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Learning Lighting

Feb. 5, 2018
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The largest manufacturers in the electrical industry are part of a global supply network that ships electrical products from the Vancouver port (shown in this photo) to Pacific Rim markets, but also to every continent on earth. And while many industry observers are most familiar with the $100 billion channel in electrical products sold in the U.S. market through electrical distributors, the biggest players source and sell products globally.
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Homes Get Smart

Feb. 14, 2017
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As oil & gas companies unlock new sources of domestic oil and natural gas in North Dakota, Texas and the Marcellus Shale deposits in Ohio, Pennsylvania and New York, it’s having a direct business impact on the electrical market.
Somnuek Saelim | DreamsTime
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Commercial Market 101 - 2023 Update

April 7, 2023

This month’s article focuses on one of the most important of all markets for electrical products — the commercial construction market. The products used in this market cut across virtually all product categories, including lighting; wire and cable; fittings; connectors and terminals; conduit, cable tray and wiring systems; wiring devices; motors and motor controls; distribution equipment; circuit breakers and fuses; switchgear; voice-data-video (VDV) products; power conditioning equipment; signaling equipment; building management systems; and electricians’ supplies.

With this selection of products, it’s easy to see why few markets are nearer and dearer to an electrical distributor’s heart than new construction and retrofit work in the commercial market. It’s a huge market that sweeps across big cities, small towns and rural areas — from Main Street America to malls and strip shopping centers. The biggest applications include office buildings, stores and shopping centers, hotels, banks, theaters, museums, sporting facilities, data centers and other public buildings.

Commercial construction probably accounts for a bigger selection of products from a distributor’s warehouse shelves than any other market. Depending on how you define this market, it accounts for approximately 26% of a typical electrical distributor’s business, according to Electrical Wholesaling’s most recent reader surveys.

According to the preliminary 2022 year-end Value of New Construction Put-In-Place data from the U.S. Census Bureau, office construction was the biggest commercial construction segment with $75.5 billion in projects underway throughout 2022. It accounts for roughly 14% of all private nonresidential construction. The warehouse construction category has grown substantially. It’s now the second largest category, with $61.5 billion in construction value. It includes the massive distribution centers being built by Amazon and other online vendors, as well as facilities for brick-and-mortar retailers. Retail construction, another large commercial construction category, has declined quite a bit in recent years. Last year it tallied $13.7 billion in new construction work. The amount of shopping center and mall construction is down quite a bit because of competition from online retailers. From 2015-2018, it regularly topped $20 billion in new construction activity.

The more commercial profitable jobs often get obscured by the “trophy” jobs. Everyone likes to drive by the biggest construction project in town and say to anyone who will listen, “We worked on that project.” But for every office tower, stadium or other landmark job, there are probably dozens of smaller — but more profitable — jobs that get done quietly, don’t go out to bid and never quite hit the radar screen in the market. Don’t overlook the small projects or retrofit work that may still be available even in the slowest of economic times.

While spending on nonresidential construction picked up momentum toward the end of 2022, the American Institute of Architects (AIA) expects construction spending will moderate in 2023 and slow significantly in 2024, according to its Consensus Construction Forecast panel, which is made up of leading construction economists. The panel is projecting commercial construction to increase +2.6% in 2023 but contract -1.4% in 2024. These economists also see office construction dropping -0.5% in 2023 and -0.7% in 2024. The AIA Consensus Construction Forecast combines the forecasts of Economy.com, FMI ConstructConnect, Associated Builders and Contractors, Wells Fargo Securities, Markstein Advisors and Piedmont Crescent Capital.

Dodge Construction Network says in its 2023 Construction Outlook that, “Commercial construction will see a pointed falloff in activity during 2023 as starts decline -3% to $153 billion and square footage falls a more substantial -15% to 921 million sq ft.”

Dodge also says the warehouse sector is overbuilt and will decline in 2023, and that the outlook for retail, hotels and offices will continue to be soft because of the impact of COVID-19. Data centers will be a strong segment of the commercial market, according to the Dodge forecast.

When you need forecasts on the health of the construction market, check out Electrical Wholesaling’s monthly “Electrostats” department, which compiles the Department of Commerce’s Value of New Construction data for offices, lodging and other market segments. More detailed data by project type is available on a monthly basis at www.census.gov. Other sources of economic data include Dodge Data & Analytics’ www.construction.com, and www.constructconnect.com the American Institute of Architects’ Architectural Billings Index, available monthly at www.aia.org; and CBRE’s www.cbre.com and JLL (www.us.jll.com). JLL and CBRE offers quarterly reports on office vacancy trends for the entire United States and major U.S. metropolitan markets. Office vacancy rates are an important regional economic indicator because developers and building owners generally won’t build many new buildings when office vacancy rates are much above 10%. The table above offers JLL data on the vacancy rates in the 10 largest office construction markets.

5 TRENDS TO WATCH

#1. Telecommunicating is reshaping the commercial real estate market and it will dramatically impact the amount of new office construction and the configuration of existing office space

Although the COVID-19 pandemic accelerated the move toward work-at-home and hybrid officing options, the trend toward telecommunication has been underway for some time. While the percent of a company’s work force working from home varies by industry and the region of the county, it’s not unusual in some cities for 50% or less of a company’s employees to work from home or to only come into the office one or two days a week.

In a post on its website (https://info.pcxcorp.com/blog/how-the-rise-of-remote-workers-are-impacting-the-construction-industry) PCX Holding, a division of Hubbell Industrial Control that designs and manufactures prefabricated electrical power distribution systems, outlined the challenges and opportunities telecommuting presents the commercial construction market.

