CHICAGO — A new year, a new outlook. CONTRACTOR interviewed industry professionals, from association and company presidents to marketing managers of manufacturing companies and construction industry consultants, and they all seem to predict that 2012 will be a bit better than 2011 — that there are positive industry trends occurring, making for a slightly improved business climate, yet certain areas of the country are having a rough time coming out of an economic downturn and the residential market is still slow to turn around.
Construction industry consultants FMI Corp., Raleigh, N.C., is forecasting a 3% increase in 2012 for construction put-in-place in 2006 dollars to show the effects of inflation. In current dollars it’s a nominal 6% increase.
“Our forecast calls for a 12% increase in residential construction for 2012,” FMI said in its Construction Forecast. “While that appears to be a strong recovery, consider housing is just starting to move off the bottom. The total represents stronger multifamily construction and home improvements as well as single-family housing; however, the total of $303.9 billion is equivalent to 1997 CPIP. In constant 2006 dollars, the gain is more like 9% for 2012.”
2011: Get ready to climb out
Niche markets, green will be ok in 2010
On the commercial side, FMI data shows CII market sectors bottoming out in either 2010 or 2011 and beginning to increase in 2012. The two exceptions are religious buildings and public safety, both of which FMI is forecasting to bottom out in 2012 and resume growth in 2013.
Anthony J. Guzzi, president and CEO of EMCOR Group, expects a slight upturn in 2012, in line with the latest FMI Construction Outlook.
“Absent our acquisitions, our backlog is up 30%,” Guzzi said, “but it had fallen in half from the peak to trough. So going back up is a good sign, although it’s not a broad-based recovery in commercial, and residential has to eventually come up.”
Given the uncertain economic climate, such as the Euro crisis that may destabilize the world economy, it’s difficult to forecast.
“We live in an economy right now that if we have a three- to six-month window, that’s as good as it gets,” Guzzi said.
Guzzi believes that the government should reform the tax code to make energy saving projects more attractive. Accelerated depreciation or tax credits could lower the payback period and increase the ROI for commercial/industrial/institutional energy projects. CII energy work would employ more people than residential, save more energy and expand the nation’s green footprint more quickly, he said.
Energy service work can be profitable for many mechanical contractors, not just the largest ones, noted Guzzi. The energy service market can be split into three segments. The big work is done by ESCOs in the public sector; that’s the type of work where an ESCO sells a complete makeover to, for example, a public university, and the multi-million dollar project is financed out of energy savings. The second type of project is done for private owners where an engineer performs the study and the project goes out to bid. The third segment — the largest part of the market where many mechanicals can play — is just good replacement selling.
Dan Schmierer, president and chief executive officer, Viega LLC, is bullishly optimistic about 2012.
“We see single digit expansion in most commercial segments, Schmierer said. “Our overall targets are up about 15% in revenue for next year. Part of that is growth in our current market segments and part is introducing a new system or two. We’re guardedly optimistic.”
In terms of market segments, Viega is forecasting new single-family structures as flat, new multi-family structures up 6.5% and non-residential private construction up 7.5% in unit volume. Viega forecasts the power and utility segment up 25%, commercial structures up 10%, manufacturing structures up 4%, and healthcare down about 3%. Viega is forecasting that all public construction — highway and street, transportation, education, sewage and waste disposal — will be down 5% to10%.
“If you look at just the residential market — this is a real trend here — we see the rental apartments and large multi-family buildings together comprising almost 50% of the market, say 45% of the market,” Schmierer said, “and both of those figures are double what they were two to three years ago. The single-family structures have dropped from 70% down to 55%.”
In the five geographic regions Viega tracks, the firm predicts that single-family residential for 2012 will increase 6% in the Northeast, 8% in the Midwest, 10% in the South Atlantic, 11% in the South Central region, and 14% in the West. On the commercial side, Viega is forecasting increases of 11% in the Northeast, 8% in the Midwest, 8% in the South Atlantic, 5% in the South Central states and 5% in the West.
Schmierer is also optimistic because the company will have line extensions and increased market penetrations. Viega will introduce its MegaPress system for black steel pipe up to 2-in. at the AHR Expo in Chicago this month. And at the Intl. Builders Show in Orlando, Fla., in February, Viega will introduce its PPP system, a polymer pipe joining system with stainless steel sleeves built in.
“The real bottom line is that we are more optimistic going into 2012 than we have been the last two to three years,” Schmierer said. “It’s nice to see some real growth opportunities.”
Rheem’s Chief Operating Officer Chris Peel said the common wisdom is that the plumbing and HVAC markets will be up 3%-6%, but he thinks it will be more like 1%-3% on the commercial side. Residentially, he believes 2012 water heater sales will increase by 1%-2%, but the residential HVAC market will be flat.
One exception will be the tankless water heater market, expected to rise 3%-4%, but Peel pointed out that 7.8 million water heaters will be sold in 2012 and perhaps 350,000 will be tankless.
“There aren’t a lot of drivers right now,” Peel remarked, so serving customers better and having good products at the right price become more important.
New construction accounts for only 10% of the water heating market, he noted; in 2006 it was 20%.
“On the HVAC side, we’re hanging steady at 15%-17% of the market for new construction, which is substantially lower than the 2005-2006 timeframe,” Peel said. “Most of our competitors in the spaces we serve have adjusted their businesses for the new construction market being borderline to non-existent.”
