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2016 Plumbing forecast: steady, modest growth is expected

Jan. 8, 2016
Regarding the commercial market, the Rheem Commercial water heating team anticipates the market will remain stable throughout 2016.  Contractors that are embracing technology and using business best practices can look forward to increased profitability.     According to Chisolm, last year was a tumultuous year for water heaters because of NAECA (National Appliance Energy Conservation Act).
CHICAGO — As we ring in the New Year, industry economic forecasts point towards more of the same for 2016 — steady and modest growth will continue.

“The New Year, 2016, is feeling a lot like 2015,” said David Chisolm, VP of Marketing at A. O. Smith. “We will prod along and have modest growth and don’t see any indicators that there will be a significant upswing or downswing. Steady modest growth is what we are projecting for the year.”

According to Chisolm, last year was a tumultuous year for water heaters because of NAECA (National Appliance Energy Conservation Act) – there were significant price increases that affected buying behavior and new products and technologies were mandated.

“Even though NAECA created a lot of noise for us that year, overall economic indicators stayed flat but slightly up,” said Chisolm. “We are looking at 2016 being a more stabilizing year — modest growth — the industry getting back to a more steady state.

“We see an uptick in the new construction market, 100,000+/- new housing starts, so there is a bit of growth in that sector,” added Chisolm. “The replacement side of the business is following general economic indicators. We are looking for non-regulatory influence in 2016, especially the residential side to get that more to equilibrium. On the commercial side we see strength driven by office and hotel activity.”

At Bradford White, the company is forecasting similar growth patterns that were seen in 2015 for the water heater market.   

“We remain cautiously optimistic for 2016, but expect perhaps some more extreme regional variances in product demand,” said Carol Pinto, director of marketing, at Bradford White. “Additionally, we expect new construction and a strong replacement market to propel the total water heater market upward. We expect the 2016 growth patterns in water heater opportunities to be very similar to 2015, with the majority of that growth driven by new construction; strong replacement opportunities.”

According to Rich Bendure, VP and general manager of Rheem Water Heating division, for residential water heating, the replacement product and services market is not discretionary based on the economy.

“The demand for water heating products outside of new home building is relatively consistent,” explained Bendure. “At Rheem we are optimistic for 2016, in regard to business opportunities for our contractor partners.

“As the replacement market remains stable at 85 percent of water heating sales across the board, there are continued opportunities for contractors to be successful increasing margins when selling and installing high-value units,” added Bendure. “Residential consumers are more educated than ever before.  Many younger homeowners understand the value of new, technologically advanced products that provide improved comfort, increased efficiencies, and more savings in the long term.”

Contractors that are embracing technology and using business best practices can look forward to increased profitability.    

“Contractors with the knowledge of high-value products, and benefits of smart home automation will increase their profitability while maintaining similar installation volume in 2016 and beyond,” explained Bendure. “By embracing the benefits of new technology and advanced product features available for the new generation of consumers, contractors will be able to continue with solvent business practices, regardless of one, two, or three-point economic growth.”

Regarding the commercial market, the Rheem Commercial water heating team anticipates the market will remain stable throughout 2016.

“Commercial businesses, particularly in the restaurant and hospitality space, are typically very benefit-oriented and value savings in energy efficiency, consistent uptime, and reliability, as well as longer asset life,” said Bendure. “For these reasons, we see a better adoption rate for new technology as compared to residential customers. Today, that shift is moving to ultra-high efficiency gas heaters.”

According to Pinto, with the aging of the U.S. population, some of the most significant growth is forecasted to be in medical facilities and the type of commercial structures that cater to an elderly population, such as assisted living facilities and senior communities.

“While higher education is always investing in its highly-competitive marketplace by improving their facilities, the on-line education boom may cause some institutions to hold off on structural investment plans,” said Pinto.

Regarding how the global economy is playing into the U.S. economy, it can have both positive and negatives effects, explained Pinto.

“While there will continue to be some uncertainty with the global economy, we expect the U.S. economy will be stronger than foreign economies, and as a result, the U.S. dollar will continue to be strong. This gives importers a price advantage.”

Niches regionally driven

According to Charles “Chip” E. Greene, 2015-2016 PHCC — National Association President and President of Greene & Associates, Macon, Georgia, there seems to be swings in the economy, which vary based on the markets contractors work in. 