“As telecommuting becomes more popular, the construction industry is going to have to adapt,” the post said. “Having a big office in a high rise doesn’t have the appeal it once did, and more corporations are going to seek ways to economize on their office space. Office space will be redesigned to accommodate more communal work spaces and fewer offices and cubicles. There will be less emphasis on large urban headquarters and more emphasis on smaller offices with coworking space. Smaller offices will help companies reduce their carbon footprint as well.

“You also can expect to see other construction industry trends emerge. Fewer commuters means that less parking will be required. It also will encourage companies to locate offices where property is less expensive and where they receive greater tax incentives.”

#2. Renovation work may account for a bigger share of the commercial market

The need for new office configurations to adapt to hybrid work strategies will contributed to the growing importance of renovation work in the commercial market. Back in January, Kermit Baker, AIA’s chief economist, wrote in his 2023 Consensus of Construction, “Over the past few decades, there has been a steady increase in the share of revenue at architecture firms coming from reconstruction projects – renovations, retrofits, building additions, and historic preservation. Part of this derives from an expanding interest in sustainability – fixing up an older building is more environmentally sensitive than tearing that building down and constructing a new one. However, fundamental economics and demographics likely play an equal or greater role. Slower population growth in recent years and the resulting slower growth in the economy means that we don’t need to expand our building stock at the pace we did a decade or two ago.

“We’re seeing this increased growth in the reconstruction share across all major building categories. Architecture firms reported that in 2021, 62% of their revenue from commercial and industrial facilities came from reconstruction projects, up from 38% 15 years ago.”

It’s tough to get hard numbers on exactly how big the commercial retrofit market can be for electrical distributors and their customers. But no one will dispute that it’s sizeable and that it can often be more profitable than new construction work because it usually doesn’t go out to bid. According to Electrical Wholesaling reader surveys, commercial/office maintenance supplies and commercial/office retrofit business account for approximately 9% of the average distributor’s sales, while new office construction is 9.5% of sales. One of the biggest sources of commercial retrofit work is energy-efficient lighting systems. The inherent cost savings of the more efficient LED lighting systems blended with utility rebates and federal, state or local tax incentives can often push the return on investment (ROI) for energy-efficient lighting systems to three years or less.

#3. Data centers are still the hottest segment of the commercial construction market

Amazon, Microsoft, Google, Facebook and other tech firms or social media companies are each spending hundreds of millions of dollars on data centers. The total construction value of many data centers can easily range between $500 million and $1 billion, and when you consider that the electrical portion of these jobs is typically no less than 10%, these jobs represent a nice chunk of change for electrical distributors.

WESCO Distribution, Pittsburgh, and its Anixter business unit focus on helping customers solve supply chain issues related to data center projects. The company bolstered its package of data center solutions with the Sept. 2022 acquisition of Rahi System Holdings, Fremont, CA, which according to the press release on the purchase “serves the full life cycle of data center solutions by helping customers manage and simplify technology.”

#4. Distributors are differentiating themselves by offering preassembled products and systems to electrical contractors

To help their contractor customers save time and labor, some electrical distributors are offering presassembled electrical products as a value-added service. Graybar Electric Co., St. Louis, and Rexel USA, Dallas, are two distributors with innovative preassembly services.

 Graybar urges contractors to “always be installing” so they can focus on the most profitable portion of any job – using their time and expertise on the job-site to install products, and not on non-productive tasks like having highly paid electricians working on time-consuming tasks like assembling fixture whips’ installing fittings into steel boxes; or assembling enclosures. A promotional video on Graybar’s website says electrical contractor spend up to up to 40% of their time working on nonproductive tasks, which impacts project profitability.

Rexel also focuses on project profitability with its preassembly services, which it provides for electrical, lighting, solar, automation & control and voice-data-video products. One of its promotional flyers for this service says, “We’ll handle the labor; you reap the savings. On the jobsite, time is money. You need to keep your high-valued labor focused on the most important tasks. With Rexel’s Pre Fab services, we deliver pre-assembled components built to your specifications right to your jobsite. We do all the work while you save time and labor cost on repetitive installation. You get consistent quality at a lower cost.”

#5. Some savvy electrical distributors are going the extra mile to help out electrical contractors with their job-site logistical challenges

Large commercial projects are often in downtown high-rise buildings or on large corporate campuses, and electrical contractors can waste a lot of time when the products they need for a project aren’t exactly where they need them. In a Oct. 2019 cover story on Lonestar Electric Supply Houston, the company’s management team told EW about how the value-added service they developed to keep their customers’ lighting jobs on track.

 The company’s executive team said logistical element of a typical lighting job is often complicated by some unique shipping challenges. Lighting fixtures are often shipped by manufacturers on a part-by-part basis in dozens of different boxes, and electrical contractors must assign someone on the job-site — often at hefty wage rates that can hit $50 per hour in the Texas market — to unpack the boxes, inspect for damages and piece together the fixtures.

Lonestar Electric Supply developed a customized cloud-based system to track fixture shipments that offers real-time mobile access for both employees and customers, and an innovative logistical support system where it brings these shipments into a special logistics warehouse and a dedicated crew inspects all products for damage, labels all shipping boxes with special job and location codes, and then holds the products for the job until the contractor needs them on the job site.

Summary. Although the commercial construction market may economic headwinds over the next year, it will remain a key market for electrical distributors, contractors, manufacturers and independent manufacturers’ reps.

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