FORECASTS BY KEN SIMONSON
In November
, multifamily construction spending was up a whopping 46% from one year earlier. Single-family construction was close on its heels, with a 29% increase. And improvements — major additions and renovations, such as HVAC upgrades — climbed 6%
Early indications for 2013 are also favorable. Single-family starts jumped 23% from November 2011 to November 2012, while multifamily starts rose 20%. Permits for both sectors — a generally reliable indicator for near-term future construction — climbed 25% and 35%, respectively. Given the long lead time for larger multifamily projects, this side of housing will almost surely remain hot for HVAC contractors throughout 2013.

The outlook for single-family homebuilding is less certain. There are relatively fewer young adults — the main first-time home-buying age group — now than a decade ago. They are marrying later and having children later — if at all. They have much heavier student debt burdens or other challenges to qualifying for a mortgage. And their attitude toward buying a single-family house, particularly a new one that is likely to be located in outer suburbs, may have been soured by congested roads, high gas prices and the difficulty of reselling (at a profit, anyway). All of these factors are driving more people toward living close to center cities and renting, meaning they are more likely to go to multifamily housing than new single-family homes.

As for regional impacts, the areas devastated by Hurricane Sandy will be an especially strong market for both replacement equipment and new homebuilding, although the pace of installation will depend on how quickly insurance checks and government relief arrive. Areas experiencing a population influx connected with shale drilling, such as North Dakota, rural Pennsylvania, and parts of Texas, will also be hot markets for both single- and multifamily new construction.

One more cloud on the homebuilding horizon is the ongoing fiscal storm in Washington. If Congress and the White House cannot reach at least a temporary agreement about the debt ceiling, interest rates could shoot up. That would reduce the pool of prospective buyers and multifamily investors. Thus, 2013 should be a good year for residential HVAC contractors. But there are still significant risks to the forecast.

Commercial HVAC: Will ‘13 Bring a Little Bit ‘a Luck?

Private office construction spending in the first 11 months of 2012 increased 17% percent compared with the same period in 2011, while public office spending fell by 23%. Fortunately, the private market was roughly twice as big, so total spending in the category rose by a modest 3%.

New office construction appeared in the San Francisco-San Jose corridor, Seattle, and New York City, but the bulk of the spending was on renovation and remodeling. In 2013, new private construction will make up a bit more of the mix but public projects will remain scarce.
The educational market shows a similarly split personality. Private colleges have resumed funding construction from endowments and capital campaigns that benefited from a revival in stocks and other assets. But community colleges and public universities are caught in the same funding squeeze as other public agencies. Worst of all is the market for primary and secondary schools, which are heavily dependent on property taxes for their budgets.

Like office construction, retail work has been dominated by renovations and tenant improvements, not new buildings. This trend also will continue in 2013 as consumers turn increasingly to online instead of in-store purchases. In contrast, warehouse construction should flourish as online vendors build more fulfillment centers close to customers.
The hotel market has started to turn positive in recent months, as chains have enjoyed nearly three years of improvement in occupancy and room rates.

In short, ’13 will be lucky for HVAC contractors in some niches. But others will need to change their segment or their location if they want to change their luck.   

Ken Simonson is chief economist, Associated General Contractors of America, and the 2012-13 president of the National Association for Business Economics. He can be reached at 703/387-5313, or by email at simonsonk@agc.org

RESIDENTIAL CONTRACTOR COMMENTARY
 

Mark Swepston, president, Atlas-Butler, Columbus, OH says new home construction is starting to come back, “but from almost nothing. Dominion Homes expects to be up 30% this year over 2011 and is planning for an additional 20% next year,” Swepston says.

Central Ohio employment is benefiting from a $400 million construction project at Ohio State University, and two major hospital projects.

“Replacement work seems to be steady, but not robust for residential and commercial,” he says.

Louis Hobaica, president/owner, Hobaica Services, Phoenix, AZ, sees another flat year, similar to 2013. The local economy in Phoenix is still quite depressed with a slight increase in new residential and commercial construction. Hobaica does not focus on either of these markets, however the growth will create some additional opportunities in the remodel/retrofit and service markets.

Hobaica has branched out into Home Performance Services. “With many rebates and incentives available for energy audits, performance upgrades and solar hot water, we’re focusing more heavily on these opportunities,” he says.

Hobaica’s appreciates the value of social media, and has a social media coordinator on staff, who keeps the company’s postings up to date. This includes daily Facebook posts and uploads, regular video uploads to the company’s YouTube channel, Twitter tweets, and one new blog post per week.

Jobs, New Home Builds Shine a Light

Dewey Jenkins, president, Morris-Jenkins, Charlotte, NC, says prospects for growth “are looking up.” He doesn’t expect a full-fledged “boom,” but says it should certainly be an improvement over 2012. The biggest factors are jobs, and new home construction, the traditional lifeblood of the HVAC industry.

“The regional economy is adding jobs and the housing market has stabilized and even rebounded,” Jenkins relates. “Charlotte home prices have risen 3% this year. In addition we’re seeing an uptick in permits for new single-family homes. Multifamily construction has gone wild. It’s almost back to the boom times, especially along the new light rail corridors near downtown.”

The supply-demand see-saw related to service is still shaky, and Jenkins says the HVAC market is still “brutally competitive.”

“With the new home market just a fraction of its former self there’s an over capacity of HVAC providers for the existing residential market. The strong are battling it out and the weak are getting weaker, due to inadequate pricing. Our strategy in this kind of market is to provide superior responsiveness and service. We intend to be there when the customer needs us,” he says.

COMMERCIAL CONTRACTOR OUTLOOK

The outlook for 2013 is good, in the opinion of division leaders Chris Taylor and Nicolas Sfeir of Southland Industries, one of the mechanical contracting industry’s top 10 companies. Both men have been with Southland Industries for 12 years, and have recently been promoted to new leadership posts. Taylor leads the Southern California division in Garden Grove, CA. Sfeir leads the Southwest division, based in Las Vegas, NV.

“All signs point to an increase in commercial construction in the coming years, however the ongoing uncertainty in the economy will continue to have a major impact on private development, especially in Southern California market,”  Taylor says.

“The good news for us at Southland, is that we’ve been able to maintain a disciplined approach by focusing on our Design/Build and Design/Assist work. This integrated effort of design and construction together helps provide a viable choice for customers looking for innovative solutions on large, complex mechanical projects. Independent of the struggling economic times, people are still building and looking for our expertise.”

Taylor says Southern California’s healthcare industry shows no signs of slowing down.

“Large, private health care providers call SoCal home, due to the population density. Those folks will continue to upgrade current facilities and build new hospitals, clinics, and medical office buildings,” Taylor says.

After some tough times, Sfeir sees signs of a resurgence in the Las Vegas entertainment-related HVAC construction and service markets.

“Las Vegas was one of the ‘ground zeroes’ in the recession. We had a huge housing bubble that burst. We believe we’re getting to the bottom of it, if not rising above it,” he shares.

“The tourism economy is coming back. Hotel occupancies are close to 98% for the past year, and we see room rates going up. What that means to us, is that hotel owners are willing to spend additional monies on new projects and renovations.”

Sfeir says he sees an uptick in boomers who are retiring to Las Vegas, and he expects improvement in the region’s hospital and health care markets.
                                             — Terry McIver, executive editor, Contracting Business.com