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Construction Industry Insight | Summer 2018

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This document focuses on a number of topics that affect the construction industry as a whole, including the anticipated growth of the construction equipment market, the improvement of the crane industry, the aging of the construction workforce, efforts being made by lumber producers to expand production, and factors contributing to the lack of women in the industry. It also includes a brief summary of trends in used equipment values.

Size of Construction Equipment Market to Reach $112.52 Billion by 2025: According to a recently issued report by Grand View Research, Inc., the size of the global construction equipment market is expected to reach $112.52 billion by 2025. Over the forecast period, it is anticipated to grow at a CAGR of 4.8%, driven by a rise in government spending on public infrastructure, and the growing trend of renting used construction equipment. Key points regarding the forecasted contributions of various market segments are as follows:

  • The concrete and road construction machinery segment is projected to grow at the highest CAGR of 7.0%, driven by road construction projects. For example, in the U.S., investment in the construction of roadways is expected to increase from nearly $91 billion in 2016 to $99 billion by 2020.
  • Among the earth moving machinery segments, excavators are anticipated to capture the highest market share by 2025. Rapid technological advancements, better capacity, and increased productivity are the key contributors to this growth. During the same period, the need for loaders is expected to rise owing to increased demand from the Chinese market, and dozers are anticipated to grow at a very high pace, as a result of high demand from the mining sector.
  • The crawler crane segment of the market is projected to reach $3.67 billion by 2025. These cranes are highly powerful and sturdy in nature, thus, useful for large operations and moving large weights.
  • The concrete mixer and paver segment accounted for more than 56% of the market share in 2017. Increasing mega construction projects in cities and the rapid pace of urbanization have boosted the demand for this segment.

North America emerged as the global leader for heavy construction equipment in 2016 as the slowdown in the Chinese market helped North American companies to capture greater market share worldwide. In 2017, North America led the global construction equipment market with a value of $27.88 billion. Dominating the market were Caterpillar Inc.; Komatsu; Hitachi Construction Machinery; Liebherr and Volvo Construction Equipment.

Crane Industry Sees Drastic Improvement: The market for crane rentals and sales has drastically improved from the past couple of years, especially in North America. Significant increases in project work during the first half of 2018 helped to drive both utilization and acquisitions. As a result of extensive opportunities in the areas of new construction, infrastructure, service work, and crude oil, rental and sales rate increases are expected to continue across North America. New construction is at its highest level since 2007 and contributing to a thriving marketplace. Recently, significant movement has been seen in the mid All Terrain classes as well as some larger All Terrain cranes. All Terrains in the 200-300-ton class have had the quickest movement, which is a significant turn of events from the first quarter of this year. Rough Terrain cranes above 90 Tons have also turned the corner as evidenced by considerable increases in both sales and rentals. Conversely, other classes, such as crawler cranes that experienced significant increases in 2016 and 2017, have lost ground as a result of changes in laws, the type of work available, and other factors. However, these cranes are still in high demand for tilt up projects, wind/energy projects, and bridge work. This work, along with infrastructure projects, is expected to drive additional demand for crawlers in both the near and long-term future. Rough Terrain cranes in the sub 90 Ton classes are also experiencing a considerable downturn in the market. This stems from the high number of these units available as a result of the oil and gas slump that occurred years ago, and the alternative use of Boom Trucks.

While the market for crane rentals and sales has significantly improved, the impact of recent tariffs placed on steel and other commodities remains to be seen. What is known is that increases in acquisitions are driving more contractors into the second-hand market and absorbing available quality machines. This secondary market flow is also improving the resale numbers from a seller’s perspective. In conjunction with longer lead times from manufacturers, it is expected that the secondary market will serve as the main source of cranes needed throughout the rest of this year, into early 2019, and possibly beyond.

Fountain of Youth Drying Up for the Construction Industry: As baby boomers retire, they are leaving behind a void in the job force that millennials are not interested in filling. In 2005, there were 11.5 million workers in the construction industry and the unemployment rate hovered around 8.2%. In 2010, that number dropped to 10.6 million and unemployment jumped to 18%. While employment has improved since the recession, the workforce has not rebounded to pre-recession levels. According to a report from BuildZoom, in 2015, the unemployment rate was 7.1%, but the construction workforce shrank even further to 10.4 million. BuildZoom Chief Economist Issi Romem said part of the problem is that young workers do not find physical labor and construction work attractive. A recent survey of 18- to 25-year-olds from the National Association of Home Builders revealed only 3% of young people were interested in pursuing construction as a career while most surveyed wanted a less physically demanding job and perceived construction as difficult. The number of workers younger than 25 has become increasingly underrepresented in the industry while workers in the 35 to 54 age range are becoming overrepresented. More millennials are going to college and pursuing careers in corporate America rather than blue-collar jobs. Additionally, construction wages are low and have not increased within the last 15 years. In 2000, the average salary for a construction worker was $49,000 per year. It decreased to $47,000 per year in 2005 and rose to $48,000 per year in 2015, still shy of the 2000 levels.

