Jack Keough: Non-Residential Construction Stays Hot

E-commerce sales, along with a rise in institutional and commercial building, have experts predicting continued gains in the non-residential construction market.

Id 7107 Construction Photo

Jack Keough, ID Contributing EditorOne of the bright economic spots for many distributors in 2014 was the strength in the non-residential construction market — and many economists are predicting the same for this year.

As just one example, a recent economic report from Wells Fargo Securities Economics Group showed private warehouse spending for last year jumped a whopping 48.6 percent and is expected to rise again in 2015. 

E-commerce was cited as just one reason for the accelerated growth in warehouse spending.

A company like Amazon is changing almost every aspect of the supply chain as it expands its reach to a growing share of the population by placing fulfillment centers close to the consumer, the report says, noting that Amazon has about 75 fulfillment centers in the U.S. and another 15 underway.

Wells Fargo also estimates that there will be growth in institutional and commercial building; those markets have been slower than others, like manufacturing building, in 2014. The company predicts structure investment spending to increase five percent this year and eight percent in 2016.

“Underpinning this forecast is continued improvement in commercial and industrial outlays, but we also expect institutional building to post a positive reading this year,” the report said. “Commercial construction is expected to continue its solid momentum with office, warehouse, and hotel posting another round of double-digit gains in 2015.”

And the year is starting off fairly well.

Non-residential construction starts, a good leading indicator for outlays, spiked more than 40 percent in February following a weak reading in January. For starts, manufacturing building soared during the month, partially due to a large project in Texas. Activity in this part of the country continues to “hum” along, the report said. 

Institutional starts also jumped in February, rising 20 percent, with educational and healthcare facilities seeing the largest gains.

For some distributors, like HD Supply, the non-residential market makes up a significant amount of sales.

"We took a cautiously optimistic view on non-residential in early 2014 and we saw measured strength built throughout the year," said Joe DeAngelo, chairman and CEO of HD Supply in a conference call with analysts following the company’s fourth quarter and year-end earnings report. "The majority of (HD Supply’s) construction and industrial’s priority 15 districts are now performing well across the country. We believe that non-residential, which represents about 23 percent of HD Supply’s fi scal year ’14 sales, should continue to be a solid market in 2015."

HD Supply is also optimistic about residential construction. “Residential is showing characteristics of a moderated but prolonged recovery. The spring selling season is a key data point for residential, especially given the weather difficulties of the past few months,” he said.

The company had 60 of its branches partially or totally closed because of the severe weather and snow storms that covered much of the country.

Some economists predict strong pent-up demand for projects later this year because of ones that were stalled in January due to the terrible weather.

HD Supply is looking for that rebound as it continues building on its excellent Q4 2014. HD Supply’s revenue for its construction and industrial business was $337 million, a 14 percent gain. For fiscal year 2014, revenue for construction and industrial was $1.5 billion, up 15 percent. Growth initiatives contributed $21 million and $107 million for the fourth quarter and full year, respectively.

One of the reasons for the increase in sales was strong walk-in traffic at 25 of its branches, accounting for about 50 percent of total branch sales.

“What we do is we position those locations to be very successful and take the heavy stuff out of our yards and get it to the job site,” DeAngelo said. “But most importantly, it’s also on the way to the job site so that the crews can come in. If you think about it, the pick-up truck for the contractor is the on-site vending machine. 

“Our job is to keep that vending machine full, so as we’ve refreshed all of our stores, we’ve created that retail insert that has all of the product that are consumables onsite. Our job is to make sure that not only we deliver with excellence, but we attract people to come in and be able to fill their on-site vending machine.”

For 2015, HD Supply is forecasting residential construction to increase mid to high single digits, non-residential construction to increase mid-single digits, power and water infrastructure to be fl at to up low single digits, and the MRO market to remain stable, increasing one to two percent. These specific end market estimates imply an approximately three to four percent 2015 market growth for HD Supply.

Jack Keough is contributing editor of Industrial Distribution. He can be reached at john.keough@comcast.net.

More in Economy