The 2014 State of the Industry Report

Metal Architecture presents its annual look at the state of the metal construction industry as seen through the eyes of industry leaders. Our group generally agrees that the market is looking stronger, but the growth is slow. There is some disagreement over the role of energy efficiency and its long-term impact on our industry, and we’re all aware of how the political environment is having a corrosive effect on business.

Kermit Baker: We talk to the leading forecasters in the country about what they see in terms of top-line information for the coming year and average that. Their consensus is that commercial markets are going to be reasonably healthy in 2014. Commercial includes retail, office and hotel. Hotel will probably be the strongest just because it was so deeply decimated during the downturn. But retail and office will be pretty healthy too. On a spending basis we see about 10 percent growth year over year for 2014.

That’s a good number; not a great number given that we’re in the early stages of a non-residential recovery that saw about a 40 percent decline. You would hope for something a little bit stronger than that, but I think the industry will take what it can get. It looks like it will be close to double digits.

Institutional construction-which includes health care, government, education, cultural and religious-usually trends six to nine months behind the commercial sector. It looks to be during this cycle, too. While commercial is in the midst of an upturn, institutional really is just starting it. We’re going to see effectively no growth this year and probably three to five percent next year. It will be a little stronger on the health care side, a little weaker on the education and government sides. Health care is really driven more by demographics now rather than Affordable Care Act (ACA)-related activity. But as the ACA kicks in and more folks get covered, and companies actually see what their demands are going to be, we’ll see a bit of an uptick.

That will be effectively more in 2015 and 2016. The demographics-an older population using more health care-will drive the upturn next year. We don’t expect to see declines on the building side with the possible exception of government building. That may apply more to markets such as public works projects like streets and highways. Those markets saw a big upturn during the downturn because of spending to get the economy going. Finally, we’re in the midst of what I would call a cyclical, non-residential construction recovery. We’re in the early phases of it, so we’ll see two to three years of growth in those markets. I think we’ve turned the corner on that.

Kermit Baker is chief economist for the American Institute of Architects, Washington, D.C., and a senior research fellow at Harvard’s Joint Center for Housing Studies.	Greg Anapol is president of Metal Sales, Louisville, Ky.	Dan Harkins is CEO of Thermal Design, Stoughton, Wis.	Chuck Haslebacher is president of Varco Pruden, Memphis, Tenn.	Geoff Stone is the CEO of MetalForming Inc., Peachtree City, Ga.

Chuck Haslebacher: There are signs of improvement for some of the industry’s key enduse markets. Manufacturing and energy segments have both shown some improvement over the past 12 months. As employment numbers and housing starts gain strength there should be opportunities for retail and office space as well.

Greg Anapol: All indications are that both multifamily and single-family residential markets have a positive outlook across the board in new construction and remodeling. Commercial construction is edging up as well, while public works projects are trending down as a result of budget cuts. We anticipate mild growth in retrofit applications as building owners look to refresh existing warehouse and industrial space versus building new. We also expect to see signs of growth in emerging areas like solar, oil and gas construction.

Dan Harkins: We believe that the market will continue to gradually improve across the board in all market segments. There is a major shift to higher energy efficiency of metal buildings due to the increasing of code stringencies and demand for more energy-efficient buildings.

Pre-engineered metal buildings have a very bright future as compared to other types of structures. Traditional insulation methods of metal buildings leave conductive purlins and girts exposed and typically result in significant compression of the insulation materials as well. These methods are being replaced by superior methods, which completely isolate the purlins and girts, and eliminate virtually all of the insulation compression of the insulation. Ironically, this change generally does not add net cost to the buildings due to designed savings in other systems of the buildings that will offset costs differences.

This can be done only if the insulation system will actually perform as represented. Metal buildings are the easiest and least expensive structure type to insulate because the depths of the structural members are ideally suited for 9 to 12 inches of insulation. This insulation can be quickly and safely installed from the outside during construction. Of all types of building structures, metal buildings will lead in the energy efficiency battle simply because of this major cost advantage. Other structure types typically require very expensive insulation options, which can easily be 200 to 300 percent or more of the cost of the metal building insulation options.

