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Construction Industry Insight | Winter 2019

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This document focuses on a number of topics that affect the construction industry as a whole, including the positive momentum of the industry, efforts by President Trump to restore funding for state highway projects, concerns regarding the diminished supply of construction workers, the construction of Apple’s new manufacturing facility in Austin, and the move toward wearable technology devices to improve safety and health within the industry. It also includes a brief summary of trends in used equipment values.

Construction Industry on Firm Footing: During the latter part of 2018, rising interest/mortgage rates, the effects of the trade war, and the downturn in oil prices created additional challenges for the construction industry. However, since the start of 2019 the industry has benefitted from the Fed’s careful stance on rates along with a solid labor market. Improved third quarter earnings have also been reassuring. Of the 92% of construction companies that issued releases as of mid-November, 73% beat earnings estimates and 91% surpassed their revenue targets. According to the latest Earnings Preview, the construction industry’s third quarter earnings and revenues were up 7.2% and 5.3%, respectively, from the same quarter last year. Considering these results, total earnings for construction companies in the S&P 500 are expected to register 6.4% growth, highlighting a marked improvement from the 5.4% decline in the second quarter of 2019. The industry is also expecting revenue growth of 2.3% versus the flat growth experienced in the second quarter.

It appears that residential construction has turned the corner. Thanks to declining borrowing costs and an impressive job market, the industry is benefitting from solid growth in the demand for new homes. Given a favorable macroeconomic backdrop and expectations of consistently low interest rates, the demand for housing is likely to continue to rise. Builders’ sentiments for newly-built single-family homes remained strong in November, thanks to the above-mentioned factors. Further, the recent report from the Commerce Department reveals that building permits, a measure of future home construction, jumped to a more than a 12-year high, indicating strength in the market amid lower mortgage rates. This strength was driven by the single-family housing division, which grew 3.2% to its highest level since August 2007. The demand for housing by first-time homebuyers, low mortgage rates, and the shortage of used homes fueled this growth. Looking ahead, a recent forecast published by realtor.com suggests that in 2020 the housing shortage could become the worst in U.S. history.

Along with the residential rebound, expectations for public sector growth are high as construction companies have been benefitting from solid pricing and the growth in large transportation projects and contract work for highways. Increasing defense spending in major economies like the U.S., higher public investment in worldwide transportation, water infrastructure and utility plants, and improving prospects of the healthcare market have led to bullish expectations for construction companies in the quarters to come. The positive momentum that the construction sector has been experiencing is evident from its Zacks Rank. The Zacks Construction sector has risen 40.1% so far this year, outperforming the 23.4% rally in the broader S&P 500 market.

President Trump Restores $7.6 Billion for State Highway Projects: On November 21, President Trump signed the Further Continuing Appropriations Act, which keeps money flowing to federal agencies through December 20, and avoided a pre-Thanksgiving government shutdown. This bill, which extends funding for programs such as Medicare and Medicaid, also blocks a planned $7.6 billion cut of Highway Trust Fund (HTF) money set aside for state highway projects, and eliminates a rescission of HTF contract authority within each of the 50 states that was set to occur on July 1, 2020. The rescission was included in the 2015 Fixing America’s Surface Transportation (FAST) Act, the highway funding bill set to expire at the end of September next year. According to Washington insiders, the rescission was a way to make the five-year, $226 billion bill “more palatable” by taking back money from each state’s non-obligated transportation funding balances. Texas, New Jersey and Pennsylvania had the most to lose. The three states accounted for a combined $2.1 billion, or close to 30%, of the total amount set to be slashed from the fund.

A coalition of 41 organizations and associations, including the American Trucking Associations, wrote to congressional leaders earlier this month urging them to repeal the planned funding cut. The bill signed by Trump blocks a looming and devastating cut to an important infrastructure program that every state in our country relies on. Further, it comes at a time when states are preparing their budgets for the coming construction season, and eliminates potential uncertainty that could have delayed important transportation infrastructure investments. The National Asphalt Pavement Association (NAPA) welcomed the measure but pointed out that it only addresses short-term funding needs. The Association urges Congress to make passage of a robustly funded, long-term surface transportation program a priority.

