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Construction Industry Insight | Summer 2019

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This document focuses on a number of topics that affect the construction industry as a whole, including areas of the U.S. where the industry is concentrated, Terex plans to sell certain portions of its business, President Trump’s proposal to tighten “Buy American” limits on steel and iron, how construction wages compare to those in the private sector, and the president’s efforts to work through the U.S. Supreme Court to resume border wall funding. It also includes a brief summary of trends in used equipment values.

U.S. Construction Industry Concentrated in 10 States: A recently released report from research firm GlobalData shows that certain areas of the U.S. are benefiting more than others from the country’s current construction boom. Of the more than 11,200 U.S. public and private projects the company is tracking in development and under construction, 10 states account for about 60% of the $3.7 trillion those projects represent.

With 1,302 projects valued at $524.6 billion, California has by far the largest share of projects. It also has more megaprojects than any other state, with the top 10 worth $139.5 billion. However, the largest of these megaprojects is the $79 billion California High-Speed Rail Authority’s bullet train project, most of which was suspended earlier this year by California Governor Gavin Newsom because of cost overruns and schedule delays. As it currently stands, only a $20 billion, 119-mile segment between Merced and Bakersfield is moving forward. But even excluding the inactive portion of the bullet train from the value of work in the pipeline, California would still be the leader with projects valued at $465 billion. Texas has the most energy and utility projects at almost $153 billion and those sectors have driven the state’s construction pipeline to more than $425 billion, an amount which includes mixed-used developments of roughly $68 billion and infrastructure projects of around $67 billion. These two states are followed by New York, which has $409 billion worth of construction projects in the works, then Florida, Washington, Illinois, Pennsylvania, Georgia, Ohio and North Carolina.

The GlobalData report is a reminder of exactly how strong the U.S. construction industry is, even as it faces a persistent shortage of skilled labor and rising material costs. In fact, according to GlobalData, the approximately $1.4 trillion spent on U.S. construction every year makes the industry one of the world’s largest. Domestically, it contributes more than 4% to annual GDP and provides jobs for more than 5% of the country’s workforce. It is likely this strength that has given contractors the confidence to predict positive things for their businesses in the next year. In the second quarter, USG Corp. and the U.S. Chamber of Commerce reported that contractors responding to their survey were predicting they would be able to secure even more work in the next 12 months.

Terex Moves to Exit Certain Portions of Its Business: Earlier this year, Terex announced plans to sell certain portions of its business as indicated below:

    Terex to Sell Demag Mobile Cranes Business to Tadano LTD. Terex Corp. has agreed to sell its Demag Mobile Cranes business to Tadano Ltd. for an enterprise value of approximately $215 million. The Demag Mobile Cranes business manufactures and sells all-terrain cranes and large crawler cranes. Included in the transaction are the manufacturing facilities in Zweibrucken, Germany, and multiple sales and service locations. The sale, which is subject to government regulatory approvals and other customary closing conditions, is targeted to close in the third quarter of 2019.

    “The Demag Mobile Cranes business has been part of our company for almost two decades and produces world class products,” said John Garrison, Terex chairman and CEO. “The sale is based on strong industrial logic, as the Demag Mobile Cranes business will become part of a global crane company with complementary products and capabilities.” Commenting on the rationale of the deal, Koichi Tadano, Tadano Ltd. representative director, president and CEO said: “This is a strategic acquisition that offers Tadano considerable scope for growth. The addition of the well-respected Demag brand of all-terrain cranes and large crawler cranes extends our product lines and options for customers. The addition of the Demag branded mobile crane product lines will enhance our global position in this segment. We believe that the Zweibrucken facilities and its global team members, as well as the current distribution partners, are valuable to the future success of the business.”

    Terex plans to exit from its U.S. mobile crane business as well, Garrison said. “In addition to selling the Demag Mobile Cranes business, Terex will exit the North American mobile crane product lines manufactured in our Oklahoma City facility,” added Garrison. “These changes will simplify our Oklahoma City operation, which will continue to produce telehandlers and re-manufactured units for our Aerial Work Platforms segment and various products for our Materials Processing segment. Although we are exiting the OKC-based mobile cranes products, we will continue to sell parts, and offer service and support to our customers.” Terex will continue to manufacture Terex Utilities products at its Watertown, S.D. Dakota facilities. Terex will also continue to manufacture Terex rough-terrain cranes for the global market in Crespellano, Italy, Terex tower cranes in Fontanafredda, Italy, and Terex pick-and-carry cranes in Brisbane, Australia. “These are strong businesses that will continue to be an important part of Terex,” noted Garrison.

