Money Matters: Looking into the Crystal Ball for 2010
by Ron Riecks
January 1, 2010
It’s
a new year and you know what that means— it’s forecast
season.
For more than 30 years, Wells Fargo Construction and its predecessors have
produced an annual construction forecast to help contractors and equipment
distributors make decisions for the coming year. This year we decided to take a
different approach and produce our industry analyses on a quarterly basis
because of the growing need for timely, relevant information. The results from
our first survey in this format should strike a chord with heavy contractors
and provide insight into what your peers anticipate for the industry in 2010.
In November 2009 we surveyed 272 construction industry executives on what they expect to see in 2010. The 272 respondents included construction equipment distributors/manufacturers (44%), construction contractors (40%) and construction industry service suppliers (16%). Survey responses came from 45 of the 50 states (not represented were Arkansas, Maine, North Dakota, Rhode Island and South Dakota). About half of all respondents said their annual revenue was above $25 million. Only 3% had revenues under $1 million.
Demand for new construction equipment fell dramatically in almost all categories in 2009. Equipment auction companies realized solid revenues from the sale of used equipment. We wanted to know how equipment prices would move in 2010. Overall, 55% of respondents said they expect new equipment prices to remain the same in the coming 12 months. But contractors had different views about equipment than distributors. About 32% of distributors compared to 16% of contractors said they expect new equipment prices to increase.
Fifty percent of contractors compared to 37% of distributors said they expect used equipment prices to decrease. About 33% of both groups said they expect used equipment prices to remain the same.The feeling is that there may be more downward pressure on used equipment prices than on new equipment prices.
On a related note, we asked contractors specifically what they expect will happen to the size of their equipment fleet in 2010. About 55% of contractors said they expect it will remain the same. About 27% said they expect it to decrease while the remaining 18% said they expect to grow their equipment fleet.
We asked what executives think will happen to construction materials costs, or construction inputs. Given the volatility of the price of fuel over the last 18 months, we weren’t sure what to expect. Our goal with this question was to gauge the industry’s perception of the direction of inflation on wholesale goods. Forty-five percent of all respondents said they expect an increase in construction materials costs, compared to 15% who anticipate a decrease. The remainder said they expect costs to remain largely the same.
We asked industry executives about equipment rental rates and whether they will increase, decrease or remain the same. Just over half of respondents (55%) said they expect rental rates to remain the same. Twenty-seven percent of executives said they expect rates to decrease compared to 18% who believe rates will increase. Publicly traded rental companies had a rough 2009 due in part to lower rental rates and asset utilization. They may face more of the same in 2010.
With so much discussion in the media about the credit crisis, we wanted to hear from contractors and distributors how credit availability had impacted their ability to do business. Interestingly, 69% of the contractors said that the availability of equipment financing had no effect on their ability to do business. Two out of ten contractors (20%) said it had a negative effect while 11% said general availability of credit had a positive effect for their company because it thinned the competition.
While 36% of distributors said credit availability had no effect on their ability to do business, 57% of distributors said a lack of availability of equipment financing had a negative effect. So the distributors we surveyed expressed more concern than contractors.
There was a consensus between contractors and distributors about equipment financing costs in the coming 12 months. Overall, 46% said they expect equipment finance costs to increase and 44% expect costs to remain the same.
We also asked executives to identify key problems they anticipate contractors will face in 2010. Of the 272 respondents, 240 (88%) said “lack of work” was one of the major concerns. They also cited “cash flow” (78%) and “profit margins” (77%) as major concerns.
We asked respondents to identify which of those problems would be the most significant for contractors in 2010. “Lack of work” was by far the greatest concern, chosen by 57% of all respondents. Two-thirds of distributors listed it as the most serious concern while 49% of contractors said “lack of work” was the most serious concern.
Cash flow came in second with 12% of all respondents. Availability of capital from lenders came in third, at 9% of all respondents, most of whom identified themselves as distributors. In comparison, contractors who responded to our 2009 survey said their top concerns were “lack of work” (27%) followed by “lack of a quality workforce” (12%).
We asked executives to identify the type of construction that offers the single greatest opportunity to contractors in 2010. Almost 30% of all respondents said that highway construction offered the greatest opportunity. Government projects came in second at 16% followed by concrete and asphalt work (13%) and bridges and overpasses (11%). These responses may highlight anticipation for government stimulus money to begin moving some projects forward. Less than 3% of executives surveyed said that residential or apartment buildings offered the greatest opportunity for construction contractors in 2010.
Good executives digest many sources of information and then consider their circumstances and regional environment as they make decisions about how to move forward. These survey results are another set of data points to take into consideration as you make management decisions this year.
If you would like to participate in or receive a copy of the Wells Fargo Construction Executive Survey, please send an email to Ronald.L.Riecks@wellsfargo.com.
Ron Riecks
Ron Riecks is general manager of Wells Fargo
Construction and is based in Tempe, Arizona.
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