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CIT Releases 30th Annual Construction Industry Forecast

Wed January 25, 2006 - National Edition
CEG



CIT Construction, a unit of CIT Group Inc., has announced the results of the 30th annual CIT Construction Industry Forecast.

The 2006 outlook indicates that for the third year in a row, U.S. construction industry leaders anticipate a strong year ahead, yet remain cautious. Regionally, two of the nine U.S. regions surveyed show an increase in confidence while three additional remain optimistic.

“For the third consecutive year, the leaders of the United States construction industry share an optimistic outlook for the coming year. While their optimism is more cautious than the previous year, their positive predictions for 2006, in terms of equipment rentals and purchases, net income, business strategies, technology and issues and opportunities, give hope for what’s to come,” said Ron Riecks, executive vice president of CIT Construction.

“Based on the history of accuracy of the CIT Construction Industry Forecast all of us in the construction industry can look forward to good things in 2006.”

Now in its 30th year, the CIT Construction Industry Forecast independently surveys U.S. construction executives on their perceptions of the state of the industry and trends for the coming year. More than 900 contractors and equipment distributors were surveyed via telephone interviews across the country.

The Optimism Quotient (OQ) is the Forecast’s primary indicator for assessing and comparing the respondents’ level of confidence in the health of the construction industry. The OQ is a weighted and averaged number that expresses construction executives’ perceptions of the industry’s prospects for the coming year.

Generally, a number of 100 or higher indicates strong optimism in the industry’s one-year outlook while a number below 100 indicates a more cautious projection.

2006 OQ: Continued Optimism

The 2006 Construction Industry Forecast’s overall optimism quotient fell seven points — from last year’s 109 to 102 — but it continues to indicate a positive outlook for the coming year.

The OQ for distributors dipped three points to 115 while contractors also exhibit a decrease in their optimism, evident from an 11 point decline in OQ levels to 89

Regional Highlights

The United States was divided into nine regions for the survey:

• West South Central:

Arkansas,

Louisiana,

Oklahoma, and

Texas

• East South Central:

Alabama,

Kentucky,

Mississippi, and

Tennessee

• Mountain:

Arizona,

Colorado,

Idaho,

Montana,

Nevada,

New Mexico,

Utah, and

Wyoming

• South Atlantic:

Delaware,

District of Columbia,

Florida,

Georgia,

Maryland,

North Carolina,

South Carolina,

Virginia, and

West Virginia

• Pacific:

Alaska,

California,

Hawaii,

Oregon, and

Washington

• New England:

Connecticut,

Maine,

Massachusetts,

New Hampshire,

Rhode Island, and

Vermont

• Middle Atlantic:

New Jersey,

New York, and

Pennsylvania

• West North Central:

Iowa,

Kansas,

Minnesota,

Missouri,

Nebraska, North Dakota, and

South Dakota

• East North Central:

Illinois,

Indiana,

Michigan,

Ohio, and

Wisconsin.

Following are the key 2006 regional highlights:

• Five of the nine U.S. regions have OQ scores above 100.

• The West South Central is the most positive region, posting an OQ of 120.

• The Mountain and South Atlantic regions experienced increases in OQ.

• Seven regions had lower OQ scores than the previous year.

• Three of the four regions with OQ scores below the baseline 100 are along the East Coast.

• The average region by region decline in OQ levels is 11 points.

• The New England region had the lowest OQ rating (66).

U.S. Construction Trends — Equipment Overview

A sure sign of business confidence involves capital spending, so it is promising news that more contractors and distributors anticipate growing their equipment reserves. Approximately 49 percent of surveyed contractors anticipate equipment purchases (up from 44 percent in 2005) and 52 percent of distributors are planning to add to their equipment rental inventories in 2006 (vs. 48 percent last year).

Contractors expect to spend approximately $60,000 to purchase pre-owned equipment (up approximately 28 percent from their 2005 budget) and an average of $70,200 on new equipment, compared to $79,200 planned a year ago.

Ninety-one percent of distributors expect their new-equipment sales to increase or stay the same as last year, while 90 percent have the same predictions for used equipment. On average, distributors who foresee an increase in both new and used equipment sales in 2006 anticipate an increase of 18 percent.

For the 11th year in a row, trucks lead the list of expected equipment purchases, which also includes hand tools and skid steer loaders, both of which are up 3 percent from 2005.

Rental Overview

While contractors favor their own equipment, they expect to meet 16 percent of their 2006 equipment requirements with rented or leased equipment and 17 percent expect that percentage to increase.

Rented or leased equipment is expected to meet approximately 18 percent of builders needs and 10 percent of non-builders needs. Their primary reason for renting equipment is a limited use for the equipment.

