In the words of David Clayton Thomas of Blood, Sweat and Tears, “What goes up, must come down, Spinning wheel got to go round…” The same could be said for the nascent recovery of the construction industry. Just when it seems we’ve turned a corner another variable enters the equation. For 2015, that variable is the plummeting price of crude oil. What does the price of crude oil have to do with the construction industry? Plenty!
A look back at 2014’s industry growth shows the fastest-growing construction market in the U.S., Omaha, NE, and the fastest-growing housing market, Dallas, TX, were both squarely in the oil and gas (O&G) region. As hiring in the O&G industry slows, we could see demand for new housing and the extemporaneous small businesses that support that housing drying up. Thankfully this is not the only driving factor for the construction industry.
Last year we looked forward to increased infrastructure spending and it paid off. “Shovel ready” road projects, like the New Jersey and Ohio Turnpikes, became realities as state and local governments tapped into the federal Highway Trust Fund (HTF) to finance much needed road and bridge reconstruction. Alas, according to Pew Research, the HTF will be insolvent by 2017, forcing states to impose gas taxes to offset the loss of federal funds. The good news is, they’re doing just that. States like California, Pennsylvania and Michigan have all instituted new, or higher, gas taxes to help fund the roads. But, and you knew there was one coming, the lower cost of gasoline has a dilutive effect on the projected tax revenues from those very same gas taxes. Spinning wheels got to go round…
Are there any bright spots for 2015? A couple of potential growth areas to watch are the institutional building market and commercial construction. The American Institute of Architects (AIA) predicts an 8 percent growth in commercial construction spending, primarily being driven by the hotel and retail industries. The same group estimates institutional spending to increase by 9 percent, supported by strong demand for K-12 schools.
While the future is somewhat encouraging domestically, the international construction marketplace is somewhat more precarious. Price Waterhouse Coopers estimates global infrastructure spending to increase to $9 trillion by 2025, up from $4 trillion in 2012, with 2015 growth projected to be 6.5 percent internationally. However, the eroding cost of crude oil will slow down expected infrastructure spending in the international market manufacturing sector, which includes drilling and extraction, petroleum refining and transportation of crude and refined fuels. This was previously anticipated to grow by more than 8 percent in 2015.
Juan Bejar, CEO of Fomento de Construcciones y Contratas, a leading construction and environmental services company in Spain, has an interesting perspective on the construction marketplace. “You can’t continue to think that the world is the same as it was five years ago,” he said. “It is incredibly different now. It’s even changed from how it was five weeks ago or five months ago. The spiral of change is speeding up.” Extraction will vary across multiple countries and regions, however the declining price of crude will slow expansion in Russia and Brazil.
Developing economies in China and Southeast Asia have accounted for almost half of the infrastructure spending since 2006, as opposed to Western Europe, which accounts for roughly 12 percent. As these economies continue to develop and grow, driven by an accelerating urbanization of China, India and Indonesia, higher demand will be placed on “need based” infrastructure development, including water resourcing, power generation, telecommunications and a transportation grid. All of this translates into higher consumption of raw materials and greater opportunities for construction growth.
Considering the ever-changing landscape of the construction marketplace, what can the commercial equipment finance industry look forward to in 2015? As was the case heading into 2014, demand for recent vintage, well-maintained used equipment remains very strong. As lessors and finance companies continue to experience record portfolio performance levels, with very low delinquency and net recoveries, used equipment is remaining in place. Banks and leasing companies that have not historically had an appetite for used construction equipment have re-evaluated their positions and have extended increasingly longer terms on gear that is three to four years old. The OEM’s, and their affiliated dealers, have proactively maneuvered to assist in the reconditioning and remarketing of used equipment. The high demand and limited availability of mid-range construction equipment has kept prices elevated and that won’t change for the foreseeable future. Of course, like the spinning wheel, it could change quickly!