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Industrial and Construction Services Newsletter | Q1 2024

Industry Commentary

  • Commercial construction activity across most geographies in North America continues to see steady performance, but a slowdown in new starts coupled with a decrease in available financing for development projects points to a flattening of activity in the next 1-2 years.
  • Construction labor remains tight, but availability has improved slightly compared to low points in the late 2022/2023.
  • Infrastructure construction, often funded by Federal spending, remains attractive and is helping to offset pullbacks in office, residential, hospitality, entertainment, and other markets.
  • High interest rates continue to be a factor in many non-Fed funded projects; however, the CHIPS and Science Act (CHIPS) and Inflation Reduction Act (IRA) are anticipated to fuel growth in manufacturing and infrastructure.
  • Overall, 2024 will be steady or slightly improved but it is yet to be determined how much of this is attributable to real growth verses inflation.

M&A Conditions

  • Volume across all industrial and construction sectors remained depressed in Q1 2024; however, valuations improved. We attribute this to the scarcity of attractive available acquisitions in the market.
  • While ample dry power is available to fund deals, high interest rates continue to keep sellers, particularly private equity, out of the market.
  • Many are expecting an increase in deal volume in the second half of 2024 as private equity owners are forced to generate liquidity, even if rates remain elevated.
    • This narrative, that activity will increase “next quarter” has been circulating for almost a year now, so it will remain to be seen if deals materialize in the 2H 2024.
  • Larger, $100M+ transactions remain scarce.
  • We would expect some of the larger transactions to begin coming to market mid-year with an anticipated close of Q4 2024.

Jim Rogers’ Construction Industry Spotlight

  • M&A activity saw very large deals announced in the Energy sector
    • Chesapeake acquiring Southwestern for $7.4B
    • Sunoco acquiring Nustar for $7.3B
    • APA acquiring Callon for $4.5B
  • The acquisition of Hess by Chevron is delayed while Exxon and Hess work through arbitration related to their joint project in Guyana.   
  • Massive infrastructure spending in the NYC area continues to fill some of the softness in commercial construction. Two noteworthy projects are the $14B JFK Terminal projects and the $16B Amtrak tunnel project. Topping out of steel (essentially – structural completion) for JFK Terminals 1 and 6 should occur in 2024.
  • Dallas will start soliciting bids for architecture, engineering, and design work on a $4B convention center, with construction slated to begin later this year.
  • Significant planning and construction continues on LNG projects despite the temporary suspension of approvals by the Biden administration. This will be a major tailwind for several years.
  • With the completion of The Sphere, Las Vegas is set to turn their attention to a new Major League Baseball park at the site of The Tropicana. The demolition is to be completed later this year with construction of the stadium scheduled to begin early next year.
  • Commercial construction for ongoing projects has remained strong in Q1 2024, but we anticipate this will moderate as these projects complete. New construction starts declined significantly in Q1 and planning for new projects is seeing the largest decline in several years.  Headwinds are anticipated in 2H 2024 and will continue into 2025.

Industrial & Construction Services Public Valuation Index

Middle Market Valuation Multiples

Where Are Industrial Subsectors Valued? (Q1 2024 EV / EBITDA)

Industrial & Construction Services News

Infrastructure Builders Optimistic Despite Drop in Some Sectors

Inflation and a lack of workers continue to challenge projects amid the federal funding boost. Contractors are staying busy with infrastructure work as federal money continues to roll out. However, worker shortages and high inflation continue to strain the sector, and spending on transit and fossil fuel projects slumped in the past year. Respondents to AGC’s 2024 Construction Hiring and Business Outlook predicted infrastructure project opportunities to increase in 2024, with 32% expecting the value of projects in water and sewer to be higher, 30% in transportation and bridge/highway, 29% in federal projects and 25% in the power sector. [LINK]

DOT Releases $830 Million for Resilience Projects

Extreme weather is becoming more frequent and severe due to climate change and is causing increased damage to U.S. transportation systems and supply chains, which were primarily designed before climate impacts were taken into consideration. In response, the U.S. DOT released $830 million for 80 projects around the country that will make surface transportation systems more resilient to extreme weather such as flooding, sea-level rise, and heat waves, according to an agency press release. These grants are the first of their kind dedicated to transportation infrastructure resilience, according to the agency. The money is expected to bolster bridges, roads, ports, rail, transit, and other infrastructure across 37 heavily impacted states, Washington, D.C., and the Virgin Islands. [LINK]

