“The data should be viewed as rather disappointing,” said ABC’s chief economist Anirban Basu. “Because of January’s unseasonably warm temperatures across much of the nation, it seemed likely nonresidential construction volumes would increase. Instead, nonresidential construction spending dipped nearly one percent in January — adding to a list of data points that have been somewhat disappointing lately.”
The good news, said Basu, is that many economists expect the U.S. economy to continue to expand moderately in the months ahead, and that should result in modest gains in construction spending.
Slow But Steady Growth
The commercial unitary market will most likely cool down in 2012, as it comes off a fairly strong 2011 that saw growth in the high single digits, noted Mike Walker, director of marketing and product management, Lennox North America Commercial HVAC. “We still expect to see positive growth in the low single digits this year. The first part of the year will be critical as we face tough year-over-year comparables for industry performance.”
Walker added that there are many factors that will drive the commercial unitary market this year, including the availability of credit, the regulatory environment, and the possible implications from the election. “Most general economic data and industry specific information point to a slow and modest recovery. At this point we do not see any monumental shifts for 2012, but we continue to watch this very closely, as things can change rapidly in this fragile economy.”
A slow and modest recovery can be seen in the reports generated by the Air-Conditioning, Heating, and Refrigeration Institute (AHRI) as well. “Looking at AHRI’s figures for the commercial sector, the industry peaked in 2007, shipping nearly 500,000 units,” said Nitish Singh, director of marketing and product management, Rheem Heating & Cooling Division.
“The industry then saw a significant downturn in 2008 and bottomed out in 2009. The industry trended upward in 2010 and 2011, and we expect to see some more growth in 2012. That said, the latest AHRI numbers show that the industry today is shipping approximately 368,000 units, which is only about three-quarters of what we shipped in 2007.”
Singh added that the growth in 2010 and 2011 could be partly attributed to federal and state incentives for commercial customers to upgrade to more energy-efficient systems. “In 2012, we expect to see very limited government-backed rebates or tax credits for commercial buildings. Public schools still can take advantage of some federal and state tax credits for upgrading to more energy-efficient HVAC systems.”
Trane also expects commercial markets in 2012 to be flat to slightly higher than 2011. “We anticipate increases in retail and office markets, while public spending in education and government sectors is expected to be slightly off 2011 levels,” said Al Fullerton, North American unitary product management leader, Trane.
“We also expect to see continued growth in the applied chiller markets into 2012, with primary growth in the industrial and manufacturing sectors, along with higher education and health care,” said Ryan Geister, North American portfolio leader, centrifugal chillers, Trane. “The obstacles for growth will continue to be economic uncertainty, which is causing projects to be extended or delayed.”
Greg Alcorn, vice president, commercial sales and marketing, Carrier, expects mid-single-digit growth in 2012 to be primarily driven by planned replacement and efficiency upgrades to existing buildings. “Customers are looking for investments that have immediate as well as long-term benefits. This is not only true for building owners, but also for occupants. So the fundamentals for growth will remain.”
Growth can take place, but first the commercial market must come to grips with limits exposed by the deep recession, credit crisis, and impact of globalization of jobs, said Charles K. McGinnis, U.S. director, commercial energy solutions, Johnson Controls. “Almost all organizations — public and private — will be faced with deleveraging their assets. For buyers, this becomes an opportunity. Owners of commercial property will focus on retaining tenants and driving cost out of their operations. We expect a strong interest in comprehensive energy upgrades that enhance the value of the building while providing a better environment for the tenants.”
Finding Opportunities
Tough economic times usually result in customers opting for lower cost equipment, and that is a very real trend right now, said Erich Bauman, commercial product manager, Rheem Heating & Cooling Division. “However, with commercial customers, in particular, we’ve also seen a growing interest in higher-end, energy-efficient solutions, because business owners can realize the return on investment much quicker. For contractors to be successful in this challenging market, they need access to advanced and efficient commercial equipment — at price points the business owners can handle.”
Keith Glasch, vice president of sales and marketing, Titus HVAC, agreed, noting that building owners and managers are often looking for simple energy solutions that provide a good value at a decent cost. “Based on our statistics, customers are willing to spend about 10 percent more for energy solutions that have a better energy story and some architectural appeal. We are also seeing an increase in demand for ECM fan motors and better performing fan filter diffusers.”
Because energy costs have been on the rise in recent years, building owners and managers are interested in solutions that will achieve sustainable energy savings, noted Al Ward, vice president of sales, Daikin McQuay. “The largest opportunities exist within the retrofit market, as both low- and high-rise buildings can benefit from the new application of high-efficiency HVAC technologies such as heat pumps, VFDs, and advanced control programs. In new construction, data center markets are expanding in order to keep up with the cloud-computing trend. As a result, there is an increased need for HVAC systems that maintain critical temperature and humidity requirements.”
Even as some building owners and managers become more willing to replace their equipment with energy-efficient units, market economics will continue to drive the decision to repair rather than replace, said McGinnis. “Replacements will be prevalent in those communities that are showing growth, and repairs will be the norm in depressed communities. The exception to this will be in areas that provide a stimulus to make the investment, such as those communities offering Property Assessed Clean Energy (PACE) programs. PACE Districts offer building owners the opportunity to spread the investment in new technology over time as part of a special assessment on their property tax bill. It removes the upfront cost of the technology and matches the payments to the savings that the customer realizes from installing the new technology.”
The repair-rather-than-replace phenomenon can only last for so long, though, as the older equipment’s repair costs will eventually approach that of purchasing a new unit, said Walker. “We expect to see additional pent-up demand drive unit sales, as more and more customers enter into a situation where it finally makes financial sense to replace rather than repair aging equipment. When that time comes, commercial contractors need to provide building owners with information showing how better equipment can lower their overall total cost of ownership.”
Geister echoed that sentiment, noting that customers are increasingly expecting solutions that offer the highest reliability and efficiency. “They are also seeking energy service companies that can offer design assistance, modeling capabilities, and ultimately integrate all components into a comprehensive system to maximize savings and job productivity. In addition, we continue to see owner influence in the decision making process, especially in the higher education and industrial markets (e.g., data center construction, manufacturing), which are allocating added funding for higher efficiency solutions.”
There are many opportunities in the commercial sector, and according to Alcorn, contractors can drive that business by:
• Assisting customers with life cycle analysis during the purchasing decision process, which includes determining the optimal balance between energy efficiency, overall building performance, and initial cost;
• Encouraging planned replacements with energy upgrades;
• Designing innovative HVAC solutions that are tailored to the individual needs of their customers; and
• Continuing to take advantage of opportunities to learn more about new technologies and engineering practices within the commercial HVAC industry.
Even though the commercial sector might only see modest growth in 2012, there are numerous opportunities available for resourceful contractors. For example, energy audits are popular, pent-up demand will likely result in more replacements, and there are building owners and managers who are looking for high-efficiency products that offer a solid return on investment. Those contractors who are best able to articulate all these options will most likely end the year on a high note.
Publication date: 04/30/2012