Geoff Stone: Residential has already picked up. We haven’t yet seen a significant uptick in nonresidential, non-governmental building. Having said that, we would anticipate that as the economy normalizes, there is going to be some pent-up demand. We’ll start to see some real increase there, but we don’t know exactly when.

Construction related to energy production will drive the industry substantially. It already is driving it where there is shale oil and gas production. While that isn’t enough business to sustain the entire industry, it will continue to be an important market segment.

I believe that on-shoring, bringing manufacturing back to the U.S. from overseas because of the lower cost of energy and other efficiencies here, will begin to drive construction activity in the manufacturing segments. Exactly when, in 2014 or 2015, I’m not sure. But given the very low level of construction activity in the last six years, we’re going to see some pent-up demand as the economy picks up. I’m optimistic.

Baker: Home sales in October was probably a bit of blip, but big picture, we’re in the middle of a strong recovery in homebuilding. We’ll probably see a 20 percent increase in starts this year, 25 percent next year and 25 percent the year after that. That still won’t take us back to trend line.

The story is really in the multifamily market, which has been a lot stronger, and began a recovery long before the single-family market. That is a catch up from something has been going on over the last 10 or 15 years. During the housing boom, there was virtually no growth in the multifamily market. That whole play was really young couples and young, single individuals buying homes to take advantage of the capital appreciation driven by a little bit of fear about being priced out of the market. This was back in 2000 to 2005.

So, the owner market was way ahead of itself and the rental market was left behind. When the market crashed, things began to return to normal. Folks that shouldn’t have purchased and were foreclosed have moved back to renting. Also, additional folks, who should have been owners, bought in the wrong market like Las Vegas or Phoenix where they saw 60 percent declines in value. If they had any decline in income, there was no way they could sell their house to get from under it; so they were foreclosed on and moved back to rental.

So far, none of the multifamily market is being driven by a demographic shift to the younger generation, which hasn’t begun to form households yet.

At the Joint Center, we spend a lot of time looking at net housing formations, and those numbers are way down. We’ve averaged 1.1 to 1.2 million net households formed every year for the last 30 years, and now we’re doing 600,000 to 700,000 and were down to 500,000 at the bottom of the downturn. A lot of young people are living at home or tripling up and not forming households. That’s slowing household formation. When that changes, it will generate demographic demand for multifamily.

But basically, our population is getting older, and older households tend to be owner households. The demographics point to homeownership that is cyclical in nature and it’s just some dislocations and catch-up that have generated the need for multifamily. But there was a lot of catch up to do.

Demand for homeownership moving forward will come out of rental stock and that will generate some construction.

Haslebacher: Yes, as these key segments improve, there will be opportunities for both new buildings and retrofit projects.

Anapol: Absolutely. As residential housing comes back stronger, it’s also coming back smarter. Energy efficiency, new technology and longevity are key components of homebuilding in 2014 and beyond. Metal products meet the aesthetic expectations of today’s home buyers while providing an energy-efficient substrate that’s ideal for attaching components for alternative energy technologies like solar and wind. Additionally, homeowners are staying in their homes longer and increasingly understanding the value of a roof that lasts considerably longer than a traditional asphalt roof. We also see wall panels gaining notoriety as a durable, colorful, stylish and energy-efficient residential siding material.

Harkins: We expect a growing trend of metal in roofing because it is simply a superior and less

costly option of roofing buildings with inside insulation systems. To obtain a well-insulated roof with decking with 8 to 10 inches of foam type insulation on top of the decking, and then a single- or multipleply roof on top of that is simply not practical, nor cost effective. There is easily a $3 additional per square foot difference in cost per square foot of these above deck system building types.

