The best way to describe the construction industry for 2014 is to paraphrase the great Bette Davis, “fasten your seatbelts; it’s going to be a bumpy ride!” As global economies steadily recover from the Great Recession and infrastructure spending grows, 2014 represents a transitional year for the industry. Global construction, led by Brazil and Central America, looks to be poised for a positive growth year. Meanwhile, lessees will continue their push to refresh construction assets that have remained on month-to-month rentals during the recent cycle. And let’s not forget the availability of Tier 4 requirements online and their impact on the domestic market. Here’s my take on issues that have recently affected the industry and how such challenges will make their mark on the year ahead…

The global construction market experienced a growth year in 2013, led by Brazil’s increased investment in infrastructure spending for the FIFA 2014 World Cup and the 2016 Olympics. Although beset with cost overruns, the Panama Canal Expansion Project is on track for completion in 2015, at an estimated completion cost of US$6.75 billion. Additionally, the Argentinian government has committed US$22 billion to infrastructure development, including the development of defense based assets.

Contrary to this, the explosive growth in China and the Pacific Rim has cooled. While their domestic construction market is still estimated in the $2.1 trillion range, Chinese construction growth grew at only a 12.4 percent rate, compared to the more than 20 percent rate it had been growing at since 2008. Chinese housing demand has stabilized and the Chinese government continues to prop up the dwindling construction industry to preserve jobs for the more than 43 million people employed in construction-related industries.

Domestically, the U.S. saw a bit of a resurgence in residential building in 2013, with a peak of nearly 1.1 million new homes in November, which was the highest monthly total since February 2008. As a bellwether for the construction market as a whole, this presents a very positive sign of continued recovery.

So what challenges do we face in 2014? From a commercial finance perspective we’ve seen a recent trend towards short-term lease requests. Lessees that, prior to the Great Recession, would have requested equipment financing over 72 months or greater terms, are now requesting terms that match their projects at hand. It’s not uncommon to see credit requests of 18 months for mid-range dozers or excavators, as lessees no longer are looking to “add inventory” but would rather use a “project finance” approach. Combined with the limited availability of late-model, well-maintained used equipment, demand is shifting towards acquiring new equipment.

The high demand for well-maintained used equipment has led contractors to evaluate their under-utilized asset pool more closely. This activity will drive opportunities in the “trade-in/trade-up” market. Contractors are realizing that they can easily monetize their under-utilized or non-essential equipment to help bolster their working capital. This, in turn, provides lessors the opportunity to maximize asset values by financing the trade-ups while providing a higher trade-in value on the used equipment. Lessors who have enjoyed extended month-to-month renewals should be prepared for an influx of off-lease equipment as we move into Q3 and Q4.

Although the impact of the conversion to Tier 4 standards is still up in the air, you should learn more since the deadline for compliance with the Environmental Protection Agency (EPA) is fast approaching. The initiative has been met with opposition on a global scale, which will make it increasingly difficult to remarket Tier 4 equipment overseas. A few of the potential pitfalls include the availability of Low Sulfur Diesel (LSD) fuel that is required to meet the emissions standard. In first world countries, access to LSD will not be an issue but third world countries, which represent the greatest growth opportunity for the construction industry, don’t currently have the infrastructure in place to support delivery and storage of LSD. While this is viewed as a near-term issue, the potential impact to global remarketing is substantial.

Another area of concern is the level of technical knowledge required to maintain Tier 4 equipment. The sophisticated emission recapture systems require a skillset that does not exist outside North America. While this will be addressed by training and education, the learning curve for third world countries is significant. The good news is, given the higher price points and potential pitfalls of Tier 4 equipment, your Tier 3 equipment will see a rise in value as global buying pressure drives up the value of non-Tier 4 equipment.

All in all, 2014 looks to be a promising year for the construction equipment market. Sellers will have the opportunity to sell underutilized equipment and a growing demand for well-maintained used equipment will keep prices elevated, pushing values higher.