2015 State of the Industry
by Jonathan McGaha | 6 January 2015 12:00 am
Every year, Metal Architecture asks industry leaders to look in their crystal balls and predict what’s going to happen. This year, the responses are generally positive. Although the metal construction industry will, invariably, face some difficulties, the respondents are, for the first time in years, universally upbeat about construction, metal construction and the economy.
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| Hank Harris is president and CEO of FMI Corp., Raleigh, N.C. | Brad Robeson is president of NCI Buildings Group, Houston | Daniel Nicely is managing director, USA and Mexico, for Umicore Building Products USA Inc., Raleigh, N.C. |
MA: What kind of growth in the construction market do you expect in 2015?
Hank Harris: We expect that growth of construction put in place in 2015 will be very similar to 2014. It will be a good growth rate of around 7 percent. Since the construction industry only grows at an inflationary rate over the long term, this is clear evidence of the recovery accelerating and the industry progressing in the up part of the economic cycle.
Brad Robeson: It is our expectation that growth in the nonresidential building sector will continue to be positive in 2015, following moderate growth over the past year. Just as we witnessed in 2014, some end-use market segments and regions will experience more significant rates of growth than others. However, with the overall improvements to our economy, we believe that even those areas of construction that have been particularly weak in recent times will become more active and contribute to a greater number of overall project opportunities for our industry.
Daniel Nicely: We expect to see 4 to 7 percent growth overall in the market. Specifically, for VMZINC, we expect a slightly higher growth rate overall and better-than-average growth rate in some key areas.
MA: What segments will shine and which ones are fading?
Harris: There is demand pull on almost all construction sectors. The problem primarily is a lack of capital expenditure. In the public sectors, there are obvious budgetary constraints at almost all levels. In the private sector, there is no shortage of capital, but there is a shortage of will to deploy it in capital expenditure programs. As an example, the health care sector should be booming due to demographics. The reality is much more modest, and construction in this sector will grow, but at a muted rate of 5 percent. We do see the commercial sector recovering at a surprisingly strong rate of 14 percent for 2014 and growth is expected to continue at 8 percent for 2015.
Data centers are one of the highest growth rates forecast in terms of construction type. Notwithstanding short-term events, the oil and gas sector will continue to boom, and we believe that the liquefied natural gas (LNG) export market will eventually be clarified, giving the U.S. the opportunity to be the No. 1 energy exporter in the world. The manufacturing resurgence in the U.S. will continue, so industrial-related work will also be growing at a healthy rate. Publicly funded sectors, such as transportation, federal government contracting and water/wastewater, will experience much more modest growth due to the related fiscal issues.
Robeson: End-use markets that have been particularly inactive over the past several years, such as institutional segments, should start to show signs of life in line with area economic development.
To keep up with population growth and higher education resourcing demand, we expect to see more projects in the areas of schools and universities. Additionally, demand for quality, accessible health care services will support the growing trend of satellite hospital, health and wellness facility development.
Although we are not expecting much in the way of negative end-use segment growth in 2015, it is likely that activity will be muted for government projects as our nation’s leaders continue to work towards prioritizing our country’s areas of focus and fiscal accountabilities.
Nicely: In the market as a whole, we expect to see industrial take more ground from the overall picture. This is due to the infrastructure that is still developing in the oil and gas areas-even in light of recent downturns in related commodities. Unfortunately, this is not an area where we typically engage the market at Umicore. Nonetheless, it is expected and should impact other key areas.
We also expect that residential will be very healthy in the coming year. Both multifamily and single-family residential should see healthy growth rates beyond the average of 4 to 7 percent.
We are less bullish in the areas of religious, higher education, commercial, health care and institutional-such as prisons. We expect moderate growth, at rates closer to 3 and 4 percent in these areas, with the exception of institutional. In institutional we expect to see a slight decline- albeit in the face of rising prison populations.
MA: Energy costs are declining, and as production increases, many economists predict further declines. What effect do you think that will have on construction for the new future? Long term?
Harris: Declining energy costs will have a limited impact on the construction industry in the short term. Certainly, midstream contractors and others operating in the oil and gas sector will experience the compression of current margins as the workload temporarily slows. However, this is a short-term market phenomenon. In the long term, the decline in energy costs will be a net gain for the construction industry. Manufacturing in the U.S. is largely fueled by the availability of cheap energy. This phenomenon is one of the primary reasons for a reshoring of this kind of activity in the U.S. Inexpensive energy also fuels the containment of cost in the production of building products, most of which are driven from manufacturing. In the bigger picture, the best hope for the U.S. economy is going to be our status as the world’s largest energy producer.