Weather and Financing Woes End 19-Month Construction Spending Streak

The recent drop, following more than a year and half of construction spending growth, stems from two factors. First, severe weather across much of the U.S. likely cut outdoor construction activities, impacting sectors such as highways, sewer, and wastewater and water supply. Second, elevated borrowing costs continue to hinder construction activity across the board, especially on private constructions projects. Despite drops in these sectors, construction spending in manufacturing has surged.  Overall, contractors’ confidence remains high for the near term, according to Associated Builders and Contractors. [LINK]

North America’s Construction Industry Heavily Advocating Sustainability

Construction is getting increasingly serious about sustainability ahead of the U.N. 2030 targets on emissions reporting. The ‘Constructing a better future’ report is one of the most comprehensive surveys ever undertaken of the industry and demonstrates that construction is getting increasingly serious about sustainability ahead of the UN 2030 targets on emissions reporting.

Among the report’s many findings, the sharp differential in how North American construction professionals are viewing sustainability compared to their European counterparts is perhaps the most significant. More than a third (36 percent) of North Americans say sustainability is now ‘very important’ compared to 25 percent in Europe and that differential narrows only marginally when ‘important’ is included for respective scores of 55 percent and 46 percent. [LINK]

Notable Industry Transactions | Q1 2024

Ziegler Industries, Inc., an industrial maintenance company that specializes in coating, insulation, scaffolding, and industrial cleaning for cold storage tanks, has partnered with an undisclosed third party, that will facilitate the Company’s growth objectives. Zielger Industries is a diverse industrial field services provider located in Keokuk, IA. The Company specializes in insulation, scaffolding, coating, and industrial cleaning services, and is the go-to Midwest provider to a wide range of end markets and industries, including the highly stable, agriculture & fertilizer and food & beverage markets. In addition, Ziegler has carved out an attractive niche within cold storage tank maintenance and has been nationally recognized for its work in this space for nearly 75 years. TKO Miller served as the exclusive advisor to Ziegler Industries.

Thorpe Specialty Services, a leading maintenance and engineering services and solutions provider for corrosion, refractory, and scaffolding & insulation, has acquired Walburn Industrial Services, LLC. Walburn provides specialty refractory services to the lime & mineral, cement, steel, and other industrial and infrastructure end markets. The acquisition of Walburn provides expansion within a strategic geographic market segment, further diversifies Thorpe’s customer base, and adds capacity to Thorpe’s field crews to service its customers’ growing demand.

HercRentals, one of the leading equipment rental suppliers in North America, has acquired AWP, a rental, service, and sale company specializing in aerial lift equipment including scissor lifts, boom lifts, telehandlers, and forklifts. AWP was a portfolio company of Borgman Capital, a lower middle market private equity firm. During the three-year investment period, AWP’s growth was driven by strategic equipment purchases, fleet diversification, operational improvements, geographic expansion to Kenosha, WI, and increasing market share.

Construction Partners, Inc., a vertically integrated civil infrastructure company specializing in the construction and maintenance of roadways across six southeastern states has acquired SJ&L General Contractor, LLC, a hot-mix asphalt and sitework company headquartered in Huntsville, Alabama, and Littlefield Construction Company, a soil base, surface treatment and sitework company headquartered in Waycross, Georgia. Both the SJ&L and Littlefield acquisitions expands Construction Partners’ service offerings in existing markets while also adding valuable crews and equipment.

United Rentals, Inc., the world’s largest equipment rental company has acquired Yak Access, LLC, Yak Mat, LLC and New South Access & Environmental Solutions, LLC (collectively, “Yak”) from Platinum Equity. Yak is a leader in the North American matting industry with a fleet of approximately 600,000 hardwood, softwood, and composite mats providing surface protection across both construction and maintenance, repair, and operations applications. Yak predominantly serves customers in the utility and midstream verticals.

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