Industrial and Construction Services Newsletter | Q4 2023
- Commercial construction, despite headwinds from both higher interest rates and lower demand for office space, continued to perform well across the U.S. in 2023.
- New project starts have decreased compared to year-end 2022, which may indicate a slowdown in commercial activity in 2024, but overall, the sentiment in the commercial market indicates an expectation that activity will remain steady for the next 8-12 months. The outlook gets murkier looking into 2025.
- While demand for office space has remained soft, infrastructure, multi-unit residential, and institutional projects, as well retrofit and refurb work, have kept commercial construction crews busy over the past year and should continue to do so in 2024.
- Industrial construction and maintenance activity also remains robust in most parts of the country. While higher interest rates have curbed some major facility expansions or other capital projects, regular maintenance activity and outage work has continued at a steady pace.
- Higher interest rates and lower natural gas prices have negatively impacted the performance of some industrial contractors, particularly around the Gulf Coast, but this sentiment does not appear to be widespread across end markets or geographies.
- Large scale battery, chip, and data center projects have also helped support a healthy industrial construction environment.
- Although planning for new projects inched up slightly in October compared to September, planning for new projects is down 8% year-over-year compared to last year. Planning for commercial construction is down 14% and offset by higher planning for institutional construction.
- Overall transaction volume and valuations were impacted by higher interest rates and a murky economic outlook. TKO Miller saw a decline in both metrics compared to ‘21 and ‘22.
- The industrial and construction service market was not an exception to this broader trend. Industrial and construction M&A activity (both valuations and volume) was down markedly compared to the previous two years as well as the previous quarter (see page 3).
- In particular, there was a notable absence of large, marquee deals in 2023. Most acquisitions completed were smaller, add-on transactions.
- Large strategic buyers (for example BrandSafway, a group that has historically grown by acquisition), were less active on the M&A front, and there were fewer large-scale private equity platform buyouts in this industry.
- TKO Miller expects to see M&A activity increase in 2024 as buyers adjust to higher interest rates as the new normal and the risk of a major recession recedes.
- Private equity owners who have held off on exits during the past eighteen months are facing pressure from investors to generate liquidity. TKO Miller expects to see an increase in PE exits over the next year.
The lack of exits from private equity-owned portfolio companies over the last 18 months has created a record backlog in private equity portfolios. With reported average holding periods exceeding five years, an increase in private equity exits is expected in 2024.
- Strategic buyers in the industrial / construction service market have been ramping up their M&A efforts recently, adding corporate development staff, hiring buy-side advisors, and increasing their direct outreach / lead generation efforts.
- A year of relative deal drought for many large acquirers has likely created some pent-up demand for transactions, which represent a critical component of many large industrial and construction service companies’ growth strategies.
Jim Rogers’ Construction Industry Spotlight
- Lendlease and Google killed a $15B real estate project in the Bay area. This comes on the heels of Lendlease pausing development of a $1.2B project in July. As higher interest rates linger and occupancy rates decline, we anticipate more commercial and multiuse construction projects could be delayed or cancelled.
- The FBI will move forward with a new headquarters in Maryland with an estimated cost of $300M. As other projects stall or cancel in the commercial sector, the US Government will continue to invest in new or refurbishment projects along with infrastructure to fill some of the gap.
- Large projects recently breaking ground include a $2.5 billion Hyundai/SK EV battery plant in Cartersville, Georgia, a $1.1 billion prison in Elmore, Alabama, and the $1 billion Microsoft data center in Mount Pleasant, Wisconsin.