Robeson: Over the past few years, the construction industry has benefited from the boom in U.S. energy production, which has brought to fruition a variety of warehousing, distribution and related community projects-especially in the fast-growing shale play areas. Unfortunately, when an over-abundance of production deflates energy demand, the result is typically a delay of planned projects intended for energy production purposes. I believe the overall energy market will continue to develop and grow in the face of deescalating costs. However, the rate of growth will slow in line with supply and demand, resulting in fewer energy-related construction projects each year.
Nicely: We believe that the longer-term cycle is more a factor than the shorter one. The declining trend may be a long-term trend, or it may be a short trend-line. Currently, as mentioned earlier, we doubt that industrial or institutional will back off in the coming year. Depending on the longevity of the current trend, it may decrease in 2016 or 2017.
Eventually the supply will meet the demand. All cycles correct and we will see a bottom once again in any given category; however, when that will occur is an educated guess based on myriad variables. With today’s data we may see a decline in 2018; however, keep in mind that a major election is just around the corner.
MA: Wages have been stagnant for the last several years, but eventually they will begin increasing. How big of an issue will labor costs be in the construction market this year?
Harris: Labor costs are already a big issue. The overall workforce in the U.S. is growing at less than half of its traditional rate. Much of this is driven by the aging population, as well as a departure of people from the industry during the down cycle. Most people would say that labor in the construction industry has already reached a crisis level, and we have not yet begun to see the real impact that the booming oil and gas market is going to have in terms of siphoning off the available workforce.
Nicely: Labor will always be a fixed cost concern- especially under the specter of possibly increasing inflation rates. Add in the recessionary climate of late in Europe, and the implications it may have in the United States in coming months and years, and any global company will be caught in a seesaw action of balancing labor costs across the board.
A bigger corollary concern in the United States will be talent management, acquisition and retention. That is, if wages are going up in the U.S., we may see a greater migration of talent across organizations.
MA: What is the greatest threat to the metal construction industry over the next five years?
Harris: Whether opportunity or threat, certainly advances in material science have significant implications for the metal construction industry in the next five years and beyond. There are scientists working constantly on nanotechnology and its applicability to the development of new materials. Materials science advances, the embedding of technology into materials and the constant development of alternatives, is certainly going to have some impact on the use of traditional metals. Most recently, we have seen that aluminum alloys are being developed with renewed strength and durability. Construction and transportation are the biggest users of aluminum in the country. Titanium utilization may also work its way from manufacturing to construction applications. Carbon fiber is five times the strength of steel, two times as stiff as steel, yet weighs 70 percent less. This is just an example of the type of advancement that will inevitably impact the choices made with regard to metal utilization.
Robeson: I do not believe there is a single overarching threat to our industry; rather, there is a combination of threats that we must address both in our respective businesses and as an industry to ensure the metal building market continues to grow and thrive.
First, the rising cost of steel can put us at a disadvantage when compared to other materials, which makes it critical that we collectively do a better job of communicating value and sustainability beyond price. Second, we have been slow in our pursuit of integrating metal into building information modeling
(BIM) and other technology platforms that have become the standard tools for many. This will continue to hinder our growth unless we pursue more effective solutions with the capabilities to integrate into mainstream construction platforms and processes. Third, as activity in the construction industry continues to grow, finding and retaining the talent necessary for success has become a greater challenge than ever before, making it imperative that we develop and execute more effective employee acquisition and training programs across our businesses.
Lastly, without a powerful voice advocating our charge, we see codes and standards changing in favor of forms of construction other than metal buildings. We must leverage our involvement with industry organizations, such as the Metal Building Manufacturers Association (MBMA), to collectively educate legislators and ensure the application of our product guidance is fair and balanced in this respect.
Nicely: Tough question. However, at this moment, and possibly because we are being confronted with this as we speak, we see that greater legislation (locally and nationally) as a threat to our subset of the industry. Advances in material and material testing may also impact demand in the not-too-distant future.
MA: Do you anticipate any emerging technologies, 3-D printing for example, having a significant impact on the construction market?
