State of the Industry: Construction in 2011

Contractors in all trades work to stay the course in anticipation of a real recovery by 2012

The U.S. equipment rental industry enters 2011 with cautious optimism, following encouraging third-quarter reports from leading consolidators and major manufacturers. Of course, the success of the equipment rental industry hinges on the health of the construction market. With that in mind, we talked to many leaders within various facets of the construction industry to find out what they see in their crystal ball for your customers in the coming year.


Government funding -- the foundation of construction recovery

Ken Simonson, chief economist at Associated General Contractors of America (AGC), says the American Recovery & Reinvestment Act (ARRA) kept highway construction from falling into a steep decline in 2010. Many contractors were able to avoid layoffs or to hire workers. "The Act provided funds quickly to every state and the money was largely spent on high-priority projects," he says. "States got a great bargain and were in many cases able to fund more projects than expected because of lower materials costs and fierce bidding by contractors."


However, total highway construction spending in the first 10 months of 2010 was unchanged in the same period of 2009, so clearly not all highway contractors came out ahead. "There is enough spare capacity in the highway construction industry to support an even higher level of funding," Simonson says.


Jack Basso, director of program finance & management for the American Association of State Highway and Transportation Officials (AASHTO) says the ARRA did help stabilize construction employment. "Before the stimulus package, the construction unemployment rate was heading toward 28% and now it's closer to 20%," he notes. "We’re pretty happy, as well, with the amount of resurfacing and repair work and material used as a result of the program."


He warns, "When this money disappears, so will about 300,000 jobs. The industry will need alternative funding."


For its part, the concrete pavement industry welcomed the ARRA initially, says Leif Wathne, P.E., vice president of highways and federal affairs at the American Concrete Pavement Association (ACPA). "In terms of the actual program, however, it had mixed results... There were some highway, roadway and airport pavement construction projects started and completed quickly and efficiently. But we simply need to do more to improve the capacity and condition of our nation’s surface transportation infrastructure."


Wathne adds the short-term gains realized from the ARRA will be lost without a robust highway bill now. "It is for this reason the ACPA is urging quick passage of a multi-year highway bill, as well as the required funding mechanism, such as an increase in the federal motor fuels tax," he says.


The much-anticipated highway bill remains stalled but, like Wathne, several construction leaders are pulling for a quick passage.


"The greatest impact [of passage] will be to provide certainty," says Jeffrey Solsby, director of public affairs for the American Road & Transportation Builders Association (ARTBA). "That certainty governs decisions by contractors, suppliers, materials and equipment firms to hire, invest and expand. You don’t make a major investment or expansion decision — or plan to buy a $10-million piece of equipment — based on one year’s worth of work. You make it based on five to six years of work in the pipeline. That federal certainty will also help the states plan their own work. Right now, we’re seeing nearly half of all states — even with the ARRA — cut their transportation budgets."


Wathne says the answer to the question of what impact the bill will have on the concrete pavement industry will depend largely on the scale of the program. "Even so, we expect the bill, when signed into law, will help reduce the high unemployment in the construction industry; create good jobs; and allow companies and agencies to plan for both the short-term and long-term needs of the federal-aid highway system.”


General construction to remain flat

According to Simonson at AGC, new contract awards are likely to remain at pre-ARRA levels in early 2011. "ARRA funds will quickly be depleted, and large cutbacks in activity and employment are likely by late 2011 unless there is a new surface transportation act by then," he says.


"We need long-term, well-funded legislation," adds Basso. "Until we get it, numbers will continue to head south. AAA now supports a gas tax to help fund a bill. So does the U.S. Chamber of Commerce, as do we and a number of other organizations."


Ed Sullivan, chief economist for the Portland Cement Association (PCA), says he expects construction to remain flat in 2011, at best. "The ARRA stimulus package will have less of an impact in 2011 than it did in 2010, not to mention the passage of a highway bill is questionable for 2011. At the state level, deficits will continue to impact street and local road construction," he says.


On a brighter note, a new highway bill and pent-up demand for new roads and streets bode well for concrete contractors and producers in 2013 and beyond. "We are optimistic that both the highway and FAA bills will be passed in the year ahead," Wathne says. "When the programs are enacted, we believe this will have a stabilizing effect on road builders and agencies alike."