    Terex Completes the Sale of Its Boom Truck, Truck Crane and Crossover Product Lines to Load King. In April, Terex completed the sale of its boom truck, truck crane and crossover product lines to Load King, a subsidiary of Custom Truck One Source L.P. Included in the transaction are the assets and parts business associated with these product lines. “We continue to implement our Focus, Simplify and Execute to Win strategy. By focusing on businesses where we have a strong market position, we can efficiently concentrate our improvement efforts to maximize value for our customers, team members and shareholders,” said John L. Garrison, Terex Chairman and Chief Executive Officer. “We will work closely with Custom Truck One Source to ensure a smooth transition and will continue to sell parts to our boom truck, truck crane and crossover customers during an expected one-year transition period,” added Garrison. After this transaction and the sale of the Demag Mobile Cranes business, as indicated above Terex will remain in the rough terrain and tower crane businesses.

Trump Proposes Tighter Buy American Limits on Steel and Iron: In mid-July, President Donald Trump issued a new executive order meant to “enforce the Buy American Act to the greatest extent permitted by law”. The act, created in 1933, generally requires that American-made products be given preference on certain projects that receive federal funding. The president is proposing that materials be considered “of foreign origin” if the cost of the foreign products used in the material is 45% or more of the total cost. For steel and iron products, that threshold would be 5%. Current Buy American regulations consider a product foreign if 50% of the cost comes from foreign products. The Federal Acquisition Regulatory (FAR) Council will consider and evaluate public comments for the next 180 days and then issue a final rule. The president has also asked the FAR Council to consider whether the foreign content threshold for products other than steel and iron should be lowered to 25%.

In comments to Engineering News-Record, Brian Deery, senior director of the Associated General Contractors of America’s highway and transportation division, said that the new rules would only affect direct federal contracts with agencies like the U.S. Army Corps of Engineers or the General Services Administration. He said the new requirements would not have a direct impact on the federal-aid highway program because states are the contracting agencies for that initiative. The president also said that the U.S. has the capacity to produce its own steel and aluminum but that in some cases environmentalists were getting the blame for preventing that. He indicated that would change in the near future. “The philosophy of my administration is simple,” he said. “If we can build it, grow it or make it in the United States, we will.” The president made buying internationally sourced products less attractive by imposing tariffs on steel and aluminum manufactured in foreign countries more than a year ago and has since placed additional tariffs on products made in China. In May, however, the president lifted the tariffs on steel and aluminum imported from Mexico and Canada in exchange for assurances that the countries would do their best to make sure that Chinese materials didn’t make their way into the U.S.

Construction Wages Exceed Private Sector Wages by 10%: According to the Associated General Contractors of America (AGC), construction firms are having to pay higher wages to attract skilled workers from a shrinking labor force. Over the past year, average hourly earnings in construction rose 3.2% to $30.73, 10% higher than the private-sector average of $27.90. In addition to raising pay and benefits, many firms have also increased investments in training as they recruit workers with little to no prior experience in construction. According to federal data, most of the construction job growth during the past year came from the nonresidential construction sector, which added 146,700 jobs, while residential contractors added 78,000 jobs over the same time period.

