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Commercial Law Litigation

High Expectations for Commercial Construction Activity

Construction industry executives are particularly optimistic regarding the prospects of local, nonresidential construction activity this year, according to a recent Wells Fargo Equipment Finance survey of industry contractors and equipment distributors.

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Construction industry executives are particularly optimistic regarding the prospects of local, nonresidential construction activity this year, according to a recent Wells Fargo Equipment Finance survey of industry contractors and equipment distributors. The 2017 Construction Industry Forecast revealed increased optimism driven by expectations of industry expansion through higher infrastructure spending and increased company profits.

The survey uses an Optimism Quotient (OQ) as its primary benchmark for measuring construction industry contractor and equipment distributor sentiment. An OQ score of 100 or more represents strong optimism for increased local construction activity relative to the perceived level of activity for the prior calendar year. A score of 75 to 99 represents more cautious or measured optimism. A score below 75 signals that fewer executives say local construction activity will increase than say it will decrease, a more pessimistic point of view.

The OQ for 2017 is very positive at 123, a marked increase over the OQ score of 108 registered in 2016. After a big dip from 2007 to 2010, industry optimism has rebounded and remains increasingly positive. This year’s OQ is the third highest recorded number in the past 20 years. It also represents the sixth consecutive year the OQ was higher than 100, and the seventh consecutive year of optimism.

According to John Crum, senior vice president and national sales manager of the Construction Group at Wells Fargo Equipment Finance, “An OQ reading at this level leads us to believe that the industry will continue to build on the momentum generated over the last few years. Contractors have increasingly improved their businesses and this year looks to provide more opportunities to do that again.”

A growing number of executives believe the industry will expand in the next two years, with 84% of executives expecting moderate to significant expansion in this timeframe versus the results in last year’s survey that indicated only 62% expected expansion.

Equipment Sales and Purchases

Regarding equipment sales, distributors are expecting to move more new and used equipment this year with 65% expecting an increase in new and 66% expecting an increase in used sales, compared with contractors who plan to increase new and used equipment purchases by 39 and 25%, respectively.

A significant result of the survey showed that only 13% and 11% of contractors expect to decrease new and used purchases this year, respectively. In 2013, these figures were 30% and 20%. This reading shows the strong confidence that equipment end users have in their businesses.

Cost Concerns

Contractors and distributors report similar cost concerns in 2017. The top concern among contractors continues to be employee wages and other benefits (24%), followed by taxes (21%) and healthcare costs (19%). Contractors are also more concerned about equipment purchase costs in 2017 than in years past with 18% selecting this as their top concern, compared with just 10% in 2016. Top concerns for distributors include increasing concerns over equipment costs (31%) and continued concern over healthcare costs (22%).

Rental Market Remains Strong

With increasing concerns about equipment acquisition costs, contractors generally expect to support construction expansion by renting equipment in 2017. Although most (49%) continue to believe rentals will remain flat, a growing number of contractors (38%, up from 27% in 2016) believe it will increase. The largest percentage of contractor respondents (49%) cited the need for flexibility as the most important factor in renting equipment instead of buying, while 29% said rental equipment being readily available is also very important.

“Rental companies, distributors, and manufacturers might notice that their customers indicated increased rental costs as a driver of more purchasing behavior. Even a small increase in rental rates of less than 5% could cause almost one in five contractors to consider purchasing over renting equipment,” said Crum.

The 2017 survey marks the 41st year in which Wells Fargo Equipment Finance and its predecessors have published primary research findings for the infrastructure construction industry. The full survey may be accessed at http://bit.ly/2nbrWon.

 

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.

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