As for other types of structures with higher pitched roofs, there is some opportunity as well, but there are many more options for insulating such structures which are cost effective. Often aesthetics enter into the design of these higher-pitched buildings which takes precedent for obvious reasons. Metal can be made to be very attractive as well, but cost is often much higher than asphalt shingles that have very high consumer acceptance.

Stone: Metal was already gaining market share, though the recession sort of stopped us cold in the residential area. Generally speaking, metal roofing and walls are going on higher-end homes. I think that will restart now that the jumbo mortgage market has loosened. That market was essentially dead for a long time. Will we gain share there? Definitely. It will be a slow, steady gain. New multifamily construction is also an area where we should gain share. It looks like it will continue to increase.

Another factor is what happens when the government begins to taper. What will happen to mortgage rates? They will increase, but how much? That will influence the rate of growth.

Baker: This is a real critical issue because I think there is a dramatic shift underway, and I’m not certain how it’s going to turn out. Energy efficiency and all the green movement has been driven by higher energy costs dating back to the mid ’70s. Now, we have what can be called an energy glut in the U.S. Production numbers are just off the charts, and they are lowering energy costs, but in a kind of squirrely way. They’re not lowering oil costs because there’s an international market for that. And even with the increase in the production through fracking, it is not enough to bend the needle on international production levels. But they certainly are on natural gas. Prices on natural gas are down 30 to 35 percent over the last five years. Energy costs in the foreseeable future are-at worst-stable and in all likelihood declining. They are less likely to be as volatile as in the past, which I think has caused as much problem as the high price levels.

It took us a long time to decide we wanted to invest in energy efficiency, so I don’t know how long it’s going to take to decide we don’t necessarily want to invest in it if the numbers don’t pencil out. It’s so deep in the fabric. It took so long to turn that liner around and move toward energy efficiently with codes, regulations and subsidies to alternative energies, and I don’t know that that momentum is going to wear off. I do have to believe it is going to. If the economics don’t justify it, I don’t think the politics or global warming are strong enough forces to continue. But we’ll see.

Haslebacher: The impact of energy on life cycle costs will continue to grow as part of the discussion for building owners as they strive to be better stewards of the environment, as well as reaping the benefits of reduced energy costs. As more restrictive energy codes are adopted, and new, sustainable construction materials come into the marketplace, there will be a shift to adapting more energy-efficient methods and materials as part of the building envelope.

Anapol: Our recent involvement with the Bullitt Center in Seattle-the world’s most energyefficient commercial building-really opened my eyes to the evolving role of net zero and energy efficiency in commercial construction. Energy usage is a primary consideration of building owners as they strive to meet ever-evolving code requirements while simultaneously balancing upfront construction investment and ongoing maintenance and operating costs of their buildings.

HVAC is the single largest user of energy in commercial buildings, and architects and designers are finding creative ways to use energy-efficient metal panels with high Solar Reflectance Index ratings to make their buildings more energy efficient. Metal Sales continues to make additional investments in products that are Energy Star listed. We’ve also launched our energy-efficient IMPower Series insulated metal panels that continue to gain attention for overall thermal performance, continuous air barrier and an ability to provide a thermal break. Metal is also an ideal substrate for on-site alternative energy production, such as solar panels.

Harkins: Net zero energy use buildings are the main focus of our research and development. This type of building design is not only possible today, but can be economically practical to build on a wide scale. This type of design requires not only the proper selection, but the extraction of the optimum performance of each of the selected materials and sub-systems used in all of the affected energy uses of the building itself.

Our company has designed and constructed a research building to advance our understanding of the various building systems and find optimal product solutions to reducing energy use of the buildings. The key to the successful design and operation of such buildings is reliable performance of each sub-system. This results in the elimination of typical over design of interdependent systems and massive savings can result. If any of the selected systems do not perform as designed, the overall design fails.

