Building Chicago 2011 - (Page 15)
Which NICHES Will Offer Riches in 2011 and Beyond?
By Ken Simonson Chief Economist, AGC of America
merging changes in construction activity indicate 2011 may be the year of the specialty contractor more than the general. While overall construction spending remains flat, several niches look promising. Other categories will soon shrink, however. Here’s a tip sheet for which segments to seek or avoid. Manufacturing employment, shipments, orders and inventories have all posted healthy, sustained gains for close to a year. As a result, factory construction is beginning to pick up, even though capacity utilization in manufacturing remains below long-term average levels. There are several reasons for the revival of manufacturing, and they suggest this sector has strong enough prospects to encourage more contractors to develop specializations to serve manufacturing. The drop in the value of the dollar against major currencies has boosted U.S. exports and improved the ability of U.S. manufacturers to compete against imports. China, in particular, is experiencing inﬂation, appreciation of its currency, and limits to its oncevast labor pool that are eroding its manufacturing advantage. Natural disasters—speciﬁcally the triple tragedy in Japan and last year’s disruption to global air shipments caused by the eruption of a volcano in Iceland— have made some manufacturers reassess total reliance on foreign suppliers. Power interruptions and political instability in some developing countries may also lead to more “onshoring” of production in the U.S. The tapping of huge natural gas reserves in the Marcellus shale formation in Pennsylvania and surrounding states, the Eagle Ford formation in Texas, and
other shale deposits has made domestic natural gas the preferred feedstock for petrochemical producers, compared to foreign plants that rely on oil-derived naphtha. Thus, specialty contractors that can build, expand and overhaul petrochemical plants have a far brighter future than they did a few years ago. Companies with expertise in building and equipping data centers are in growing demand, as more ﬁrms turn to “cloud” computing and individuals increasingly communicate, navigate and shop via the World Wide Web. Demand for construction of ﬁber-optic cables and cell towers may also be on the verge of a modest pickup. Alternative energy and power markets will continue to offer opportunities but also plenty of pitfalls. States appear likely to keep the pressure on utilities to buy more wind, solar, geothermal, biomass, and hydro power. There should also be continuing demand for energy conservation retroﬁts to existing residential and nonresidential buildings. However, cutbacks in tax credits and other subsidies are likely to undermine the economics of many facilities. Extreme price swings for oil and corn have derailed many reﬁnery, ethanol and biodiesel projects. Technological hurdles have thwarted several cellulosic ethanol, “clean coal” and carbon sequestration projects. And nuclear plant construction—always a question mark—has become more dubious since the problems in Fukushima, Japan. Renovation specialists are likely to ﬁnd more bidding opportunities than greenﬁeld builders in retail and hotel work. Consumer spending has been picking up but not enough to keep large chains from closing or reducing their store count. Expanding chains are more
likely to move into vacant locations, triggering demand for tenant improvements, than build new. Even chains that formerly built new “big box” stores, such as Wal-Mart, Home Depot and Best Buy, are trying much smaller footprint layouts, often in space abandoned by failed competitors. Hotels have enjoyed nearly doubledigit growth for the past year in revenue per available room, or “revpar,” a key industry metric. That has inspired investors to snap up distressed hotels, which they are likely to rehab. Other hotels are being “reﬂagged”— rebranded—or updated to stay competitive. But few new hotels are in the pipeline for now. On the downside, ﬁrms that have specialized in almost any type of government construction—building or public works—will ﬁnd the pickings leaner in the year ahead, and probably for several years to come. The federal government is nearing the end of stimulus, military base (Base Realignment and Closure, or BRAC), and hurricane-preparation initiatives that have fueled a variety of niches for the past two to ﬁve years. State tax revenues have been increasing but not enough to reach pre-recession peaks, so many states are still trimming capital budgets. School districts and local governments, which depend heavily on still-shrinking property tax revenues, are in the worst shape of all. Total nonresidential construction spending will probably end 2011 higher than in 2010, but by no more than ﬁve percent. But the gains will be distributed very unevenly—clearly not every specialty niche will get rich. A Building Chicago 2011 • 15
Table of Contents for the Digital Edition of Building Chicago 2011
Building Chicago 2011
A Message from the Builders Association President
The Green Path to Collaboration
What is The Builders Association?
Economic Incentives of Safety
Index of Advertisers/ Advertisers.com
Building Chicago 2011