Commercial Roofing Outlook
Predictions can be troublesome even with sophisticated tools and analysis in every sector. The roofing industry's past is littered with fads that became commodities and sustainable markets that dried up. Like the weather, the market has to be something, so attempts are made to at least justify a capital expense or wave of hiring.
After discussing the coming year with industry observers, the general consensus is a positive market for 2004 with strong numbers in retail, office and warehouse construction. The last recession was mild compared to 1990-91 (the GDP increased 0.3 percent overall in 2001) and many expect future growth similar to 2003's increase of 2.4 percent in the GDP. While there are pessimists and super optimists, there are many factors in place for a healthy economy for the next few years. However, like the mutual fund managers like to say, "Past performance is no indicator of future returns."
When all these variables get distilled into the roofing industry, there are several trends and data that can be particularly useful to the roofing contractor. Contractors no longer bound by geography can capitalize on regional growth. The ability to switch specialties can offset volatile trends. Being among the first to recognize promising developments in roofing products can change one's fortunes. Grabbing a hold of the larger picture can prepare you for changes long before you read the bid documents.
"If you're in a down position, you expect things will turn upwards. [But] when do you hire more people or buy equipment?" observes Thomas Bowne, industry analyst for the Freedonia Group in Cleveland. "The challenges people face always seem to be changing. ‘If I'm wrong and things keep going well, how am I going to do the work?' The savvy contractor with the well-run business would be picking up market share when, overall, times are bad."
Business is UpConstruction grew at an average annual rate of 4.8 percent during the last half of the 1990s (vs. 4.0 percent for overall GDP), according the U.S. Department of Commerce. That's fairly robust for an industry worth $480 billion in 2001. Some expect that growth to be sustainable: The Freedonia Group, a market research firm that issues forecasts on many segments, estimates 5 percent in real growth annually for the period of 2002-07. McGraw-Hill Construction Dodge, widely known for its monthly reports on construction starts, is calling for an upturn in commercial construction this year.
Even cold hard business decisions carry some psychological weight that can't be justified by data and forecasts. Like consumers, business owners can't help but allow intuition and emotion to delay important decisions.
"It does particularly when you have a war," says Kim Kennedy, manager of forecasting for McGraw-Hill Construction Dodge Analytics and Consulting Group. "That meant a whole first quarter where nothing happened."
That mixture of economics and psychology, as well as national and regional trends, can create a complicated picture when deciding to buy a new conveyor or expand the sheet metal shop. A look at the big picture can foretell local opportunities as well as give a sense of overall direction. For instance, acres of new roofing for manufacturers aren't being installed due to a prolonged decline in the industrial segment. Construction starts peaked in 1997 and last year reported an all-time low (65 million square feet) since Dodge reported numbers in 1967. If foreign automakers hadn't built plants in the Southeast, those numbers would be even dimmer. A strong dollar and under capacity production of plants (74 to 75 percent) will keep industrial starts low for the time being.
While new construction makes up only a quarter of low-slope roofing (NRCA, 2002), declines in manufacturing mean those closed plants don't get maintenance either. This landscape means little activity and severe economic pressures for jobs that are contracted. But there are ways for even contractors in the rust belt to stay busy.
"Flexibility. To be able to move from a specialty in health care to a specialty in education to a specialty in office space," says Kennedy about the opportunities for the coming year. "If somebody can harness the ability to move across the segments ... they're going to be a lot more stable and more successful."
Experience with project types and diverse materials give contractors an edge. Smaller scale jobs, like clinics and medical offices in 2004 for instance, can help roofing contractors in the future when hospitals renovate or address regional shortages. There are huge educational enrollments in the South and West, institutional construction continues to play a major role and it seems that nearly every school district is desperate to solve its roofing problems.
According to McGraw-Hill/Dodge, new construction for all non-residential buildings should experience growth in 2004, except for declines in education and hospitals. Single-family housing starts will drop somewhat (1.36 million units for 2003 vs. 1.29 million predicted for 2004) but multifamily units will be up. The echo from the housing boom still means significant investment in shopping centers, particularly the big box stores as they continue to grab market share. Warehouse construction serving new distribution patterns and regions will also keep up.
Office and Bank construction starts fell 9 percent last year, but have mostly rebounded. While hotels and garages represent a small portion of construction starts, their combined starts for 2004 present several opportunities for companies that can travel and deal with volatility.
Changes in the tax code may have impact as well. NRCA, among others, is lobbying Congress for a reduction in the depreciation schedule for building components from 39 to 20 years. The recovery period was raised in 1993 to boost federal revenue, but some say it removes an incentive to replace failing roofs. Its repeal may spur reroofing projects nationwide.
High NoteSome companies stake their fortunes on a particular type of roofing membrane, which can make all the difference regardless of market forces. Stevens Roofing Systems of Holyoke, Mass., made its reputation on Hypalon single-ply in the 1980s and rode the wave of TPO products (it was the first to introduce a reinforced version.) in the 1990s. Now the future is a new PVC membrane called Elvaloy that Stevens introduced in 2002, according to Vincent McPartland, vice president of global sales and marketing.
"This year is certainly ending on a high note. We've had some explosive growth in the past two months," he says. "The PVC business is a lot larger than we thought."
"This opened up a market for us that is roughly twice the size of the TPO market," agrees Sam Everett, director of corporate communications.
While TPO proved it was no fad, McPartland laments at how it has become commoditized and overcapacity has created price pressures. Add to that rising polymer prices for Hypalon, and the company was seeking to break out with the next generation product. While the company will continue to serve its Hypalon customers, the market research Stevens conducted showed a loyal, but limited universe. It appears that most of the true believers have already been converted and new customers weren't pouring in.
"We took a look at the numbers and thought Hypalon wasn't for everybody," says McPartland, adding that they'll still continue to service that segment. He knows that some customers lock onto a product or category and make it difficult to influence. "What it really comes down to is that the architect or specifier has the notion they want a PVC material or a TPO.
Stevens' exports - it has sold in 50 countries since 1985 - remain a core business, but no matter where the sales are conducted or what the market brings, customer service remains an integral part of getting and keeping contracts. Competition will remain stiff despite rosy predictions so it's good old-fashioned work ethic and making one sale at a time. "I have never seen things as aggressive as they are now. I don't see it lightening up, that's for sure," says McPartland. "I never take a single order or customer for granted."