The foundation of all of these net zero designs in metal buildings is a building envelope that performs extremely well. We expect to have practical net zero metal building package designs on the market as a standard option in spring of 2014. The biggest change by designers and contractors will a switch from the “sum of the cheapest components principle” to the “sum of the least performance costs of the optimized building as a system.” The fact is that paying more for some sub-system does result in paying less for others. We expect a huge demand for buildings that can deliver on low-energy consumption, and net zero energy use buildings are the ultimate in those designs.

Stone: Obviously, energy use continues to be expensive. But could we see a significant reduction in energy costs and could that impact this drive towards net zero? We could be producing 9 or 10 billion barrels of oil a day here in the United States by 2017. A substantial reduction in energy costs could become a negative trend that affects net zero building. Consumer behavior is driven by price. I’m guessing the government will continue to mandate more and more things that drive energy savings, so from that point of view, they will drive demand. But how fast net zero grows will be heavily influenced by overall energy prices.

Baker: It is important to distinguish between capital markets and credit standards. There is a lot of capital out there-a lot of private equity-that’s looking to find investments. The notion is the stock market is sort of maxed out, so we’re not going to see a lot of growth there. And you can’t put a lot of money in bonds because they’re paying nothing. So real estate is one of the areas that is attracting a lot of capital.

That’s from an investment perspective, which is different from a company trying to finance an expansion or something like that. Real estate still has a bit of a black eye from the downturn. People are nervous about investing in the market. I hear from architects all the time who have started on a project and will get a call from the owner two to three months in who says, “Sorry, we didn’t get our financing.” Those anecdotes are supported by the quarterly survey of bank lending officers the Federal Reserve does, which shows that capital to the real estate market has been modestly eased but nowhere near as much as demand would indicate. Some of it is increased standards and some of it is the perceived risk of those loans.

Haslebacher: The market has some pent-up demand but financing is still challenging. Lenders are requiring more owner involvement in proving viability before project lending goes forward. Funding for speculative buildings is not widely available.

Anapol: Overall, investors and businesses are planning and building for growth more aggressively than they have in a number of years. Their planning horizons have gotten longer. Buildings that last and buildings that perform are going to have a lower operating cost and a higher resale value-both of which equate to a higher return on investment for both new construction and retrofit.

Harkins: I believe small businesses in the U.S. rely more on confidence in the overall economic health of the country. With the housing bubble having burst and the after effects of that massive excess supply mostly absorbed into the market, I expect that housing starts will again increase, and that will lead everything else out of the depression that has existed. Now, if government will just adopt a reasonable management plan for the future, things will continue on a positive path. Investor interest is second to confidence in the economic well being of the country.

Stone: The trends are positive. The availability of capital for construction projects has certainly improved greatly and we expect that to continue. In our industry, between 2008 and 2012, it was very, very difficult to finance our customers’ purchases. Lease financing has always been a critical factor in equipment purchasing, but I can tell you in 2013 it loosened up enormously. The availability of capital became very significant. The cost of capital has been very low and continues to be, mostly based on the Fed holding interest rates so low. The increased availability of capital to our buyers for equipment purchases has helped enormously.

Baker: There are a lot of different scenarios but what is most relevant is supply conditions-material and labor. Volatility in pricing for materials will affect the metal construction market and we’re also concerned over labor availability. Material pricing is a result of production capacity and how fast it can come back online.

The labor problem is very odd. The unemployment rate for construction workers is still above the national average, but it’s down to 10 to 11 percent from a peak of close to 25 percent three years ago. That rate has dropped with very little addition to the workforce. The rate dropped not because folks have been hired but because folks no longer consider themselves in the construction labor force. They have either retired or they’ve gone to work in other industries. Construction has not done a good job of attracting young workers for a variety of reasons. Immigration has always been a key source of construction labor, and immigration numbers are way down.

All of those things are likely to recover, but when is the question. Will it be in time for the cyclical upturn in construction activity? We could get material and labor shortages, and it can drive up costs in the near term. It’s probably less of a concern now than it was a year ago, because it looks like this recovery is just incredibly slow. So there’s a lot of opportunity for a supply response.