Despite the general consensus that 2011 will not bring significant improvement in road and highway construction, Simonson says it will be a turnaround year in some sectors. "There will be improvement at various points during the year, starting with hospitals, multifamily and warehouses; followed by universities and hotels; and, lastly, some signs of life in retail, office and manufacturing," he predicts. "But markets that held up well in 2010, such as highway and military base construction, will flatten or begin to decline. Other transportation, power, water and wastewater construction should remain healthy. Public schools and other state and local government projects will stay moribund."


Improvement within any sector will be a boon to equipment rental businesses, Simonson says. "Most contractors will lack the financing or the certainty about future work to afford new equipment, at least in the first half of 2011," he says. "That means they’ll turn more to rentals as work begins to pick up."


Business greening up for landscape contractors

As it does for all contractors, the economy remains a challenge for landscapers. The good news is many professionals have adjusted accordingly to the new normal. "The good contractors have now had a couple of years to dig in and reconfigure their budgets and strategies to navigate these tough times," says Gregg Wartgow, editor-in-chief of Yard & Garden and Green Industry PRO magazines. "Maintenance services remain strong. In fact, nearly 60% of contractors expect to grow sales in 2011."

He continues, "On the installation and landscape enhancement side, business conditions are beginning to improve. New construction and housing starts are still sluggish, but homeowners are starting to loosen up again when it comes to renovating existing landscapes, installing backyard living spaces complete with hardscapes, water features, kitchens, firepits and lighting," says Wartgow.


Despite signs of improvement, competitive and pricing pressures remain top concerns for landscape contractors. "Everyone is fighting for a more limited amount of business than they had to fight for in the mid-2000s," he says. "Most contractors say customer retention and controlling overhead to stay profitable are by far the biggest challenges. Everyone is scrambling for a point of differentiation without adding cost for both the client and themselves.”


Wartgow says many maintenance contractors are looking to procure new mowing, trimming and debris cleanup equipment again in 2011, as most contractors have remained busy in these service sectors, so equipment is wearing out at a normal pace of anywhere from one to three years. "With respect to installation equipment such as compact track loaders and related attachments, contractors are still touch and go," he says. "There is still a lot of uncertainty in this area of the business, due to a housing market that seems to be refusing to correct itself. That said, contractors are on the lookout for additional services they can provide a client, and renting tools like attachments, compact excavators, track loaders and aerators makes sense."


Demand for aerials should start to increase

Whether they're involved in general construction, landscaping, concrete or are simply do-it-yourselfers, your customers use aerial work platforms and when they do, they rent them. So how will this market segment fare in 2011? To find out, we asked Tim Whiteman, managing director of the International Powered Access Federation (IPAF) for his take on the subject.


"Aerial work platforms will continue to be a preferred means to place workers at height, especially as falls from other types of temporary access continue to be the single-largest cause of fatalities in the construction industry," Whiteman says. "AWPs provide a fully guarded, railed work platform at the exact height of work to increase the safety and efficiency of the worker. The financial crisis has had a temporary impact on the aerials business, but IPAF’s annual market reports indicate that business will improve during 2011. The past few years have seen a reduction in capacity in rental fleets and personnel to levels required to address current demands and focus on profitability rather than growth.


"Rental fleet sizes were reduced through direct sales, but auctions were required to move the large amounts of excess fleet in the market," he continues. "Auctions generally move equipment at lower prices, thus reducing the value of existing fleets. This experience should be an example for rental companies to grow their rental fleets only to a capacity that can be maintained over the long haul. If your rental fleet is of size to take every rental opportunity during peak demand, you will have too much equipment for your demand during the full year and/or when any downturn occurs."


Whiteman predicts in the short term, rental companies will grow cautiously, as the strength of the economy will be both erratic and cyclical. "Aging fleets, smaller fleets from several years of selling used fleet with little to no additions, opportunities with new models and technology, and the beginning of financial recovery will all bring a slow increase in fleet acquisitions," he explains.  


As always, Whiteman notes, niche markets provide greater rates and utilization. "Bringing in new products and technology will offer better ROI," he advises rental businesses. "Fleets that are well maintained both mechanically and in appearance provide an edge with users. Rental companies that offer their customers value-added service(s) will hold an edge over their competitors."


Providing solutions

Whatever your market niche is, no equipment rental business can escape the effects of economic factors far outside of its control. Understanding how these factors are challenging your customers, however, can provide you with the insight necessary to tweak your business plan in anticipation of the inevitable, as well as assist you in remaining a vital solutions provider to the professionals your serve.