The construction labor shortage has exacerbated the country’s affordable housing crisis and affordability will continue to worsen as the industry struggles to find workers. Tapping into a foreign workforce could help but may not be politically feasible. Technological innovations and automation could be the next viable step for the industry but would take years to develop. Prefabrication is already allowing contractors to build more efficiently and with a smaller workforce and additional innovations in design, manufacturing and logistics can also create better ways of building.

U.S. Lumber Companies Rushing to Expand Production: Lumber producers in the U.S. are scrambling to expand production, build new facilities and hire more workers. This is attributable to two primary factors. First, lumber prices have soared over 60% since early 2017, thanks to a perfect storm that hit the Canadian supply. Canadian producers experienced tree-eating beetles, forest fires, transportation issues involving a shortage of trucking and rail cars and finally, last fall, U.S. duties imposed on Canadian lumber that amount to a 20% tax. Second, the demand for lumber is rising as the U.S. housing market continues on its slow recovery. According to the U.S. Census, May housing starts were up over 18% year-over-year.

Canadian lumber currently supplies about one-third of all U.S. demand, and while U.S. producers are planning to expand, there are plenty of roadblocks on the way to establishing new mills. “We’re going to need more land that you can harvest lumber on,” said Robert Dietz, chief economist for the National Association of Home Builders. “We’re going to need more mills in terms of increasing the production capacity, and that requires materials, it requires regulatory approvals, permits, and hiring, and let’s keep in mind the labor shortage has been affecting the housing market from a builder perspective. It’s also going to limit the uptake of sawmill producers and transportation to increase that domestic supply.“ Additionally, it takes steel and aluminum and machine parts to build new lumber production facilities, and the U.S. just levied heavy tariffs on Chinese imports of these products. Despite these challenges, Jason Brochu, co-president of Pleasant River Lumber, which operates two mills in Maine and employs 300 workers, is not concerned. “We’re not looking ahead saying, Oh Jeez, stuff might be more expensive so we’d better hold back. We feel confident that we’ll be able to put in the equipment we need at the price we need to put it in and expand and grow and we’re gonna do well.” Producers still have a long runway ahead, which may be why they’re not concerned about the cost of expansion. “We know there are going to be highs, we know there are going to be lows,” added Brochu. “What we try to react to is confidence. Things that are longer term give us confidence to spend money to improve the mill or expand the mill.”

Factors Contributing to Lack of Women in the Construction Industry: Despite decades of advocacy by local workforce agencies and organizations like the National Association of Women in Construction, women make up only 9% of the national construction workforce, a figure that includes both administrative and supervisory positions. While the culture may vary from job to job and from company to company, women who want to pursue a career in the trades face a number of challenges. These include lack of personal and word-of-mouth industry connections; absence of the social network that exposes women to construction careers; inadequate funding for pre-apprenticeship programs that serve women; lack of steady work that sees more hours given to white males; and sexist jobsite cultures, among other things. These factors collectively lead to substandard training and lower retention; fewer opportunities for advancement; and few public projects that mandate goals for hiring women.

Aside from the above challenges and the efforts being made to address them, just getting women interested in a construction career is part of the battle. Agencies like the U.S. Department of Transportation host summer camps that expose young girls to the construction and transportation industries. The agency tries to make clear the financial rewards a construction career can bring as well as how the industry has changed because of technology, eliminating some of the “heavy lifting” positions that have kept some women away. However, there is one area where women workers do have a distinct advantage in the construction industry. According to the HOYA Foundation, the nationwide pay disparity for women is 79 cents on the dollar, compared with 92.5 cents on the dollar in the construction industry.

Trends in Used Equipment Values
Auctioneers continue to have a hard time finding good late model low-hour equipment for their sales. Many contractors are still feeling the sting of the financial meltdown. In addition, while the financial recovery has been steady, it has also been slow and we are yet to see a final bill related to the President’s infrastructure plan materialize. As a result, contractors are reluctant to make large capital expenditures for new equipment designed to meet updated emissions regulations or to lock into long-term leases.

At the same time, increasing construction activities coupled with rising government initiatives on infrastructure spending are boosting the growth of the construction equipment rental market. Businesses currently prefer renting construction equipment rather than owning it due to the various advantages such as reduced costs associated with the operation, transportation, and servicing requirements. Further, renting construction equipment becomes a feasible option for businesses having budgetary constraints and is preferred by construction companies that require the equipment only for a specified period of time. Finally, rental companies are now offering enhanced maintenance services which are expected to propel the growth of the construction equipment rental market. Just over one year ago, it was estimated that the rental market in the U.S. represented approximately 50% of the total construction equipment market and would continue to grow. At that time, the American Rental Association expected rental revenues to reach $55.5 billion by 2020.

Despite the current popularity of the equipment rental market, Irontrax believes the market for sales of used heavy equipment remains stable. It is also our opinion that the values of used equipment are poised to recover in the near term as the economy continues to gain strength, lead times for new equipment continue to increase, additional spending comes about in connection with President Trump’s Infrastructure Plan, and considering the number of energy projects coming back on line.