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; datacom 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 offices, stores and shopping centers, hotels, banks, theaters, museums, sporting facilities 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 anywhere from 27 percent to 30 percent of a typical electrical distributor's business, according to Electrical Wholesaling magazine's November 2001 Regional Factbook. Here are the market trends that shape the commercial market:
The more 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, “I 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 small projects.
Retrofit work is equally as important as new construction. 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's 2001 Regional Factbook, commercial/office maintenance supplies and commercial/office retrofit business accounts for 8.9 percent of the average distributor's sales, while new office construction is 12.6 percent of sales.
Market statistics point to a commercial market that's been slow to respond to improving economic news. Two of the most important measures of the health of the commercial construction market are office vacancy rates and the U.S. Department of Census statistics on new construction put-in-place for offices. According to national realty companies such as Grubb & Ellis and Cushman & Wakefield, current office vacancy rates are mixed across the country. At the end of 2001, the cities or metropolitan areas with the highest vacancy rates (and the least market demand for new construction) included Dallas, Detroit and Columbus, Ohio. The Atlanta metropolitan area also had a relatively high vacancy rate at that time. Major metropolitan areas or cities with low office vacancy rates included Washington, D.C.; Sacramento, Calif.; and Wilmington, Del.
The most recent U.S. Census statistics on office construction are not encouraging. The value of construction put-in-place for office buildings in February 2002 was off 29 percent from February 2001, and declined from $44 billion in January to $42 billion. The Census Department also reported that other commercial construction projects also declined during this time period, dropping from $60.7 billion in January 2002 to $59.4 billion in February. The value of construction put-in-place for other commercial projects declined 10 percent in February 2002 compared to February 2001.
The McGraw-Hill Construction Information Group's 2002 Dodge Forecast is looking for smaller declines overall this year for this market segment. The Dodge Forecast is looking for the construction of income properties such as offices, hotels, stores, and warehouses to decline 3 percent to $101 billion this year. It also forecasts that office construction will slide 5 percent this year to 240 million square feet. Hotels will take the biggest hit in this category, it says, with a 15 percent decline to 50 million square feet following a 16 percent decline in 2001.
Manufacturer mergers and acquisitions touch on virtually all aspects of the construction market. Because of the breadth of the commercial construction market, it comes as no surprise that this market segment has seen the same consolidation that has transformed other parts of the electrical manufacturing community. While mergers and acquisitions have been relatively quiet during the past two years, there have been several recent major acquisitions in the past worth noting. Southwire Co., Carrollton, Ga., bought the building wire and cordset business of General Cable Corp., Highland Heights, Ky., and sold General Cable its Cyber Technologies datacom cable business in Peachtree City, Ga. In the lighting market, Hubbell Inc., Orange, Conn., announced plans last month to buy the USI lighting business from U.S. Industries. The $250 million acquisition includes Progress Lighting, Architectural Area Lighting, Columbia, Dual-Lite, Kim, Moldcast, Prescolite and Spaulding and would give Hubbell a major presence in the commercial/industrial lighting arena.
Other acquisitions of recent years that had a big impact on the commercial market included the following: Osram/Sylvania, Danvers, Mass., bought the Motorola Lighting ballast business; Cooper Industries, Houston, purchased B-Line Systems Inc., Highland, Ill.; Legrand acquired Wiremold, Hartford, Conn.; and Tyco International Ltd., Pembroke, Bermuda, purchased of a variety of commercially oriented manufacturers, including AMP, Harrisburg, Pa., and AFC Cable Systems, New Bedford, Mass.
Customers look for faster turnaround of custom-built products. When it comes to switchgear, large load centers and other products that require a high degree on customization, customers expect manufacturers and distributors involved in the transaction to get the product on the job site as quickly as possible. With CAD/CAM design systems, speed-of-light communications and the move to more modular components, manufacturers have to make their manufacturing processes as responsive as possible. When possible, manufacturers design these systems with modular components so they can tailor a product to a customer's specific request. This enables manufacturers to cut down on the number of different products they have to design, build, stock and track.
“Design/build” construction seems to be gaining ground on traditional “design-bid-build” construction. In a design/build project, the same company does the design and construction work, as opposed to the traditional bid project, where a design firm handles its part of the project for the building owner, who then puts the project out to an open bid.
