WFEF: Construction Activity Rises

by John Crum Nov/Dec 2013

The 2013 Construction Executive Survey by Wells Fargo Equipment Finance reveals a distinct improvement in sentiment about the U.S. construction industry compared to a year ago. Executives at contracting firms and equipment distribution houses report increased construction activity and a stronger intent to hire new employees over the next six months.

John Crum,
SVP & National Sales Manager,
Wells Fargo Equipment Finance, Construction Group

Here are more of the survey’s key findings:

  • Pricing. Prices of new equipment are up according to our industry executives. The cost of renting equipment does not appear to have risen at the same pace.
  • Tier IV Equipment. We wanted to know if contractors were confident in the resale value of Tier IV equipment. More than 80% indicated that they expected similar or higher resale values when compared to the equipment they currently own.
  • Equipment Acquisition Strategies. One item that we find particularly interesting is that one-fourth of contractors said that within the past twelve months they have acquired equipment of some form over the Internet without first inspecting it in person. In addition, they overwhelmingly said it was a positive experience.

Industry Environment

The 2013 survey confirms that the construction industry continues on an upward path, even if it is a slow and mostly steady one. Fewer executives see a contraction of activity than in the previous year and the jump in the number of executives who see “much higher” activity levels is encouraging. Almost six in ten respondents (57.7%) said activity was “somewhat higher” or “much higher” than the year previous. In 2012, that percentage was 47.8%. In addition, 15.5% of respondents said construction activity is “somewhat lower” or “much lower” than a year ago. In 2012, that number was 18.4%. The trend is slow but unmistakable: Overall levels of local construction activity have been improving for each of the last three years.

Both those that sell and those that buy equipment are reporting improved levels of construction activity compared to 2012. About six in ten equipment distributors (60.4%) said construction activity was “somewhat higher” or “much higher” than a year ago. In the 2012 survey, 48.6% of distributors said activity was higher than in the previous year. Almost as many contractors as distributors (57.8%) said local construction activity was “somewhat higher” or “much higher” than a year ago. In the 2012 survey, 45.4% of contractors said overall activity was higher.

Construction executives said they see growth in the residential construction sector compensating for the declining expenditures in the public, non-residential category. One in four executives (25.3%) said residential construction was growing the most in their region, compared to 11.5% in 2012. In contrast, 56.4% of executives said that public non-residential construction was seeing the most growth in 2012, whereas 40.5% said it is growing the most in 2013.

In the survey, no distinction was made between new and used equipment prices, yet there is a distinct sentiment that equipment prices have increased over the past year. About three in four respondents (76.9%) said equipment prices were “somewhat higher” or “much higher” than in 2012.

One promising barometer for optimism comes from our question about executives’ views on hiring in the next six months. The mood about hiring new employees has definitely improved compared to 2012. Within the next six months, 60.4% of executives said they expect to hire “a few” or “many” new employees. In 2012, that number was 41.0%. Only 4.9% of executives said they “may need to” or “will have to” decrease their workforce within the next six months. In 2012, 15.5% of executives expressed the more pessimistic attitude about hiring.

Rental Review

One of the hallmarks of the recovery in the construction industry over the last few years has been the resurgence of the equipment rental market. In an uncertain construction environment, contractors have become more frequent renters of heavy equipment than in prior years. Contractors and dealers acknowledge the trend, although they differ slightly in their view of how profound the trend has become.

The percentages for 2013 are strikingly similar to those for 2012, although the percentage of respondents who said that rental rates were “about the same” as the year prior (50.9%) is the lowest it has been in the last four years. Not quite half of respondents (44.6%) said equipment rental rates were “somewhat higher” or “much higher” than in 2012 indicating that rental rates continue to rise. Very few respondents saw a decline in rental rates compared to last year.

Equipment Acquisition Preferences

Just more than one-fourth (26.3%) of contractors said they acquire all of their equipment through an equipment dealer. Only 4.2% said they acquire none of their equipment through an equipment dealer. Three out of four (76.6%) said that they acquire none of their equipment directly from a manufacturer. Half (50.4%) said they acquire none of their equipment through auctions. About four out of ten (42.5%) said they acquire none of their equipment through private party sales. Equipment dealers remain the primary source for construction equipment in the industry. Although the variance in responses ranged significantly, on average, contractors estimate that almost three-fourths of equipment (71.9%) is acquired through the traditional dealer channel.

What may be the beginnings of an important change in the way contractors buy equipment is the fact that one in four respondents (25.7%) said they had purchased equipment over the Internet without physically inspecting it. Perhaps of equal significance is the finding that the overwhelming majority (90.7%) of these equipment buyers said they were “satisfied” or “extremely satisfied” with the purchase.

Conclusion

Compared to just a few years ago, we have seen distinct improvement in the levels of construction activity — and in the overall sentiment about the construction industry — around the country. Interestingly, some of the potential hazards to domestic growth that we feared in previous years seem somehow less ominous as we close out 2013. For instance, the European debt crisis has abated to a large extent and gross concerns about a tenuous level of economic growth have largely been put to rest. Certainly there are risks and concerns to the forecast but the Construction Group at Wells Fargo Equipment Finance remains cautiously optimistic that 2014 can be another year of growth and improvement.

John Crum joined Wells Fargo Equipment Finance in May 2006 and currently serves as national sales manager of its Construction Group, overseeing the group’s originations activities in the U.S. and Canada.

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