CHICAGO When it comes to nonresidential construction industry forecasts, proceed with caution, one metals industry investment banker advised a group of steel distributors gathered in Chicago this past week.
Reconciling upbeat forecasts for activity in the nonresidential construction marketand an attendant rise in a key stock index for the sectorwith less sanguine forecasts for U.S. gross domestic product (GDP) and actual market realities on the ground can add up to an exercise in contradiction, Vincent Pappalardo, managing director of investment banking at Chicago-based Stout Risius Ross Advisors LLC, told members of the Association of Steel Distributors at a Dec. 5 meeting.
In support of his contention, Pappalardo pointed to an American Institute of Architects construction consensus forecast, which predicts a 7.6-percent improvement in nonresidential construction activity next year. The outlook is backed by projections calling for a 15-percent increase in hotel building, 11.7-percent growth in retail store building and 9.5-percent rise in office building. Even the industrial sector is pegged to see 6.3-percent expansion.
Next up, the S&P 500 Building and Construction Select Industry Index, shows a 28-percent return through Dec. 5, meaning stocks of companies in that index have basically outperformed actual build rates. The index covers a range of industries, including iron and steel companies, heavy equipment and truck builders, home builders, drywall and aggregate producers.
"Investors are looking for places to put their money and get returns in anticipation of actual growth," he said.
The architectural billings index, which has hovered above 50 since April, reinforces forecasts promoting a favorable outlook, as it predicts building projects six to 12 months forward. Any number above 50 indicates growth.
If architects are drawing projects, it indicates "construction companies are going to recover. ... And the engineering companies are starting to work on the projects, so things are beginning to happen," Pappalardo said.
"My caution is that the projects (in planning) havent actually started (to be built). They have to get financing and people have to do the work. History shows it doesnt always happen. All roads are leading in the right direction, but projects have to start before steel will be used," he said.
The cloud dimming the bright outlook is the slim 2- to 3-percent projected growth for U.S. GDP next year. "Theres a disconnect," Pappalardo said. "Maybe some part of the economy is in contraction or seeing slow to no growth. (The construction market) isnt the entire GDP, but how is (the market forecast) supported by the economy?" he asked.
Even so, Pappalardo suggested service centers look for business opportunities in the nonresidential construction market. "If you have the capability, it makes sense to explore and find new customers in construction," he said.