Electrical contractors with design/build capabilities see less competition and more profit margin in the design-build market than in the traditional design-bid-build market. They also can take control of an entire project, get involved earlier in the process and eliminate the disputes that exist between the contractor and the designer.
According to the Surety Association of Canada, the biggest advantages of design/build projects from an owner's perspective include the following:
There's a single point of responsibility for construction and design. The finger-pointing between contractor and design professional so common in the design-bid-build delivery system is lessened or eliminated under the design-build system.
Potential exists for fast-tracking the project (beginning construction or procurement prior to the design being completed), resulting in a shorter overall delivery time for the project. This is a significant incentive to owners where time is an issue.
Change orders can be reduced or eliminated because the design/builder is responsible for both design and construction.
The owner can be provided with a fixed price of the project earlier in the process when compared with the traditional design-bid-build method.
Voice/data applications continue to grow in all areas of the commercial market. You don't have to look far in any modern office building to see that there are more applications than ever for voice/data cabling in commercial applications such as offices, stores and warehouses. People are producing more data than ever on computers, and because they need to send, manage, print and otherwise manipulate this data, it creates an enormous amount of opportunity, even in the current recession.
Security has also become a bigger concern in commercial installations, and that means more opportunity for your customers to install security cameras, pass-card entry systems, alarms and many other security systems.
In the not too distant future, look for wireless systems to gain popularity in new construction and retrofit applications in the commercial market. The article “Wireless Networks Spread” on page 26 of this issue describes how some hotels are offering wireless hook-ups for business travelers who want wireless access while they are on the road.
Energy-efficient lighting systems have become more of a given, rather than a value-added sales benefit. The lighting system in a commercial building can easily account for up to 25 percent of the building's electrical bill. One would think that the proven cost savings of a state-of-the-art lighting system would make it easy to sell energy-efficiency, but it's tough to convince a building owner of the truth of the “pay-more-now-for-future-savings” mantra when they are looking to cut building costs. Still, improvements in indoor and exterior lamps, lighting fixtures, reflectors, dimming systems and daylighting designs have combined to offer dramatic savings for your contractors' customers. You can help contractors get the word across to their customers by working your manufacturers, and taking advantage of the sales tools they offer, such as case studies and energy audits.
Electrical distributors' customers are slowly adopting project management software, remote ordering and other productivity tools. As the electrical construction industry moves slowly but inevitably toward greater computerization, electrical distributors can expect their customers to order products via personal digital assistants (PDAs) on the job site and to monitor their performance on supplying their construction project needs with project management software. Project management software packages offered by companies such as e-Builder, BuildPoint and Constructware allow electrical contractors and subcontractors in other building trades to track deliveries, order products and monitor construction project deadlines via the Web. Although the adoption rate of these technologies appears to be slow and depends on the size of the contractor (with bigger companies most prevalent among the early adopters), it's a trend worth watching.
Next month: The Residential Market
Editor's Note. Some of the most popular articles that Electrical Wholesaling has run in the last 10 years were part of a series on the key market segments in the electrical wholesaling industry: commercial, industrial, residential, utility, voice/data, schools and hospitals.
The electrical market has changed significantly in the past 10 years. To reflect this evolution, Electrical Wholesaling is updating this series in monthly installments.
The articles are written for new employees at electrical distributors, independent manufacturers' reps and electrical manufacturers, as well as for industry veterans who need to brush up on a particular market segment. The articles use cutaway drawings to highlight the sales opportunities in each type of facility and are written with a “Beginner's Guide 101” flavor to walk readers with little knowledge of the electrical market through the material. These articles are also part of “The Electrical Marketer's Survival Guide,” which has become a popular training resource available in a book and on a CD-ROM. It's available by calling (913) 967-1946.
Definitions vary for the scope of the commercial market because some people like to break out this market into different sub-segments. Whatever you decide to call it, there's a ton of business waiting for savvy distributors and their customers. Here are the biggest customers in the commercial market:
- Office buildings
- Strip shopping centers
- Big-box retailers
- Shopping malls
- Main Street America shops
- Hotels and motels
- Theme parks and other entertainment facilities
- Sporting stadiums