitive edge in their respective markets.
We will continue to see an expansion of contractor-based manufacturing. Just visit the international trade show METALCON and observe the expansion of equipment manufacturers and their offerings directed at the contractor trade. Contractors today are expanding their manufacturing capabilities for the right reasons, and the advancement in equipment technology and quality are phenomenal.
The influence of codes and testing requirements will impact the industry in many ways. From this aspect, the metal industry is experiencing more uniformity than in the past. Uniformity will reduce complexity for specifiers who struggle sometimes to determine which product will meet the correct performance standards and still meet the design intent. If it’s easier to specify, we hope to sell more metal applications. From a contractor perspective, installing code approved and/or engineered systems will reduce liability, which is a contractor’s single largest concern.
Marcouiller: Looking across the industry, I believe we’ll see trends develop on several levels: buildings, manufacturing and contractors. On the buildings front, there will likely be an increased emphasis on green products and building systems, energy-efficient practices, and integrated air/energy/moisture management systems in the overall building envelope. On the manufacturing level, the industry is so fragmented, I would expect some contraction.
Contractors can expect to see two metal wall panel business trends, including more sophisticated building products/systems that require increased skills, and fabricating less sophisticated metal wall panels at local and regional levels. The net effect will be a greater share of the business concentrated with fewer contractors.
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