US building materials industry enjoys modest growth on housing starts

21 December 2017 5 min. read
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The US construction industry materials segment has witnessed a resurgence in demand thanks, in large part, to an upswing in residential starts. While revenues continue to climb, and total shareholder returns surpass the S&P 500, challenges continue to mount, largely due to labour shortages thanks to former workers let go during the financial crisis not returning to the industry.

The materials segment of the US construction industry was one of the hardest hit parts of the US economy following the financial crisis, when, at its low-point in 2011, value fell to $788 billion. The industry has seen an uplift in more recent years, as the US economy improved and infrastructure investment was on the cards again. In the intervening years, total value increased by more than 50% to hit $1,164 billion.

Amid this new resurgence, a report from Roland Berger has examined the US construction materials industry in terms of recent performances as well as projected growth, uncovering bumps in the road for the industry in the future.Financial metricsBuilding materials revenues stood at $144.2 billion in 2016, up 3.1% from the previous year. EBITDA margins saw modest increases, up 10%, while working capital as a % of sales was up slightly to 19%, while debt/EBITDA ratio fell to 2.4x from 3.1x the previous year, indicating reduced risk, largely due to debt reductions among ‘roofing, siding, and other materials’ and ‘construction metals’ companies.

Returns to shareholders for much of the industry has rated above that of the wider S&P 500. Total shareholder returns averaging 12.1% among building material firms between mid-2014 and mid-2017, while the S&P 500 averaged 7.3% over the same period.

Value of returns

HVAC plumbing and electrical equipment ran out ahead, with the value of every $100 invested increasing to $192, while roofing, siding, lumber and other materials saw an increase to $155. Not all industries surpassed the S&P 500 average of $124; while lighting and wiring saw the lowest relative return, at $111. Higher returns in recent years were driven in part by commodity price reductions, although some sectors suffered from increased uncertainty in relation to potential tariffs over imports from Mexico et al.

Major growth

In terms of major growth areas for the annual addition of construction put in place over the past years, 2017 is projected to see a boost across all segments: infrastructure; residential buildings; and commercial buildings. The firm is projecting that the industry as a whole will grow at an average of 3.5% between 2016 and 2019, topping out at construction additions of almost $1.3 trillion. Infrastructure will see the most significant increase, at 4.2% annually; the country’s infrastructure was awarded an overall D+, suggesting that considerable investment may be required. The residential buildings segment is projected to see somewhat more modest growth at 2.9%. Annual value of construction added.Growth in the industry is partly the result of relatively robust economic growth, even with sectorial drag, such as a difficulty finding skilled labour, pushing up costs.

The residential sector has seen particularly strong growth in recent years, with multi-family housing growing by more than 20% in terms of annual value of construction put in place, up from $35 billion to $62 billion. Improvements investment was up 8.3%, from $122 to $155 billion, while single family home construction saw a firm 12.9% increase, up from $172 billion to $247 billion.

Annual value of construction

One of the divers for growth has been the cumulative population increase since 2012 in metropolitan areas. Particularly large and middle size metropolitan areas saw increases, at 1% and 0.8% per annum respectively. In total, around 9.1 million people joined a US metro area between 2013 and 2016.

Labour shortages

While the industry has improved its revenues significantly since the crisis low-point, the industry does continue to face bottlenecks. One major area of concern is that many of the skilled labourers let go during the financial crisis years have not returned, resulting in an increased mismatch between growing demand for new housing starts and labour. Shortages hit almost 60% in 2016, with former workers not enticed back by higher wages so far. Many of these have moved to work in less cyclical industries or migrated out of the US.Housing starts and labour

The authors of the report concluded that, “The primary driver of this performance is the residential sector with double-digit growth in the multi-family segment and population growth in the Southern US. However, there have been some headwinds hampering the sector. The workforce shortage has knock-on effects in the forms of delayed projects, increased wages and higher home prices. Some builders have also had to slow down the pace of accepting new orders to make sure they can meet deadlines.”