Large equipment rental companies are the preferred source for obtaining the required equipment, according to contractors who on average fulfill approximately 70 percent of their rental needs from such companies.

Just as contractors expect to rent more equipment, 58 percent of distributors anticipate an expected increase in their rental income, which is the most optimistic distributors have been since 1999 when 59 percent expected their rental income to grow.

Distributors expect to meet the rental equipment demand by growing their equipment fleet. Fifty-two percent plan to expand their fleets in 2006, compared to 48 percent in 2005.

Of those who expect to add to their inventory, the increases are expected to average 17 percent growth. Seventy-six percent of distributors report that they are winning business or holding their own against large national rental companies.

Finance

Approximately 90 percent of contractors and distributors expect their net income to increase or stay about the same in 2006.

Of the 45 percent of distributors who foresee a higher net income anticipate a 20 percent boost on average, compared to a 13 percent growth in last year’s Forecast. Contractors are a bit more cautious regarding their net income — builders expect it to increase by 18 percent while non-builders think it will be up by 15 percent.

In terms of sales volume for the coming year, 30 percent of distributors said that sales will top $10 million, although the median estimate is much less — only $4.13 million. Contractors are less aspirational — only six percent said their sales will exceed $10 million and more than half expect sales of less than $500,000 in 2006.

Since 2003, survey respondents have been predicting higher financing costs — 2006 is no different. Eighty-one percent of distributors and approximately three-fourths of contractors agree that their financing costs will rise in the coming year.

Business Strategies

As the housing market continues to strengthen in many parts of the country, it’s no wonder that most builders make residential construction the foundation of their business.

In the 2000 Forecast, half of builders (50 percent) said they concentrated on residential construction — today, that number has ballooned to 73 percent. Just 14 percent of builders prefer commercial construction, including commercial buildings, office buildings or warehouses.

Non-builders are increasingly favoring the residential market. The number of nonbuilders who cite homebuilding as their primary source of business has doubled since last year, from 6 percent to 13 percent. However, more non-builders cite excavation and clearing projects and water and sewer projects — 15 percent and 14 percent, respectively.

When asked to name their most important marketing strategies for 2006, one-third of distributors said they plan to diversify their business even further. Seventeen percent plan to expand their business interests by taking on new product lines in 2006.

Relationships continue to be a major driver of business in the construction industry, according to both contractors and distributors. Eighty-seven percent of contractors and 90 percent of distributors said industry friends and colleagues were a valuable source of business information, while industry journals, daily newspapers and meetings and seminars also are highly regarded.

Technology

The Internet has quickly evolved into an effective sales tool and both distributors and contractors rely on it to connect with customers, prospects, employees and others in the industry.

Surveyed distributors expect online equipment sales to increase by 50 percent in 2006, compared to 38 percent of contractors who said they will use the web to buy equipment. More than 70 percent of distributors have a Web site, of which approximately 70 percent sell equipment through the site and 20 percent rent equipment.

Approximately one-fourth of contractors have Web sites, and 21 percent without a site expect to have one in 2006. The content of their Web sites includes e-mail access (96 percent), lists of recent projects (46 percent) and more than half provide location information, mission statement and company background.

Sixty-three percent of contractors and 83 percent of distributors predict that their business use of the Internet will grow in 2006. Distributors expect to take advantage of the Interview to buy equipment (62 percent) or find and purchase parts (67 percent). The number of contractors that also plan to use the Web to find and purchase parts has almost doubled in three years, from 28 percent in 2002 to 50 percent in 2006.

Both contractors and distributors cite learning about product information as their top business use for the Internet.

Issues and Opportunities

When asked about the construction industry’s most serious problems for 2006, health insurance costs were cited by 81 percent of contractors and 80 percent of distributors, while a lack of a quality workforce, profit margins and the high cost of capital also were mentioned.

The single most serious problem facing the industry is a lack of a quality workforce, according to 31 percent of contractors and 29 percent of distributors, up from 30 percent and 24 percent, respectively, a year ago.

Nineteen percent of distributors are worried about lack of work in 2006, while 23 percent of contractors are, down from 28 percent in 2005.

The number of distributors who said fuel and energy costs are a serious issue grew more than six-fold, from 2 percent to 13 percent, in the last year.

Residential construction is viewed as the most promising business opportunity for 2006 by 67 percent of builders, up slightly from 62 percent who felt that way a year ago. Twenty-seven percent of non-builders agree with that assessment, a dip from last year’s 29 percent.

For the sixth consecutive year, distributors were most positive about general construction opportunities. Forty-three percent said general construction was the industry’s single best opportunity, an increase of 3 percent from 2005.

There also was an increase in distributors who see strong opportunities in oil and natural gas development projects (17 percent vs. 14 percent).

For more information, call 201/460-2845 or visit www.cit.com.