“Except for certain pockets of the country, heavy commercial/industrial markets seem to continue to struggle (educational, institutional and industrial),” said Greene. “Single-family residential and multi-family markets seem to be doing very well in population-centered areas (Atlanta, Phoenix, Charlotte are examples).  

Contractors also need to be aware of niches in the contracting industry, plus how technology and the labor shortage are affecting contractors.

According to Greene, niches in the contracting industry will be regionally driven in 2016. 

“In the southeast, power and water are cheap, so a lot of these types of projects are only being done by government agencies; private projects’ decisions are still very much driven by dollars per square foot, which can affect the willingness to invest in this area,” said Greene. “In the middle and western parts of the country, water conservation and energy efficiency measures are more integrated into everyone’s mindset, particularly because resources like water are scarce. 

“Regarding alternative energy, my conversations with the utility providers indicate that solar and other sources of alternative energy are not on a scale that significantly offsets the demand for energy production,” said Greene. “So while there is some payment for solar power production it is not a quick payback for a developer who provides the money to do the project.”

Technology is also playing a huge role in contracting businesses — it is very much part of a contractor’s daily life now.

“On large construction projects, BIM is an integral part of the coordination process; construction contractors are using tablets with their field managers to provide them with all documents related to a project,” explained Greene. “Submittals, RFI’s, email questions and answers, etc., can now be pushed directly to the field electronically. In addition, daily reports from field forces can be sent directly to the office along with time reporting.”

According to Greene, the service side of the industry has been integrating similar technology for the last few years.

“Service technicians can do repair estimates on their tablet right in the customer’s location, process payment there, and then send all that directly to the office for integration into the main accounting system,” said Greene. “And manufacturers are putting all their information regarding the equipment they make on the Internet where not only can you access submittal type information, but warranty information, troubleshooting tips, parts breakdowns, etc. This gives the technician access to this information when on a site working on a piece of equipment, allowing the tech to make smarter decisions about diagnosing the problem.”  

Another issue affecting the industry in 2016 is the labor shortage.

“The talent pool to draw skilled help has shrunk by 2 million workers since 2008, making growth limited because of a smaller pool of workers to draw from, and we are playing catch up as a society to provide programs to attract high school kids into the construction trades,” said Greene. “Contractors seem to be looking to invest in technology to try to compensate for the loss in skilled labor and productivity. This is becoming an easier decision to make when a piece of equipment that assists with building layout used to cost $50,000 two years ago now costs $15,000.” 

Looking within

CONTRACTOR also had an opportunity to talk with Jack Tester, president & CEO of Nexstar Network about what contractors can expect in 2016.

“Business for our members has been outstanding in 2015, and we do not see any loss of revenue momentum as we enter 2016,” said Tester. “Our median member is internally growing at over 10% this year in all revenue lines — plumbing, HVAC and electrical.”

According to Tester, residential service and replacement is strong across the United States and Canada with no areas better or worse. 

“This segment [residential service and replacement] is naturally more consistent and less influenced by economic news — which is why we focus our support in this area,” explained Tester.  

When asked if contractors in any specific areas of the country are still struggling, Tester said no areas are struggling among Nexstar Network membership.

“From time to time I will hear a contractor complaining about the unique business challenges in their market — whether it be making sales or finding employees,” said Tester. “They will spend the bulk of the call telling you it is not their fault, but rather some malignant market problem. Then I will talk to a company in the same town and there are killing it.

“As an organization, Nexstar Network believes business success is not something that comes from outside the business,” said Tester. “It is about developing great leaders, hiring and training top field talent and building a business system that creates consumer value and company profits. So we tend to remain focused on business fundamentals rather than looking at emerging market segments to go after. 

“If you are not careful these can be a distraction and create more businesses challenges than they are worth, added Tester. “If you have the fundamentals down and you have high market share in your core trades — great! Now let’s add something new to our bag of tricks. Until then we recommend contractors be very careful. Normally, the answer to business growth and profitability lies within the four walls of the business.”

About the Author

Candace Roulo

Candace Roulo, senior editor of CONTRACTOR and graduate of Michigan State University’s College of Communication Arts & Sciences, has 15 years of industry experience in the media and construction industries. She covers a variety of mechanical contracting topics, from sustainable construction practices and policy issues affecting contractors to continuing education for industry professionals and the best business practices that contractors can implement to run successful businesses.      

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