Forecast for Central Florida's Construction Market: Gloomy Now, Sunny LaterBy Mike Larson
Article Date: 12-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
As AED prepares to descend on Orlando for the 2011 Summit, CED examines the state of the local construction market - currently suffering through an overcast pall as bad as the region has ever seen. But the distant future looks brighter for the contractors and equipment dealers who can find a way to survive.
The Central Florida area around Orlando is best known for its world-famous entertainment attractions like Walt Disney World, Epcot, SeaWorld, Universal Studios Orlando, and Cypress Gardens, which pull millions of tourists to the area each year.
Orlando Economic Development Commission statistics show that the area hosted 46.6 million visitors in 2009, and that they spent a total of $27.6 billion.
Tourism supports 380,000 jobs in Orlando's 110-square-mile, three-county metropolitan area, which is home to more than two million people and claims to be the fourth-largest metro in the southeastern U.S.
But the Orlando area's economic engine is also powered by a diverse economy that includes high technology, aviation, aerospace, film and television production, life science research, manufacturing and distribution, and development.
Jennifer Wakefield of the Orlando Economic Development Commission said, "The area's top economic drivers are tourism and defense, followed by medical services. Defense includes high-tech simulation, lasers, photonics, and optics."
Until a few years ago, one of the region's major economic drivers was the booming construction industry powered by ever-expanding development that built hotel rooms for tourists, and homes for both permanent workers coming to the area and snowbirds from northern states who wanted vacation homes where they could winter in comfort.
That changed dramatically with the nationwide economic crisis that started in 2007. Not only did the economic crash put the brakes on the building of commercial buildings and housing developments in Florida, the nationwide loss of jobs dramatically cut the number of tourists who came to visit the area.
The overall loss of business hit Central Florida's construction industry hard.
Bill Owen, founder and principal at Real Estate Research Consultants, of Orlando, notes that total building permits in metro Orlando dropped from more than 36,000 in 2006 to 12,500 in 2009 and to about 5,000 through the first eight months of 2010.
"The foundations of the region's economy are tourism and conventions, residential growth, high-tech and bio-tech expansion, and second homes and retirement," he said.
"Employment drives demand for industrial and office space. Population drives demand for housing and retail space. Visitors drive demand for lodging and entertainment," said Owen.
Drastic drops in income from all those major segments of the economy have driven the area's overall unemployment to more than 12 percent. Owen estimates that unemployment will remain near 12 percent through 2011.
The recession has presented Orlando's construction industry - and the equipment dealers who supply it - with a tough row to hoe.
"Builders can't build because foreclosures and short sales keep appraisals so low that they can't sell a home for what it costs to build it," said Beth McGee, executive director of the Home Builders Association of Central Florida.
The challenge extends to commercial buildings, too.
"These are tough and challenging times," said Brian J. Morris, senior vice president of Skanska Buildings U.S.A., and manger of the company's Jacksonville and Orlando offices. Skanska Buildings, he says, works primarily on health care facilities, commercial buildings, schools, higher-education facilities, airports, and theme parks.
"We are focusing on securing as much work as possible from owners we have served successfully in the past and are taking aim at work we know is going to be funded and moved forward in six to 12 months," Morris said.
He notes that projects that would have attracted about 10 competing proposals a couple of years ago now draw 20 to 30, making competition much stiffer. "It puts a premium on being able to pick jobs that are right for us, and also on knowing when to pass," he said.
Jeff Fuquay, president of Orlando's Amick Construction Inc., agrees. "Many contractors are working for break-even to a 10 percent loss, just to keep cash flowing through their business," he said. "If you have debt, you need cash flow to support it. During 35 years in business, I've always made it a point to keep my company debt free. As a result, I have more freedom to pick projects that are right for us."
Orlando's tight construction market makes life challenging for the equipment dealers who compete in the area.
Fuquay says that in the market's best year, all the equipment dealers sold a total of about 950 major pieces of new equipment. He says that through 10 months of this year, they've sold a total of about 46.
So how do Orlando's major equipment dealers view the market, and what are they doing to succeed despite its challenges?
Flagler Construction Equipment
Mark McDonell is president of Flagler Construction Equipment, Volvo's exclusive construction equipment dealer for Florida.
"The market is weak by historic standards," he said, "but I don't see it getting any weaker. In fact, some segments are showing marginal improvement."
McDonell says that industrial accounts, for example, have had their normal replacement cycles so disrupted that their equipment now needs significant refurbishing or replacement because it can no longer meet production requirements.
