Some Thoughts on the Year Ahead
|PGT glass hurricane mural at the International Bulders Show|
It’s fortuitous that the International Builders Show takes place early in the year because the outcome of the show usually provides a view of the tempo of the market in the year ahead. If that holds true this year, we’re in for a great 2017. Attendance at the show was estimated to approach 80,000 people who were there to see 1,500 exhibitors. I would describe the crowd as having been “on the hunt,” meaning that everyone was there looking for something in particular. Some years, the crowd rolls past like tumbleweeds. At this year’s event, it was difficult to get down the aisles during essentially the entire first two days. Optimism was high and it looks like it will be a strong year ahead for the industry.
Given the backdrop of a good year ahead, we should ask ourselves what will be the most influential trends in the year to come. The elephant in the room in that regard is, what will a Donald Trump presidency mean for the building products industry? Whatever his quirks, Donald Trump is a builder who measures success by skyline changing real estate projects. At the risk of oversimplifying the complex organization that is a presidency, it’s hard to believe he’s going to do too many things that discourage building and construction.
One side note is that the ever growing perception in the market is that there will be tougher laws on immigration. We’ve had our first potential buyer look beyond having I-9 forms on file to ask whether all workers at a target company had passed the e-Verify system. If it turns out that Trump is tougher on undocumented workers than in the past, buyers will not want their names associated with a company where workers are deported. For companies with any doubts in that direction, now is a good time to raise the standard on worker clearance.
As we enter the New Year, capital availability remains strong. Lending standards are friendlier than in the past and senior debt providers are funding manufacturers, distributors and builders. The entire supply chain has access to capital again. Many private equity funds raised a new fund in 2016, often hitting what is called the ‘hard cap.’ This is the absolute maximum size of the fund that was agreed upon in the formation documents, meaning that the fund was fully subscribed by investors seeking to back private equity transactions. A great fund raising environment leads naturally to a great M&A environment as these funds begin to make acquisitions.
Geopolitical risks are probably more prevalent now than they were at this time last year. At the start of 2016, the Russia-Ukraine conflict loomed large among other potential issues. Today, terrorism and acts by lone wolf terrorists represent the greatest source of geopolitical risk. In the fenestration industry, we have a unique role to play in protecting the occupants of buildings through improvements in blast and ballistic resistant products. The demand for such products will grow strongly over the next decade as targets that would previously have been considered off limits come under threat.
The skilled labor shortage will continue to be a driving force this year and in the years ahead. As skilled labor remains scarce, builders place a higher value on building components that are modular, prefabricated or provided on a unitized or prehung basis. All of that plays well into the strengths of fenestration manufacturers.
Lead times for glass remain unusually high, particularly for various types of specialty glass products. These long lead times flow out from the glass producers, to door and window manufacturers to builders, installers and contractors. Greater unpredictability in the supply chain puts the successful completion of projects at risk. Manufacturers that can bear the expense may consider bringing IGU production, tempering or laminating in-house.
Glass shortages and long lead times are not helpful, but I think we can all agree that they represent a relatively elegant problem to have, compared to a recession. A few bumps aside, it looks like 2017 will be a very good year for the industry.