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 office buildings, 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 approximately 30 percent of a typical electrical distributor's business, according to Electrical Wholesaling magazine's November 2010 Regional Factbook. Following are the key 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, “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 in the slowest of economic times.
Retrofit work is equally 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 2010 Regional Factbook, commercial/office maintenance supplies and commercial/office retrofit business accounts for 4.9 percent of the average distributor's sales, while new office construction is 9.6 percent of sales. One of the biggest sources of commercial retrofit work — even during the recession — was energy-efficient lighting systems. The inherent cost savings of the more efficient 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 such as T5 or T8 lighting to two years or less.
Although solar installations on commercial facilities are becoming more popular in the geographic market areas that offer a lucrative blend of utility rebates and local incentives, along with the 30 percent federal tax incentive, currently most photovoltaic (PV) systems for in the commercial market have a ROI of at least five years or more.
Market indicators point to still-sluggish commercial market
The commercial market is governed by the laws of supply and demand — developers and building owners only build or renovate offices, shops, restaurants, and other commercial projects when they believe there will be enough customer demand to buy or lease them. As we all know, there's been little customer demand for new projects over the past three years because of the lack of capital to fund new projects, high unemployment, historically high office vacancy rates and the general uncertainty over the direction of the economy. While the construction industry is through the worst of this business cycle, market conditions have been painfully slow to improve.
The national numbers for the commercial market aren't too encouraging yet, but Electrical Wholesaling's editors are starting to hear from some from distributors that project business is starting to pick up in some geographic markets. When you need to get 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 by clicking on the “Construction” tab and then selecting “Value Put in Place.” Other sources of economic data include McGraw-Hill's www.construction.com, and Reed Construction Data's www.reedconstructiondata.com; the American Institute of Architects' Architectural Billings Index, available monthly at www.aia.org; and CB Ellis' www.grubb-ellis.com. CB Ellis offers quarterly reports on office vacancy trends for the entire United States and broken down for 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 percent. As a point of reference, in the fourth quarter of 2010 the national vacancy rate was just below a historically high 17 percent, and some markets, including Dallas; San Jose, Calif.; Stamford, Conn.; and Detroit; were suffering with office vacancy rate of more than 25 percent in their central business districts. On the flip side, Fort Worth, Texas; Charleston, S.C.; Columbus, Ohio; New York; and Raleigh, N.C.; all had vacancy rates of less than 10 percent.
To find vacancy rates for your local market, go to www.grubb-ellis.com, click on “Market Research” and then on “Research Reports.” From there you can click on the metropolitan area in which you are interested, or the national reports, accessible below the map of the United States.
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. More and more of this is done wirelessly, and wireless networks have quickly become common in commercial buildings.
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.
With the help of LEED design standards, federal legislation and a growing “green consciousness,” energy-efficient lighting systems have become more of a given in commercial buildings
The lighting system in a commercial building can easily account for up to 25 percent of the building's electrical bill. It has gotten easier to sell energy-efficiency to building owners on lighting retrofits, now that the payback is often two years or less, thanks to improvements in indoor and exterior lamps, lighting fixtures, reflectors, dimming systems and daylighting designs. You can help electrical contractors get the word across to their customers by working with your manufacturers and taking advantage of the sales tools they offer, such as case studies and energy audits.
One driver for greener buildings is the Leadership in Energy and Environmental Design (LEED) green building rating system developed by the U.S. Green Building Council, Washington, D.C. LEED standards have helped increase awareness in the design community of the economic and environmental benefits of green buildings.
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 of customization, customers expect manufacturers and distributors involved in the transaction to get the product on the jobsite as quickly as possible. With CAD/CAM design systems, speed-of-light communication systems 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 continues to gain 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 for open bidding.
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. From a building owner's perspective, proponents of design-build projects say the biggest advantages of design/build projects are the single point of responsibility for construction and design; potential to fast-track a project (beginning construction or procurement prior to the design being completed); shorter overall delivery time of the project; and the reduction or elimination of change orders.