Haslebacher: Recovery will continue to move slowly for the next few years. We are not likely to see big growth happen in new construction. Also, there is a chance that changing federal monetary policies could set up conditions for inflation, which would slow new construction even further.

Anapol: Talent. Changing codes and increasing demands on products require expertise and experience. Our industry has to recruit, train and develop the talent in research and development, manufacturing and the trades that can deliver on the promise of metal.

Harkins: Failure of the U.S. and state governments to stop the pork barrel politics and do what is best for the people and the country. Corruption and special interest money must be removed from politics to fix it. Taking money in return for influence used to be called a bribe; we need to reinstate severe penalties for that. Enforce the laws and the problem will fix itself.

Stone: Government regulation and government inadequacy. The problem keeps getting worse. The enormity of government regulation and its cost to our customers and their customers is a huge threat. What will be the cost of health care? The impact of the government shutdown? The debate over the debt limit? The government is a mess. The amount of uncertainty and the amount of regulation will continue to be a drag on economic recovery. OSHA, for example, is doing incredible things at the moment that could have a major impact on the roofing industry. The additional cost of fall protection. Will silica be named as a hazard? Will asphalt be labeled as a carcinogen?

Companies are holding a lot of cash now because they are unsure whether they’ll get a return in this regulatory environment. And they don’t know what the government is going to do next. For a business to make a decision, even if the news is bad, if you know what the news is and you can have an expectation of how to manage around it, you still might make some investments. It’s when you can’t figure out what’s going to happen tomorrow that you think, “Well, I’ll just wait.”

Haslebacher: VP is implementing BIM technology into both our engineering and our marketing efforts. Demand for these capabilities is still just beginning to emerge. However, as technology improves and users develop more proficiency, BIM will be adapted as part of the building plan requirement.

Anapol: The adoption rate of BIM continues to grow, and Metal Sales is investing in providing BIM assets such as downloads on our website. According to McGraw-Hill, historical adoption rates are 28 percent in 2007, 49 percent in 2009 and 71 percent in 2012. The promise of BIM is real. BIM provides more tools to the design team and makes the design modification process easier and more accurate. It allows the project team-designers, engineers, contractors and owners-to work collaboratively from the beginning of the design process. This coordination reduces inefficiencies in reworks and scheduling that ultimately saves time and money.

Harkins: Energy use modeling is required to determine the optimal performance of the whole building design, including all sub-systems. This is required to simplify the calculations and achieve the best understanding and, therefore, the best solutions. Modeling typically proves that the “sum of the cheapest components design method” is not the best option of the building owner or user when the building is conditioned.

Stone: Four years ago, Metalforming developed the first on-site rollforming machine that could actually produce a finished, cut-up metal roof from a building information file. We have the only machine in the world that can do that. But no one is talking about it. Very few people are doing anything about. BIM has not come into the roofing business up to now. While the concept and practice have enormous value in construction, while BIM has become part of many, many construction projects, when it comes to the roof, there’s no involvement. BIM was designed to increase efficiency across all the trades, but it hasn’t really gotten to the roof yet.

We think the reason is that general contractors are not requiring roofing contractors to participate in BIM files. They are basically just giving the roofing contractor a basic roof plan, and he does what he does without the model. Of course, we believe it will come. We just wish they would do it tomorrow. It would be an enormous increase in efficiency.

Haslebacher: Politics will always be debated no matter which party is in office. Further, as the global economy emerges, politics beyond our shores will impact us as well. The U.S. is and will continue to be the greatest country on the planet. The resilience of American citizens will find a path to success despite the obstacles we encounter.

Harkins: The whole process of national and some state governments is viewed by many as a dismal failure of representative government where special interest money and corruption prevail. This is a huge disgrace to the entire country and severely erodes confidence of consumers and business. The attitude is often more of survival than of confidence in the future!

