Investor Conference Focuses on Recovery

October 5, 2012
Meetings & Events

New York–"Today's housing fundamentals are fantastic," according to John Burns, a California-based real estate consultant. Speaking at the 2012 Building and Infrastructure Conference here, hosted by Lincoln International and LEK Consulting, he pointed to steady job growth and low mortgage interest rates as key factors for steady growth in housing starts over the next several years.

"Almost every region is growing," Burns said, noting that in some markets it's likely that housing demand could outpace supply. That view was shared by many of the speakers at the event, including building product company executives and investors active in the arena.

With housing starts near the 750,000 level this year, "we're only 25 percent back from the bottom and still only half way to normal," Burns reported, noting annual housing starts average about 1.5 million each year. He predicts the single-family market will grow 15 to 25 percent annually until "we get back to normal."  The multi-family market will grow about 20 to 25 percent annually.

The rental market has already seen more of a rebound and will be "the prime beneficiary early in the recovery," according to Burns. With job growth, more of the young college graduates living with parents will move out into their own apartments. Additionally, those who lost homes to foreclosure, and those continuing to lose homes, are also in the rental market. Over time, he continued, many of those renters will become homebuyers.

Investor Panel
A panel of investors agreed with Burns' positive outlook for the residential market over the next several years. "We're seeing it already and we see it looking into next year in our discussions with builders," said L.T. Gibson, president and CEO of US LBM Holdings.

"We're seeing every month this year is better than the same month last year," said Ira Starr of Long Point Capital.  Despite the many "head fakes" that have appeared in the housing market, he added. "We're getting more confident." 

With the recovery has come a small rebound in merger and acquisition activity in the building products arena, according to Andrew Prete of Nortek Inc. Uzair Dossani of Warburg Pincus reported that lenders are also coming back into the industry. 

As a potential seller, Starr suggested his company would not want "to give up the upside" of the current market. "Housing starts are going to double over the next several years," he said. "Why would you sell?" 

The recovery in the housing market is bringing another change to the market–rising prices for building products, stated US LBM's Gibson. Increased demand has already translated into higher commodity prices, as well as increases in prices for roofing, siding and insulation materials. The trend is not evident with windows and doors yet, he observed, but he expected that to happen as well.  

Despite improving market conditions, most speakers expressed caution at the event.  A second panel that focused on managing growth in the current climate talked about smaller, more strategic initiatives.  "We're focusing on growing in our core business," stated Richard McPhail, VP of strategic business development at the Home Depot, who outlined the company's initiatives to better connect its online presence with its retail business. "We're watching our investments, but that's an area where we think it's risky not to invest in."

Greg Henry with Rheem Manufacturing and Brendan Delay of L&W Supply, the distribution business of USG Corp., offered similar perspectives.  Both described strategic efforts to work more closely with certain channel partners and target specific market opportunities. Henry said his company was looking to redeploy more resources to the web, while Henry mentioned app development as an important initiative to work more closely with customers.

The positive news in the residential market bodes well for commercial construction, said Bernard Markstein of Reed Construction Data, who concluded the conference.  Most segments of the commercial market, including offices, hotels and retail, are improving, although there has been a pause in the market recently, he suggested. The institutional market has been performing well, with private colleges in an investment mode, but publicly-funded projects are not as strong as they could be, he noted, pointing to constraints in government spending.

The longer term outlook is positive, Markstein continued. The health care and manufacturing segments are particularly strong. There also continues to be some shakeout in the retail sector. Some stores are falling by the wayside as a result of online sales, but warehouse stores and restaurants remain strong categories. He concluded by urging further infrastructure investment by the U.S. to both strengthen the economy in the short term and help make the country more competitive in the long term.