Flagler's key customers include road builders, civil contractors, and industrial operations like scrap handlers, and, he says, many of those customers are looking to rent equipment rather than buy.
"Contractors have downsized their fleets to meet the current workload, and the uncertain market makes it hard for them to know how much future work they will have, so they don't want to invest in new equipment," said McDonell.
Although Flagler has trimmed its overall inventory, the company has developed a fleet of larger production equipment that's available for short-or long-term rent. "We want to be sure to have the right rental-fleet mix, so we're bringing in more new units," he said.
"Rental will continue to increase," McDonell said. "Contractors may no longer own the right piece of equipment for a job, or they may have a temporary need for more capacity, so they will tend to rent instead of buy."
In addition, he says, Volvo and Flagler offer programs to help customers with major refurbishing that can add useful life to their existing machines.
Like many of the Orlando-area equipment dealers with whom CED spoke, Flagler is seeing brisk action in used equipment, though McDonell says that good used units are becoming harder to find. "We have the expertise and relationships to help customers find the right machine through trades or the rental fleet," he said.
Financing is also part of Flagler's strategy. "Having good relationships on the wholesale and retail sides has helped us put together deals," said McDonell, who notes that Volvo financing has liquidity and can help. "Lending standards are tougher than they were three years ago, but we're still able to get things done."
Nortrax handles Deere construction and forestry products, as well as Bomag equipment and NPK attachments at five locations including an Orlando branch, which is managed by Chris Wood.
"Although I think we've seen the bottom of the trough, the market is still very challenging," said Wood. "I estimate that the region's overall sales volume for all the competing brands is down 65 to 80 percent from the 2006 peak."
He says that equipment-rental companies are starting to buy briskly again, and that this is a positive sign. "When our market rebounds," he said, "rental companies lead the pack by about six to eight months, then the new market begins to gain stability."
Wood says the number of potential customers buying equipment has shrunk. "Big contractors are now often self-performing more work than they used to. As a result a few contractors have big chunks of the work. As an equipment dealer, we need to form a partnership that's feasible for those contractors and us."
Wood says that Nortrax is seeing brisk activity in used equipment and that he expects the trend to continue into 2011. But he notes that getting good pre-owned units is becoming more of a challenge.
"We get them from trades, equipment remarketing services, lease returns, repossessions, and by buying machines directly from contractors," he said. Equipment auctions are not a big source for Nortrax's Orlando office, unless there is a specific machine for which the company has a buyer.
Like other successful distributors, Nortrax has trimmed its inventory quite a bit, says Wood. The company will be placing orders for new equipment that meets the federal Tier-4 Interim clean-air standards that kick in during 2011.
Not surprisingly, the product-support business has been a key to Nortrax's success in weathering the current market storm. "If you don't have a robust product-support business in this market climate, it will be difficult to survive," said Wood. "There are so few whole-goods sales opportunities that you need the income from service and parts more than ever."
While Nortrax, like most dealers, curtailed its inventory to be in line with diminished demand, the company is ordering new interim Tier 4 Deere machinery in preparation of the new federal standards that begin kicking in next month.
It's also no surprise that helping customers get financing is part of Nortrax's success.
"Financing construction equipment can be a challenge," Wood said. "Normal banks are fearful because they don't understand the equipment or the market. Deere Financial gives us an edge in helping contractors get the financing they need - and more are asking for help these days. Our ability to help with financing has helped sell machines."
Ring Power is another major equipment dealer that counts Orlando among its markets. It handles Caterpillar equipment for construction, earthmoving, agriculture, and other industry-specific tasks, and it also carries cranes, material-handling equipment, air compressors, and more.
Senior Vice President Tim Maguire says that the market is as bad as he's ever seen it, down about 90 percent from its 2006 peak. But he's expecting a slight upturn in 2011 that will get sales back to about 20 percent of the peak level.
Maguire notes that the Orlando area has excess inventory of homes and office space that will have to be filled before more is built, so selling new machines to contractors with little work is difficult.
Fortunately, he says, Ring Power is active in the rental and used-equipment markets.
Orlando Branch Manager Steve Porteus elaborates: "Ring Power has always been active in rental, and continues to be. Contractors are still using the rent-to-own strategy, but we are doing little in the short-term rental arena because many companies are offering cheap rates."