Stone: It has an enormous impact and an enormously negative impact. The uncertainty caused by the federal government, in the regulatory environment and elsewhere, is the biggest threat the industry faces.

Baker: I would point to the one trend of our aging population. Ten or 20 years from now the major demographic effect will be Baby Boomers who now are turning 65 are going to be 85. That tells me a lot about demand for health care. Look at what that demographic group is doing. They’re not out shopping, not working in offices, not staying in hotels, not going to school. So health care will be the primary effect of that change as well as housing. The story I like to tell is the increasing integration of housing and health care. Assisted living and different varieties of that will be real hot construction markets moving forward.

Haslebacher: In many ways, the same as it looks today. However, I can see where our industry will gain attention for its sustainability, develop more energy solutions and expand capabilities to provide construction solutions to an even broader spectrum of end-users.

Anapol: As an industry, we’ll continue to demand more from our building materials. The companies that invest in research and development, new product development and educating our design partners will be at the forefront of the industry. The investment in education will result in an upgrade in the talent of our industry. In 10 years, the metal construction industry will be much smarter and more sophisticated than we are today.

Harkins: I believe that the metal construction industry will be much like it is now with one major difference, and that is buildings will be built much more energy efficient than they are now. New energy-efficient technologies will make metal buildings a much more preferred choice than they are now.

Specialized pre-engineered structures using new technologies will mostly be “net zero energy use buildings,” considering typical heating, cooling and general lighting loads. Erroneous insulation values for over-the-purlin insulation systems have just recently been corrected in the ASHRAE 90.1-2013 Standard. The in-place performance values of many over-the-purlin methods were reduced from 20 to 40 percent from the previous overstated values advertised by the industry.

We expect that designers and contractors will not be able to be deceived in the future by industry-published, false performance information. Ten years from now we expect most of those promoting false performance values today to be either out of business, or at least making honest representations about their products. Only then can other trades rely upon the values to accurately size HVAC equipment, lighting systems, etc., and give the building owners what they have been paying for. Metal buildings will have a much better reputation for energy efficiency because they will then perform extremely well and hopefully as represented. It is exciting to develop leading solutions to the energy conservation of pre-engineered buildings.

Stone: Nothing like today. It has to change, and it will. If you look at industry productivity trends, you see that the non-farm productivity index, or general manufacturing index, has shown a productivity improvement from 1964 to 2006 of around 220 percent. At the same time, productivity in the construction industry has actually declined. This says something very serious about our industry. Where others have automated, our industry has not. If you look at a graph of the metal construction industry, it has recorded the worst productivity record of all the different construction activities, and the architectural and structural manufacturing segment is at the bottom, flat-lined.

For my customers in metal parts manufacturing, the question is what will their factories look like in 10 years? The answer is an absolutely seamless, total integration of their machines to their mainframe computer systems, to their ERP systems, to their MRP systems-and the elimination of all the manual processes between order entry and part production. Machines will produce exactly what they are supposed to produce at exactly the right moment in a lean fashion without people having to do all these manual processes.

We are doing that today with Computer Integrated Roofing Manufacturing, our CIRM system. We can drive all of our equipment automatically from an ERP system. We can report back the work being done, work status and so on. We are eliminating an enormous amount of time, effort and manpower that goes into making a part. For the companies that lead our industry in 10 years, that will be the norm.

At the METALCON show, we had a massive increase in the sale of up/down bending equipment. We think that what’s going on is that most of these factories are using technology that is 30 years old and as the replacement cycle comes around, they are beginning to invest in automation. We think that is going to be a significant trend over the next five to 10 years.

Another driver is the lack of qualified workers entering our industry. The education system isn’t producing them. People are not looking at making architectural parts as a great career path. The demographic issues, the competitive issues, the fact that software is changing everything in the world at an enormous rate, all of that will drive towards automation. And that movement, finally, appears to be getting traction now.