Chapter Corner

FMI's Construction Outlook 2nd Quarter 2014

Posted in: Features, September/October 2014

Yogi Berra once famously said, “Nobody goes there anymore. It’s too crowded.” Berra was responding to a question about why he had not been to a favorite, popular restaurant anymore.

In our case, we are using this bit of paradoxical humor as an introduction to our forecast, in particular, to look at the changes in retail commercial construction and the changing construction industry in general. Berra’s quote will not help us explain why our forecast for the construction industry has been lowered 1 percent compared with last quarter’s outlook forecast. For that answer, we will try to explain below. If there is one overarching theme to the global economy, someone is lying to you. Better to listen to another famous quotable major league manager, Casey Stengel, who said, “Never make predictions, especially about the future.”
 
With that bit of Stengel-ese in mind, we return to the Berra quote to look at the changing retail market. The idea that “it’s too crowded” probably started some holiday shopping season about a decade ago or actually a little bit earlier with the breakout success of Amazon.com. Amazon’s success as a bookstore decimated traditional bricks and mortar bookstores. Amazon’s success as a buy-just-about-everything-online business is being imitated all over the Net. Now imagine the result as some late, lazy, or clever shoppers seeking to avoid the crowds do most of their shopping online one cold holiday season in 2001. If it worked out fine, gifts were purchased and arrived on time. Then it is no surprise that such shoppers will try it repeatedly.
 
This is one important reason that commercial construction is not coming back as fast as one would historically expect after a recession. New shopping capacity is being created on the Internet, where the real estate is seemingly infinite and less expensive to maintain. (That is, barring the unforeseen viruses and malware mucking up the sales, a real problem to consider in the future.) Just how much online shopping has hurt the retail industry in general and contractors building commercial buildings is harder to track down, but it is certainly changing the way retailers view their traditional storefronts. Despite growing about 4 percent since 2005, e-commerce is still a very small percentage of total retail sales. However, what we are suggesting here is that, to quote Berra again, “The future ain’t what it used to be.”
 
The idea that e-commerce will overtake bricks and mortar storefronts is not inevitable, but it is inevitable that it will continue to remake the concept of the traditional store and might even decimate more markets like the bookstore. For instance, can you find a local camera store these days? So what is next for the e-commerce engine? Consider online education as one of the biggest construction markets — as a potential candidate for more online exchange of goods.

Religious “construction” can also be done online and is. Office, travel, amusement, and recreation, even health care, are all changing as more of our lives are spent online. How far will it go? We will not go there with that answer. It’s too crowded.

The point to all this pontificating about changing technology is that, even traditional, mature industries like construction need to be aware of how much these things can and will change their businesses, not just in market changes but in construction companies utilizing new technologies in new ways. In most cases, even the generations-old family business is not the same even though some have maintained the original culture. That’s how a business grows for multiple generations.

So where does a company go with its strategy in a technological world? New markets? Same markets but new products and services? Same clients with new services? Same markets, same services, but more competitive? All of these are valid strategies, but which approach does a company use if, for instance, more retail goes online? There is a need for more data centers and warehouses and maybe even pick-up centers. If a company persists in going to the same market where it has always worked even if it is getting too crowded there, it must have some new tactics such as being the low-price provider or the most efficient contractor. That can lead to ideas like using more modular and prefabricated construction. There is no single solution. If there was, why have multiple competitors in the market?

While it is a dangerous business, we are compelled to predict the future. And predicting the direction of the economy is even more difficult than the long-term weather forecast. In fact, most are blaming at least some of the current slowdown on a tough winter and spring weather. Floods, tornadoes, ice, snow, and firestorms will put a dent in a growing economy, and we can predict that there is more to come whether or not one “believes” in global warming.

Moreover, speaking of unpredictable, it is once again an election year. Even a nonpresidential election year can now cause the economy to shudder. Negative advertising is even now being cooked up behind closed doors, which helps the revenue of the news media but gives the rest of us heartburn as the economy sits on the sidelines and waits it out once again. Will there be a new highway spending bill? More funds spent on infrastructure and schools? Stay tuned. We predict that things will change.

Construction Forecast

With all the talk about the unpredictability of predictions, we are going out on a limb and mostly sticking to our predictions of last quarter. Overall, our construction forecast remains in the cautiously optimistic zone; it is just that we are a little more cautious and a little less optimistic. We still believe that residential construction is expected to remain a high-growth market, but we have once again pulled back on the outlook. Multifamily is still a fast-growing market, but the rate of growth is slowing. Home improvements are improving. The interplay among these three residential categories is dynamic and heavily influenced by job growth, wage growth, and interest rates, among other factors.

Despite all our well-reasoned and researched caution, we still feel that in some areas nonresidential construction is on the verge of breaking out of its long slumber. For instance, health care and education markets have both slowed due to political circumstances. Those issues could be solved next year, and the pent-up demand will come rushing into the markets. Infrastructure is another example. If someone can come up with the political will or new ideas for funding and operating, this area could take off. These are longshots at this time, but we may even see a Triple Crown winner this year too.

All that said, we expect total construction put in place to grow at the rate of 7 percent this year and for the next few years. Despite all odds and nasty economic weather, the nation needs to grow, and that means more construction projects.

Reprinted with permission from FMI Corporation (919) 787-8400. For more information, call Sarah Avallone at (919)785-9221. To read the full, 28-page FMI’s Construction Outlook – 2nd Quarter 2014 report, visit www.fminet.com.