Porteus says that sales of used equipment are helping sustain the dealership through the downturn. "Strong overseas markets have a healthy demand for used equipment, and we have the organization to supply them. Some of our local customers who used to buy new equipment are now choosing to buy used equipment instead of new - when they have to buy."
Although Ring Power would rather sell equipment to an end user, it does buy and sell equipment through auctions, Porteus says. And though it has used online auctions, Porteus says he leans toward attending absolute reserve auctions in person.
Here too, product support is a major part of the strength that Porteus says is enabling Ring Power to succeed despite the down market. He says that some contractors have cut back their service departments and are now calling on Ring Power to maintain and repair their remaining equipment. He also notes that contractors are holding on to equipment longer and investing in repair, instead of trading old machines in and buying new.
"Certified rebuilds are booming now," he said. "Cat does them very well. It's like getting a new machine for a fraction of the cost of buying a new unit. Certified rebuilds also help us keep the customer with Cat and keeps the relationship strong for the future."
Every dealership that survives the market draught in Central Florida knows how critical the used equipment market and prod-uct support business are to its survival. Ring Power also thrives on Cat certified rebuilds.
Porteus is confident Ring Power will survive the current market drought. "Today's numbers are similar to those from 2001 and 2002. We are well funded and well positioned to support customers with leading brands of products and excellent support. I'm confident we will survive and be ready when things turn," he said.
Vermeer Southeast Sales and Service
Vermeer Southeast Sales and Service has survived many down markets in its 40 years of serving the Orlando area with equipment, parts, service, and solutions for the underground construction market and the tree-care industry.
But Vice President Craig Sunberg says the current market is as tough as he's seen it in 15 years. "Our main products are underground and environmental equipment. Sales of underground equipment are driven by real estate development, and that market is stagnant."
Like the other Orlando-area equipment dealers CED interviewed, Vermeer Southeast is seeing most of its activity in selling used machines. "If you can get a good used machine at a good price, you can resell it quickly," said Sunberg.
Sunberg says that Vermeer Southeast obtains used equipment through auctions, finance-company repossessions, taking in trades as part of selling a new machine, and some buying back directly from owners.
Parts and service support are always an important part of the company's business, says Sunberg, and even more important now. "You sell every part and service for every machine you can," he said. "We are doing a lot of electrical servicing for machines in the field. We have the equipment and expertise to do it well."
Equipment rentals, he says, are up a little, but not a lot. "Directional drills are specialized equipment. You can't rent them to just anyone," said Sunberg. "Most of our rentals go to good customers who already know how to use the equipment and just have a temporary need to produce more or to bore a larger diameter hole."
Like other equipment dealers, Vermeer Southeast is balancing its inventory to keep it lean but still have enough units to meet its customers' needs. "We now spread our inventory among three stores and supply customers from whichever location has the unit they need. It's all a matter of turns, and the number per year depends on the kind of equipment," Sunberg said.
Credit is a major consideration for Vermeer Southeast. The company employs a full-time finance specialist whose responsibility is helping customers get the financing they need. "Deals that would have been easy three years ago can be really hard now," said Sunberg.
A More Promising Future
Although the construction industry and equipment dealers in the Orlando area and Central Florida are working through a rough time right now, the area's long-term future holds promise.
None of the dealers, contractors, or the real-estate analyst we talked with expect 2011 to be much of an improvement over 2010. But hope for improvement in the region's construction markets - and equipment sales - lies in the potential for growth of its high-tech economy and the eventual return of tourism.
There is a lot of work planned, but like elsewhere in the U.S., project owners are waiting for the economy to stabilize before they move forward.
Jennifer Wakefield of the Orlando Economic Development Commission says that more than a billion dollars of projects are in planning or are underway in the region.
Bill Owen of Real Estate Research Consultants notes that largely rural Polk County, which sits between Tampa and Orlando straddles the proposed path of a planned high-speed rail line that will connect the two cities, and is prime for development.
Owen also notes that Disney, Universal Studios, and the former Cypress Gardens (now Legoland) theme parks are all planning projects.
Skanska Building's Brian Morris notes work at the area's five hospitals and the Orange County School District's $2-billion building and renovation program.
And Amick Construction's Jeff Fuquay, who has operated his construction company in the area for 35 years, says, "Things are getting better. Supply and demand are starting to come back into balance. How fast will they do that? I'm not optimistic about the next two to three years, but I'm very optimistic for the 5-to 10-year time frame." ??
Mike Larson, is a freelance reporter based in Manitowoc, Wis. He can be reached at email@example.com.
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