Harris: Certainly, it stands to reason that 3-D printing technologies will continue to advance and that component parts that apply to the construction industry can be made that way. Also, technologies that attack a specific supply chain problem or some other specific inefficiency in the construction process will continue to proliferate. Within individual firms, we think more construction industry leaders will be looking at how they achieve competitive advantage with technology investments. Historically, the gains from these investments have mostly been realized by owners. Trying to transfer some of these advantages to the service providers themselves will become an increasingly significant issue.
Nicely: Absolutely. Companies like Statasys, 3-D Systems, and even stalwarts of the trades such as Autodesk, are all competing or working together to make this more of a reality in our day-to-day lives.
We expect to see this more in concrete, plastics and other material areas for the time being, but Moore’s Law may apply here, and we expect to see a synthesis of robotics and 3-D printing used in most trades and manufacturing on an increasing basis.
MA: Although there don’t seem to be serious material shortages, we are hearing a lot about difficulties shipping materials due to an over capacity logistics infrastructure. Is this constraining the growth of your business? Are there areas constraining growth?
Harris: The main issue that we see with material shipping constraints is the fact that the oil and gas-related shipping requirements have grown so much that they are consuming the infrastructure. This is constraining the shipping of almost all other goods and tying up the intermodal transportation system. While this will bode well as a driver of future rail and related transportation construction, as well as perhaps the implementation of pipelines, it will continue to be a short- to intermediate-term constraint on logistics infrastructure.
Nicely: Shipping is always a concern for a global company, however, we see it more as a customer service, expectation management and design issue in the United States; meaning simply that we are looking at ways to come up with a better “mousetrap” approach to customer service and the logistics that accompany that service.
MA: What will the metal construction industry-or the construction industry in general-look like 10 years from now?
Harris: It is hard to predict what anything will look like 10 years forward, but we do think that some of the current trends impacting the industry will continue to evolve and certainly will create a differentlooking picture for the industry a decade from now. With some degree of speculation, we would predict that a decade from now, there will be very few of what we typically refer to as general contractors.
Those that do exist will be employing different business models from those that you see today. Engineering and design-related professions will continue to evolve toward broader-picture advisory work, as detail design increasingly becomes the province of automation. More construction is likely to be manufacturing-based. The idea of using technology, engineering and manufacturing to control the construction process, mitigate risk and create a more rational delivery process will continue to be key drivers. Controlling a labor force, having proprietary technology combined with specific firm processes, and developing other intellectual capital that can yield competitive advantage will all continue to be key themes as we move to the future.
Robeson: What the metal construction industry will be in 10 years will depend greatly on the actions we take as a united industry today. The reality is we have many challenges and competitive forces that put metal buildings at a disadvantage against other types of construction, despite the superior benefits we are able to provide.
To thrive in the future, we must align our resources now to address some of the most compelling obstacles facing our business landscape, some of which include a lack of awareness of architects, engineers and insurance agencies regarding the positive impact and benefits of our products, construction codes changing in favor of non-metal forms of construction, a declining pool of talent to support our industry’s growth, and a general lack of focus on technological advancements to support the integration of our products into a broader spectrum of project types.
To address these concerns the MBMA has developed a strategic three-year plan to institute and advance initiatives in support of growing the metal building industry to become the “firstchoice construction solution” in the nonresidential construction market. Ensuring the success of our plan will require a united effort on behalf of our entire industry. I would encourage everyone to reach out to the MBMA and learn more about what you can do to contribute to the future growth and prosperity of the metal buildings industry so that in 10-years’ time, we will all benefit from a larger and more effective business environment.
Nicely: If we could answer that with a great deal of accuracy, we probably would not need to work.
Seriously, we expect to see a greater synthesis of efficiency and effectiveness combining under the auspices of bigger dominant players. We are already witnessing the merger and acquisition mania to a small extent in the metals industry. The trick will be to define systemic approaches within those larger organizational machines in order to ensure effectiveness and not merely efficiency. This will again come back to talent acquisition and management; having the right players in the right seats on the bigger bus, along with the skill sets and the talent to design and implement systemic changes.
At the same time, we would not be surprised to see a greater localized response to fabrication and distribution working symbiotically and synthetically with (or within) larger organizations. That is, subcontractors acting as localized production and/or distribution for larger organizations. This would play into the 3-D printing portion of these questions, but also to the diversified tendencies of localized codes, a rise in the entrepreneurial ethos, and the models that we see in other industries, such as the ones employed by Amazon.com and others.
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