By John Burns Real Estate Consulting Two questions: Which is a bigger industry: new construction or remodeling? How many $500 billion+ industries can say that they are almost certain to grow 30%, even if interest rates rise? In a survey at our Summit conference in June, industry executives voted building product stocks as the best risk-adjusted future return. The building products companies are sitting pretty They are looking forward to 30%+ growth in new home and apartment construction, which will allow new construction to eventually surpass the remodeling business. New construction. At least 90% of forecasters, including us, believe residential construction will rise at least 30% to 1.5 million+ units because we can all count the number of young adults delaying household formation, and 1.5 million has long been considered a normal level of demand. While the timing will depend heavily on economic growth and interest rates, the demand clearly indicates that the $235 billion spent on new residential construction in the U.S. last year will grow dramatically. Remodeling. Spending on home repair and remodeling has been very difficult to count and forecast, but not anymore thanks to a new report we issued this month! Repair and Remodeling spending should grow 7.8% in 2016, with strong growth thereafter. Barring a recession, we see little downside in the U.S. Repair and Remodeling industry, which totaled $266 billion last year. If mortgage rates rise, which would hurt new home construction, we believe remodeling will benefit as move-up home buyers stay in their existing home with a low-rate fixed mortgage and tap their home equity line to remodel instead of moving. Thanks to VP Todd Tomalak, a 6-time winner of the Most Accurate Category Forecaster by the Chicago Federal Reserve and previously the Manager of Economic and Industry Analytics at Kohler Co., we have completed the first comprehensive forecast of U.S. Repair and Remodeling done by anyone, ever (at least that we can find). Others have forecast portions of the business but not all of it. We separated out the 2.2% growth attributable to Natural Disaster (ND) spending in 2014 and have sliced and diced the industry multiple ways: By tenant type: 72% Owner and 26% Renter By project size: 43% Big Projects and 55% Small Projects By labor and materials: 33% Professional Contractor Labor, 41% Materials Purchased by Contractors, and 26% Materials Purchased by DIYers (including ND) 2016 growth will consist of: Big Project spending 7.2% growth in big project spending 10.0% owner growth 3.8% renter growth Small Project spending 8.6% growth in small project spending 9.4% owner growth 2.8% renter growth 4.0% growth in Natural Disaster Spending if 2015 reaches normal spending levels After much testing, Todd settled on 18 major industry drivers, and we developed assumptions for each. Some of them, such as demographic shifts, are easy to predict. Others have more uncertainty. If you are a large building products manufacturer, installer, or investor, please contact Todd Tomalak at ttomalak@realestateconsulting.com or in Wisconsin at (920) 373-6727 for more information. To subscribe to our research, please contact Lisa Marquis Jackson at lmjackason@realestateconsulting.com or in Dallas at (214) 389-9003. This article courtesy of John Burns Real Estate Consulting.
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