Industrial & Construction Services Public Valuation Index
Middle Market Valuation Multiples
Where Are Industrial Subsectors Valued? (Q4 2023 EV / EBITDA)
Industrial & Construction Services News
Biden Mandates PLAs on Large Federal Contracts
The White House announced in December a final rule implementing an executive order that will require project labor agreements on federal construction projects costing $35 million or more. It will likely result in PLAs being required on a majority of large federal jobs. As a result, the White House estimated as many as 200,000 workers on federal construction jobs could see boosted wages, benefits and safety protections regardless of union membership. Part of the goal of the executive order, according to the White House fact sheet, is to increase efficiency by having all stakeholders — contractors, subcontractors, unions or other labor groups — negotiate the terms of each project ahead of time. [LINK]
Infrastructure Nudges Backlog Higher as Other Sectors Struggle
Backlog inched up in November to 8.5 months due to an uptick in infrastructure projects, according to a Tuesday release from Associated Builders and Contractors, but other sectors continue to struggle. Large contractors, or firms with more than $100 million in revenue, shed the most backlog in November, losing about 2.8 months worth of work, according to an ABC member survey conducted Nov. 20 to Dec. 4. On the other hand, firms with under $30 million in sales clawed back about 0.5 months of backlog in November, though that amount is still lower than a year ago. Infrastructure projects posted the only gain in backlog in November, adding about a month’s worth of work. For contractors outside of the infrastructure scope, though, backlogs have taken more of a hit. [LINK]
Industrial Services Market worth $59.1 billion by 2028
The industrial services market is projected to grow from USD 39.1 billion in 2023 and is estimated to reach USD 59.1 billion by 2028; it is expected to grow at a Compound Annual Growth Rate (CAGR) of 8.6% from 2023 to 2028 according to a new report by MarketsandMarkets™. Organizations are increasingly focusing on the entire lifecycle of their assets, from installation to decommissioning. Industrial services that address the total cost of ownership, including maintenance, repair, and upgrades, are in high demand. [LINK]
Construction’s Biggest Staffing Struggles Continue Into 2024
Construction’s labor struggles will continue in 2024, and it’s not just due to the number of new jobs set to break ground. The reasons for a lack of skilled applicants this year are many. Hard-to-reach jobsites create challenges for workers in need of transportation or childcare, and some craftworkers fail drug tests, making them ineligible for work. One of the top issues facing hiring managers is that many candidates do not have the right skills or experience to work in the construction industry, according to a survey conducted by Associated General Contractors of America last year. In addition, many of the industry’s experienced, trained workers will soon age out and the industry continues to fail to draw in new workers to train. The median age of construction workers has risen, and nearly half of construction workers are older than 45, according to the Bureau of Labor Statistics. [LINK]
Notable Industry Transactions | Q4 2023
Visu-Sewer, a second-generation, family-owned business, is a leading underground infrastructure maintenance provider focused on sewer and wastewater pipeline rehabilitation and maintenance, has partnered with Fort Point Capital, a Boston-based private equity firm. Headquartered in Pewaukee, WI, Visu-Sewer has a broad service offering that includes trenchless cured-in-place pipeline rehabilitation (CIPP), sewer maintenance, video inspection, pipe jet cleaning, sealing, and water blasting. Throughout the years, the Company has repeatedly expanded its geographic reach both organically and through acquisition. The Company currently operates seven branch locations across the Midwest and Mid-Atlantic regions, primarily serving municipalities and general construction contractors. TKO Miller served as the exclusive advisor to Visu-Sewer.
H&E Equipment Services one of the largest rental equipment companies in the nation, has acquired the equipment rental assets of Giffin Equipment, a California-based provider of non-residential construction and industrial equipment. The acquisition included three branch locations and a fleet size, as measured by original equipment cost, of approximately $13.4 million. The rental branches are located in Ventura, Goleta and Santa Maria, California. Following the transaction, H&E’s equipment rental operations extend across 135 branch locations in 30 states, including 15 locations in California.
Alta Equipment Group Inc., one of the largest integrated equipment dealership platforms in the U.S., has acquired Burris Equipment Co., a supplier of market-leading construction and turf equipment with three locations in Illinois. The acquisition of Burris will yield immediate accretive returns to Alta’s shareholders and will notably enhance their business in IL. The purchase price was $14.0 million in cash. Including Burris, since Alta’s initial public offering in 2020, Alta has completed 15 acquisitions which have contributed $487 million in revenue, and $58 million in adjusted EBITDA.
Granite Construction Incorporated, one of the largest diversified construction and construction materials companies, has acquired Lehman-Roberts Company and Memphis Stone & Gravel Company, longstanding asphalt paving and asphalt and aggregates producers and suppliers. This acquisition expands Granite’s footprint and creates a new growth platform for Granite in the attractive Memphis metropolitan market. The acquisition was financed through a new term loan of $150 million maturing on June 2, 2027, with the remainder funded through Granite’s existing revolver and cash on hand.
Runyon Equipment Rental, a premier independent provider of rental equipment in the greater Indianapolis market, has been acquired by Sunbelt. Founded in 1961, Runyon Equipment Rental’s decades of customer relationships and market insights positioned the company as a leading rental company in the Indianapolis market. This partnership with Sunbelt will allow Runyon to continue providing exceptional service to its customers and will open exciting prospects.