Booming Construction Industry Facing Uncertain Future Without New Workers and Technology: The U.S. construction market is booming with no signs of slowing down. According to the USG Corp. and the U.S. Chamber of Commerce Commercial Construction Index, 93% of contractors expect to see equal or greater profit margins in the next year. However, it is uncertain as to how much of those profits will be invested back into the workforce. As construction work has increased, the construction labor market and productivity has been in decline over the past 40 years. While the majority of contractors say they will hire new employees in the coming months, almost all are having a difficult time hiring skilled workers. This diminished supply of construction workers will ultimately have a significant impact on the development and renovation of buildings that house critical infrastructure like laboratories, hospitals, schools, dormitories, and businesses. There are however, a number of ways the industry can move forward to prevent the worker supply gap from having a negative effect on the overall economy:

  • Advance Stem Jobs and Education. The industry needs to invest more heavily in STEM (science, technology, engineering and mathematics). Many of the most valuable construction workers have an understanding of the science and engineering involved in projects. This empowers them to make more informed decisions about everything, from which building materials are least likely to cause health problems to how the different materials affect one another.
  • Attract More Women to the Field. A specific area where advancing STEM jobs can lead to broad dividends for the construction industry is by undertaking a concerted outreach to recruit more women. According to the Bureau of Labor Statistics, women make up only 9% of the construction industry. One way to make a tangible difference is by creating and funding college scholarships for women to pursue STEM careers. However, the industry has a long way to go to create a working environment that is safe and a culture that is welcoming to women.
  • Encourage Craftsmanship Training. The perception that you can’t make a good living as a laborer needs to change. The reality is that a career construction laborer can make a good living, while not saddled with the debt of a four-year college education. The average salary for a mid-career construction laborer is more than $59,000, 6% higher than the average salary of a mid-career clinical laboratory scientist. According to recent projections, jobs in the construction field will be among the fastest growing through 2022, continuing a trend that began more than 5 years ago.
  • Train Employees Effectively. Internal training programs should include a wide range of technical subjects as well as on-the-job coaching. For companies that can’t offer training programs in-house, tuition reimbursement programs or training through industry groups can be beneficial. It should start in high school and doesn’t have to be at vocational schools. Exposing young students to the construction industry, can raise awareness and get a new generation excited about opportunities in the trades.
  • Incorporate New Technologies to Innovate. Historically, construction has not been perceived as a particularly innovative industry, but that is no longer the case. Today, new construction technologies are being incorporated onto job sites to create more effective collaboration, allow teams to make better informed decisions and avoid problems before they happen. The use of virtual, augmented and mixed reality allows construction teams to better visualize and simulate construction details and sequences. For example, 3D virtual mock-ups can be used to model complex construction details and even entire spaces ahead of time. The teams “experience” them in virtual reality to identify and solve issues long before construction begins.

By promoting craftsmanship training, advancing STEM jobs and identifying new ways to incorporate new technologies for growth and innovation, the construction business can strategically combat the labor shortage and set the industry up for success.

Apple Breaks Ground on $1 Billion Austin Campus Expansion: Apple has started construction on its new three million square foot campus in Austin, Texas, where it is manufacturing the Mac Pro. The $1 billion campus, which is expected to open in 2022, will initially house 5,000 employees, with the capacity to grow to 15,000. Apple is steadily growing in Austin with approximately 7,000 employees in the city, more than a 50% increase in the past five years. “Building the Mac Pro, Apple’s most powerful device ever, in Austin is both a point of pride and a testament to the enduring power of American ingenuity,” said Tim Cook, Apple’s CEO. “With the construction of our new campus in Austin now underway, Apple is deepening our close bond with the city and the talented and diverse workforce that calls it home.”

