In many ways, the construction industry is no different from other industries in the sense that it faces constant changes and fluctuations over time. When looking to appraise or value both residential and commercial construction companies, there are many unique factors to consider that set this industry apart from others. In BVR’s new special report, What It’s Worth: Valuing Residential and Commercial Construction Companies, expert Pasquale Rafanelli covers the opportunities these types of valuations can provide for business appraisers, which we’ve excerpted here.
Over the next five years, from 2019 to 2024, the global construction industry is expected to have a wealth of opportunities in the residential, nonresidential, and infrastructure industries. Global Construction Perspectives and Oxford Economics recently released their global benchmark study, which estimates that the construction industry is expected to grow at a compounded annual growth rate (CAGR) of 3.9% and is forecasted to reach an estimated $15.5 trillion by 2030, with the United States, China, and India leading the way. The industry as a whole is seeing an increasing demand for:
- Green construction to reduce carbon footprint;
- Bridge lock-up device systems to enhance the life of structures;
- Building information systems for efficient building management; and
- The use of fiber-reinforced polymer composites for the rehabilitation of aging structures.
Here are some of the other more prominent trends and opportunities in the residential and nonresidential construction marketplace:
- Consolidation. The easiest way for a company to enter new markets and strengthen its position in existing markets is to continue to grow through acquisitions. Larger firms, which stockpiled cash and land during the economic downturn, are looking to expand, especially as home values and buyer demand start to stabilize.
- Nonhomebuilding services. In today’s market, it is not uncommon for builders to branch off into other related fields such as:
- Modular and manufactured housing;
- Construction materials;
- Commercial construction;
- Mortgages; and
Some builders have even established mortgage banking arms to provide financing for home buyers. This service typically focuses on the operations to originate mortgages and then to sell them to other investors.
- High-tech homes. We live in a high-tech world—one that is constantly changing—and builders are starting to respond to the current consumer demand by building more new houses with advanced data and other communication capabilities. Consumers raised on electronics and computers expect structured wiring that supports smart home technologies such as learning thermostats and internet-enabled security and monitoring features.
- Green construction. Although a green home can cost more than a conventional house, some lenders are offering mortgage incentives for energy-efficient homes. Some of the green building innovations include:
- More porous materials in walkways and patios to prevent erosion from rain runoff;
- Engineered recycled lumber in building; and
- The conversion of wood or drywall construction waste on-site into landscape mulch.
- Millennials becoming homeowners. Millennial home buyers, particularly those who have started families, are navigating toward more affordable residential areas that promise high job growth. The suburbs are successfully attracting first-time home buyers and younger individuals because these areas are typically much less expensive than those nearest major metro areas.
- Internet marketing. An active online presence can dramatically improve traffic to sales centers, increase conversion rates, and improve customer satisfaction by enabling builders to stay connected with customers through the entire home ownership cycle. With internet and mobile application technology, potential buyers can visit a number of different developments, view the types of models available, and take virtual tours through model homes.
- Special-purpose housing developments. The changing demographics of the U.S. population suggest that demand for second homes and retirement communities will increase. The large baby-boomer generation is now in its peak years of earning power and asset accumulation, potentially giving them the means to buy second homes for vacations.
- Multifamily and for-rent apartments. High demand for apartments and condos has resulted in many traditionally single-family homebuilders turning to multifamily construction. In today’s changing market, many people are unable to afford to buy a home or cannot qualify for a mortgage, which creates stronger demand for rental properties. Builders are starting to follow the trend by increasing their presence in building apartment complexes and condo communities.
While a lot of the trends are the same for residential and nonresidential construction, there are a few additional worth referencing.
The growing design-build movement encourages collaborative project development in all phases of design and construction. Significant cost and schedule savings as well as increased quality can result from collaboration on technologically sophisticated projects.
- Modular construction.
Permanent modular construction can enhance the speed and efficiency of project completion. Modular components can be built off-site in a factory or warehouse and are then transported and placed. Advancements in modular technology allows for more durable, versatile structures.
The world’s population is becoming increasingly concentrated in urban areas, a trend that drives demand for structures such as airports, office buildings, parking garages, restaurants, and shopping malls. According to the United Nations, in 2014, approximately 50% of the world’s population resided in urban areas, and, by 2050, it is projected that more than 60% of the population will live in urban areas.
- Green building.
Demand is growing for environmentally friendly building, which includes construction materials, practices, and certification. According to the United Nations Environment Programme, buildings are responsible for more than 40% of global energy use and one-third of global greenhouse gas emissions. Construction companies with green building capabilities are positioned to benefit from increasing efforts in the commercial and government sectors to build and operate more environmentally friendly buildings.
- Emerging markets.
Developing countries provide some of the greatest opportunities for construction expansion. According to Global Construction Perspectives and Oxford Economics, it is predicted that the U.S., China, and India will account for more than half of global construction growth between 2015 and 2030.
There are plenty of opportunities in the market for business owners to consider and take advantage of to grow their businesses. As a result, this has increased the need for appraisers not only to play a pivotal role in providing valuation services for their clients, but also to act as their advisor and give them the help and tools they need to better position themselves in the market. For more on valuing residential and nonresidential construction companies, be sure to check out BVR’s special report, What It’s Worth: Valuing Residential and Commercial Construction Companies.