Peel has been to Washington a number of times and it’s clear to him that energy efficiency incentives will be a victim of the nation’s budgetary woes. On the other hand, heavily used commercial equipment that operates in the 92%-97% efficiency range is so attractive that it will sell even without incentives.
For example, Rheem is integrating some of its water heating and HVAC operations and one of products coming out of that is the H2AC rooftop unit, a rooftop air conditioner that makes hot water that’s aimed at the restaurant market. A projected 2012 launch, the rooftop has been tested on a restaurant in northwest Arkansas and chopped $2,300 off the facility’s gas bills.
Peel said that all regions are struggling, especially areas that have been hard hit by foreclosures, such as Arizona, California and Florida, but, conversely, those same markets also have the biggest chance for a faster recovery.
Scott E. McDowell, senior director of marketing at Zurn, said the markets that will see the most growth nationwide in 2012 are commercial buildings and retail.
“The large markets will continue to be stable, but not have high growth rates like CB and retail,” said McDowell. “The residential market will be slower to respond than commercial due to the high population of homes being sold. The regional markets that will see growth are in the southeast and northeast markets. The southwest and west markets will be slow to grow due to home value shrinkage.”
McDowell noted that the green building market is growing and has always been a focus of Zurn, pointing to the products the company has launched in the past years (Hydrovantage flush valves, and EcoVantage pint urinals).
Plumbing-Heating-Cooling Contractors — National Association President Keith Bienvenu said there are some positive economic and industry trends occurring throughout the country.
“This leads me to think business will be slightly better than 2011,” said Bienvenu. “However, that thought could change in a minute. There is still much unease among p-h-c contractors related to the economic downturn, affecting their level of confidence in launching new business initiatives, expanding staff, etc. PHCC is encouraging our members to approach 2012 with goals to keep refining operations, training staff and preparing for a gradual turnaround.”
Business outlooks vary depending on what type of work contractors do and what region of the country they are located in.
“Service and repair contractors are faring better than new construction contractors overall,” said Bienvenu. “And within new construction, commercial contractors are doing better than residential ones. The regional situations are different across the country. Some areas are still struggling, and others are doing well. Any type of recovery will be a slow-moving process in 2012.”
Bienvenu also said that in 2012 it is anticipated that the commercial sector will continue to fare the best, and rising commodity prices are a concern for both sectors at this time.
Concerning the residential market improving, Bienvenu said that PHCC members report that there are signs that the residential market is slightly improving, particularly in multi-family construction.
“We are hopeful that 2012 will be better for the residential service market,” said Bienvenu. “There are opportunities for residential service contractors to tap into new business related to shifting homebuyer preferences, such as aging-in-place features and energy/water efficiency.”
Charlie Wallace, vice president and COO of Quality Service Contractors, a PHCC enhanced service group, said that he is cautiously optimistic for 2012.
“I see 2012 starting out the same as it is as we end 2011, although I feel it will start to pick up in the last half of 2012,” said Wallace. “I think that being an election year will spur each party to move forward with loosening up the economy. I originally thought there would be more improvement in the economy in 2011, but it hasn’t happened. While we are better off than we were in 2010, there is still too much economic uncertainty among small business owners that want to expand their business.”
The service side of the industry is still the area that has kept many businesses from going under, Wallace pointed out.
“You can find contractors in many parts of the country that have figured out how to make more profit with equal or less sales,” said Wallace. “They have made adjustments in their business to prosper rather than merely survive. Many are ‘having the best year ever,’ but unfortunately there aren’t enough of them."
Mark Rogers, president of the Mechanical Contractors Association of America, said that he is hearing different perspectives on business and economic trends from firms in different regions as well as different segments of the market.
“Places like Omaha aren’t experiencing the bust largely because they didn’t experience the bubble,” said Rogers. “Other areas will take longer to turn around. Markets like energy, infrastructure, and building retrofits appear to be on the upswing.”
Rogers told CONTRACTOR that multifamily residential building appears to be a bright spot in the forecast according to experts like McGraw Hill.
“That’s certainly good news and an area that many of our members can turn to since we’re unlikely to see many more commercial buildings anytime soon,” said Rogers. “And our members are particularly well-qualified to help owners of existing buildings improve their efficiency and bottom line by providing energy solutions. That market can only grow and can be a win-win for everyone.”
Regarding the service trades, Jack Tester, president and CEO of Nexstar is predicting that 2012 will be a strong year for all home service trades.
“I’m seeing consistent double-digit revenue growth among our membership now and I don’t see anything impacting that in 2012,” said Tester. “Plumbing is up. Electrical is up. HVAC service is up, although replacements are down because we don’t have the artificial impact of the tax credits.”
According to Brian Beaulieu, the economist Nexstar uses to track the economy, there is no looming recession for 2012 and the economy looks okay, plus work is strong now in home service and homeowners are spending money on home improvement, Tester points out, and as a result 2012 will be better.
Regarding niche markets, Tester said that geothermal installations are growing and the high-efficiency and tankless market will continue to grow too and be a strong area of business opportunity for contractors.
“Contractors have also become more educated in trenchless sewer replacement and those who jump on that bandwagon will continue to grow the sewer side of their business, as long as they do it right,” said Tester. “In fact, anticipating this market opportunity, Nexstar created trenchless marketing and sales training for our member contractors to utilize within this emerging sector, as well as for high efficiency water heaters. If contractors stay on the cutting edge and then figure out the strategies that work, they’ll be profitable.”