As part of its commitment to respecting the historical and geographical significance of the area, Apple is partnering with Austin-based Bartlett Tree Experts to preserve and increase the diversity of native trees on the 133-acre property. Thousands of trees spanning over 20 varieties native to Texas are planned for the campus, significantly more than were on the site before construction started. Additionally, the site will be designed to maximize green space, with landscaping covering over 60% of the campus, including a 50-acre nature and wildlife preserve that will be open to the public. Like all Apple facilities, the new Austin campus will run on 100% renewable energy, including solar power generated on site. Earlier this year, Apple launched its Community Education Initiative in Austin, partnering with Austin Community College, Austin area public schools and other community partners to bring Swift coding into the classroom. In addition, Austin Community College was one of the first community colleges in the country to offer App Development with Swift to train its students to design and develop apps.

Wearable Technologies for Improved Safety and Health on Construction Sites: Construction sites are dynamic environments with unique and often hazardous working conditions. In any given year, nearly 20% of all work-related fatalities occur on construction sites, yet the industry only hires about 6% of the U.S. workforce. These environments frequently expose workers to extreme temperatures, loud noises, poor air quality, and tasks that are regularly performed in close quarters. Often, heavy construction equipment is operating in proximity to ground workers, creating potential hazards for collisions between workers and construction vehicles. In addition, the temporary nature of construction sites makes the use of many standard industrial monitoring systems impractical. These and other factors are creating a growing demand for wearable technologies.

Wearable devices and related sensors in the form of clothing, watches, helmets and eyewear are beginning to be developed, tested, and used for a variety of applications in construction. For example, wearable proximity detection and alert systems that are reliable and effective have the potential to warn workers when moving hazards such as heavy construction equipment are near. Physiological status monitors can reliably collect worker data in the outdoor environment and warn about the potential for heat stress, and environmental sensors can be used to monitor air quality, including carbon monoxide, hydrogen sulfide, gas leaks, temperature, humidity, and noise.

While wearable technology devices can provide many safety advantages, there are a number of barriers to their adoption. Cost, maintenance, and privacy are all issues that could affect how widely these technologies are adopted. Many of these systems require infrastructure spending in addition to the cost of the wearable devices themselves. Costs vary widely depending upon the technology. Individual sensors can cost as little as $35 (Bluetooth device) to over $1,000 (Radio frequency identification-RFID). In many cases, more research is needed to fully understand the impact these new technologies have on the workforce. Some groups are concerned that wearables could be used to monitor productivity or to track an employee’s location, hours worked, and breaks. However, in many cases it is possible to set up a system that keeps the user information anonymous.

Trends in Used Equipment Values
Large global projects continue to bolster growth in both construction equipment sales and the equipment rental market. The addition of technological advancements such as digital services for automated service enhancements, equipment service tracking, and mapping features has been an ongoing trend in the heavy equipment market and the desire to obtain these features has been rising as more manufacturers move to add new technologies to existing equipment. This revamping of used equipment is largely the result of the high cost of new equipment, as well as the lead times required to obtain it. Consequently, prices for most used equipment remain stable. However, prices for large mining equipment used in the production of coal have been under pressure as a result of bankruptcies filed by several large coal mining companies over the past 18 months. Coal production in the Powder River Basin, the largest coal producing area in the country, sank to a 20-year low during the third quarter. In any event, in the current market, equipment in good condition with lower hours of service is often 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.

For many of the same reasons, the equipment rental market has also experienced continued growth. In addition, to avoiding the high cost outlay for new equipment, contractors appreciate the fact that many rental companies are also willing to bear the cost of maintenance and repairs. The American Rental Association expects this market to grow consistently and reach $69.8 billion in North America by 2022, while outpacing the growth of the overall economy. Other factors that could contribute to the strength of the used equipment market during the same period include additional spending that is likely to come about in connection with efforts to upgrade the U.S. infrastructure, the heightened emphasis on renewable energy projects, and the recovery in oil prices.