A shortage of skilled labor has caused U.S. companies to continue to increase pay as they work to attract new hires in what AGC CEO Stephen E. Sandherr said is “one of the tightest labor markets” that contractors have ever experienced. According to the Bureau of Labor Statistics (BLS), construction employment increased by 3.2% over the past 12 months, while the number of unemployed job seekers with construction experience fell. Another government report showed that the number of job openings in construction, last reported for May, totaled 360,000, the highest May total in the 19-year history of the report. Sandherr attributes at least some of the problem to the lack of technical training in U.S. schools and called on the federal government to boost funding for training programs for students. “The nation’s education system continues to produce too many overqualified baristas and not enough qualified bricklayers and other craft construction professionals” he said. “As a result of these educational imbalances, too many young adults are struggling to pay off college debts while too many construction firms are struggling to fill job positions that pay well and don’t require costly degrees.” Government data shows that construction salaries vary by job type. The latest data published by the BLS indicate that in 2018 construction managers had the highest hourly median salary, at $44.26, followed by electricians at $25.75, operating engineers and other construction equipment operators at $24.21 and carpenters at $22.51. With the unemployment rate at historic lows in most areas of the country, keeping workers happy is the No. 1 priority for most construction executives. As a result, firms are relying more heavily on creative tactics such as profit sharing and training opportunities to keep employees happy.

Trump Looks to Supreme Court in Effort to Resume Border Wall Funding: President Donald Trump and his administration have petitioned the U.S. Supreme Court to allow military-funded border wall construction to move forward while the issue makes its way through the lower courts. Lawyers for the administration have framed the transfer of military funds to the project as urgent because the money will become unavailable in three months when the fiscal year ends. Another argument that the president’s lawyers made is that the plaintiffs, which include the Sierra Club, do not have standing. In June, U.S. Circuit Judge Haywood Gilliam permanently blocked construction of portions of the border wall, ruling that the administration could not use $2.5 billion of U.S. Department of Defense (DOD) money otherwise intended for the military under the president’s February 15 national emergency declaration.

The DOD has found money to put toward border wall construction from various accounts but has always maintained that the money was obtained from savings or was not needed to advance military operations. The department’s first $1 billion of funding came from counter-narcotics programs. This was followed by another $1.5 billion from the Afghan Security Forces Fund ($604 million); a program that sees to the destruction of lethal chemical agents and munitions ($251 million); Air Force contract programs ($344 million); the military retirement system ($224 million); and a fund used to reimburse coalition partners that have helped U.S. military operations ($78 million). The DOD said most of this latest round of money was a result of savings.

In all, the president is looking for approximately $8 billion of DOD money to help fund the border wall, and the U.S. Army Corps of Engineers started prequalifying contractors to do the work. While the White House keeps trying to advance construction paid for with military funds, other work paid for by other means continues. One of the latest is a $33 million contract to Southwest Valley Constructors, based in Albuquerque, New Mexico. Southwest will build a stretch of border wall in four segments, all of which are designed with 18-foot- to 30-foot-tall steel bollards. The company will also install detection technology and new lighting and will also perform some road construction. In its announcement of the deal with Southwest, U.S. Customs and Border Protection made a point of stating that the work would be paid for with fiscal year 2019 appropriations and with funds from the military.

Trends in Used Equipment Values
The prices for used equipment remain relatively high. Moreover, in the current market, equipment in good condition with lower hours of service is frequently being priced at a premium, while prices for equipment in lessor condition with higher service hours are declining. In either case, the age of the equipment is not always a critical factor in determining its value.

A primary factor contributing to the stability of the used equipment market is the backlog of new construction equipment. In fact, several manufacturers have indicated that the lead times for certain models of all-terrain cranes, as well as orders for custom equipment extend well into 2020. This stems from the fact that some suppliers of components needed for the manufacture of new equipment remain concerned about a possible recession and are therefore hesitant to ramp up production. The values of crawler cranes in particular are beginning to increase but overall continue to be soft. As stated in our prior publication, other factors that could contribute to the strength of the used equipment market include the additional spending that comes about in connection with efforts to upgrade the U.S. infrastructure, the heightened emphasis on renewable energy projects, and the recovery in oil prices.

At the same time, the demand for equipment rentals continues to outpace new purchases due to the backlog in new equipment orders and that fact that rental rate pricing has remained steadfast. In June, Ralph Petta, Chief Executive Officer of the Equipment Leasing and Finance Association (ELFA), said “The continued low interest rate environment, coupled with solid fundamentals in the U.S. economy, provide incentive for U.S. businesses to expand and grow their operations.” ELFA’s leasing and finance index measures the volume of commercial equipment financed in the United States. Any reading above 50 indicates a positive outlook. The index is based on a survey of 25 members that include Bank of America Corp, BB&T Corp, CIT Group Inc