The latest in design and communication technologies are becoming a bigger part of the commercial market
You don't find many electrical contractors wandering into a distributor's counter area with a materials list for a commercial job scrawled on a piece of 2×4, as in the old days. Electrical distributors' customers are slowly adopting project management software, CAD/CAM, remote ordering and other productivity tools. As the industry moves slowly but inevitably toward greater computerization, electrical distributors can expect their customers to order products via tablet computers like the iPad and personal digital assistants (PDAs) like iPhones and Blackberries, right from the job-site. They will also see contractors monitor their performance with project management software. Project management software tools offered by companies such as e-Builder and AutoDesk allow electrical contractors and subcontractors in other building trades to track deliveries, order products and monitor construction project deadlines via the Web.
Trade Service Corp., San Diego, Calif., recently launched a new e-business tool for electrical contractors that will save them time in the bidding process. Submittal Manager includes software and 250,000-plus catalog pages covering more than one million electrical items accessible with the click of a mouse.
Get familiar with the latest trend in construction design: BIM (building information modeling)
One buzzword you are sure to run across in the commercial market is BIM. Wikipedia defines “BIM” as, “Building information modeling covers geometry, spatial relationships, light analysis, geographic information, quantities and properties of building components (for example manufacturers' details)… The concept of Building Information Modeling is to build a building virtually prior to building it physically, in order to work out problems, and simulate and analyze potential impacts.”
One of the biggest reasons BIM is important to electrical manufacturers, distributors, independent manufacturers' reps, is that in a full-blown BIM design, each electrical product used in the design may have a digital record “attached” to it that includes not only its technical specifications and capabilities, but pertinent logistical and pricing information such as suppliers, change orders, and where it fits in the project timeline. If you are looking for information on BIM, a great place to start is www.buildingsmartalliance.com. The Building Smart Alliance is run by National Institute of Building Sciences, Washington, D.C., to promote BIM and educate construction professionals on its use in the building trades. Associated General Contractors, Arlington, Va., and Engineering News-Record magazine (www.enr.construction.com) are two other great resources for the latest information on BIM. Although BIM's adoption rate 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: Industrial Market 101
A Look Inside
The Commercial Market
- Pole -line hardware & utility meters
- Load centers
- Distribution equipment
- Circuit breakers & fuses
- Solar panels and mounting hardware
- Building wire & power cable
- Wiring devices and wallplates
- VDV cabling & equipment
- Portable cord
- Building management
- Cable fittings & fasteners
- Receptacle boxes
- Junction boxes & covers
- Underfloor wiring systems for offices & IT rooms
Misc. Electrical Loads
- Fluorescent, HID, incandescent, halogen & LED lamps
- Lighting fixtures & ballasts
- Dimming equipment, occupancy sensors & other lighting controls
- Motors & drives
- Snow-melting equipment for walkways
In the Truck
- Voice/data/video systems
- Security systems
- UPS & power conditioning equipment
Tools of the Trade
- Hand tools
- Power tools
- Metering equipment
- Conduit benders
- Insulating tape
Key Commercial Applications
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
- Theaters, theme parks and other entertainment facilities
- Sporting stadiums
- Data centers
The commercial market has seen lots of changes and now offers even more sales opportunities for distributors, reps and manufacturers. Here are some of the biggest changes.
Applications for LEDs are expanding from exit signs into parking lots, accent lighting and some general lighting applications.
Building owners are leasing their rooftops to solar companies and getting a break on the electricity these PV installations generate.
Building Information Modeling (BIM) is starting to hit the mainstream and will eventually help distributors become more integrated into the logistics of supplying projects.
Wireless networks are commonplace.
Buildings designed to meet green LEED standards are much more common.
As electric vehicles become more widespread, EV supply equipment will be a key add-on product.
The Commercial Market by the Numbers
While McGraw-Hill Construction expects the construction of commercial buildings to increase 16 percent to $44.9 billion, that's still more than 55 percent down from the recent market high of $101 billion in 2007.
Commercial/office construction accounts for approximately 30 percent of all electrical supplies sold through electrical distributors and in 2011 should account for more than $25 billion in 2011, according to Electrical Wholesaling's Market Planning Guide.
Eighteen of 59 metropolitan areas (31 percent) in the most recent Grubb-Ellis report on office vacancies had vacancy rates exceeding 20 percent.