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2006 Forecast

Introduction and Graph Legends/Forecast by George Schmok, Publisher

The construction industry and thus the landscape industry has been one of the main economic highlights for most of this century (or should we say Millennium) . . . in 2005 only three of the major categories lost ground in put-in-place values: Religious, Amusement and Power; while every other category rose, bringing the entire spectrum up by 8.8% ytd September '04 - September '05. With increasing interest rates and bubble poppers raising their evil heads, the good news is that population and (good for us, bad for them) natural disasters will continue to drive the construction industry forward. Shortages in basic materials will affect profitability of developers, and will also give steam to inflation driven by those and fuel and housing costs. This means you had better borrow any monies you need now, as the Fed is certain to use those interest rates to try and curb inflation. In any event 2006 looks to be another solid, ior at least stable, year for the landscape industry. One of your major challenges will be to keep a large enough staff to get the job done . . .

Voices of the Industry

Compiled by Stephen Kelly, regional editor

If it's December, it must be time for our Annual Forecast feature, full of vital stats, colorful charts and information on the outlook for the landscape industry at large for 2006, including areas of growth and trends. The 2004 hurricane season drew quite a bit of attention, but was dwarfed by this year's season.

While experts anticipated Katrina to be the costliest natural disaster in U.S. history, some early predictions in damages exceeded $100 billion, a survey of 56 economists by the Wall Street Journal (WSJ) predicted that the GDP, the broadest measure of U.S. economic activity, would expand at a 3.6% seasonally adjusted annual rate in the third quarter and at a 3.2% rate in the fourth quarter. In light of Katrina, they raised their forecasts for the first half of 2006 by 0.2%, as they see post-hurricane reconstruction giving the economy a kick in early 2006. To put things in perspective, the Gulf region accounts for only about three percent of U.S. economic output.

Donald Straszheim of Straszheim Global Advisors felt Katrina's impact would be so insignificant vis-a-vis the GDP or inflation data that "in five years, economists with somewhat foggy memories will be asking themselves: 'Now what year was that big hurricane in New Orleans anyway?'"

The Wall Street Journal survey of economist said there was only be an 18% probability of a recession in the U.S. over the next 12 months.

Still, the economists expected Katrina's effects would be a drag on U.S. employment. They predict that over the next 12 months, nonfarm payrolls will expand by an average of 173,000 jobs a month--the lowest forecast in more than a year and well beneath the pace of roughly 195,000 new jobs a month so far in 2005. At the same time, forecasts for the unemployment rate were nudged upward, with the economists now predicting a 5% jobless rate in November and a 4.9% rate in May 2006. Last month, the economists forecast 4.9% unemployment in November and 4.8% unemployment in May.

Fifty-nine percent of the economists said that there is a bubble in a few of the hottest local housing markets, but only 26% said a bubble exists in a significant part of the nation. Sixteen percent say there is no bubble at all.

Meanwhile, 65% say that the end of the housing boom would lead to a noticeable slowdown in economic growth. About a third say there would be little to no effect. Just two of the survey economists felt a recession would result.

Housing Poised to Recede from Peak Levels

The National Association of Home Builders (NAHB) expects the Federal Reserve to continue tightening interests rates into early 2006, when housing activity should start flattening out below this year's torrid levels, NAHB Chief Economist David Seiders told the NAHB Construction Forecast Conference in Washington, D.C. Oct. 19, 2005.

"The housing market is seeking out a peak," Seiders said. He noted housing starts increasing 3.4% in September and third-quarter performance exceeded expectations. However, he believes the Fed has "started to hit its mark" and housing will begin losing some of its exuberance. "The power of long-term interest rates for housing is incredible," avers Seiders, and key to the housing outlook is where those rates are headed. The rates on 30-year fixed-rate mortgages reported weekly by Freddie Mac have been moving up over the past month, he pointed out, and are now above 6%. In his housing forecast, Seiders predicts long-term mortgage rates will rise by another 60 basis points by the third quarter of 2006, bringing them to about 6.6%. He predicts the Federal Reserve will decide to boost its federal funds rate by one-quarter of a percentage point at each of its next three meetings, bringing it to 4.5% at the end of January 2006 when Fed Chairman Alan Greenspan's term runs out. Most likely, that will be the rate at which the central bank decides that its policies have reached neutrality, neither stimulating nor slowing down the economy.

NAHB is forecasting a decline in total housing starts from 2.032 million this year to 1.94 million in 2006 and a further drop to 1.883 million in 2007. After that, the annual production of new housing units (including manufactured homes) should settle around 2 million units, which is within the 1.9 million to 2.1 million rate that is sustainable on average for the 2003-2013 period, he said.

Single-family construction is projected by NAHB to decline from 1.683 million starts this year to 1.590 million in 2006 and 1.533 million in 2007. Multifamily output, however, should remain close to the 349,000 level expected for this year through 2007.

With vacancy rates falling and condominiums becoming oversupplied in some markets, the composition of the multifamily market should shift a bit away from condos and back to market-rate rentals, Seiders predicts.

Del Webb (Pulte Homes)

Pulte Homes, Inc., (NYSE: PHM), based in Bloomfield Hills, Mich., is a FORTUNE 200 company with operations in 54 markets and 28 states. In 2004, the company delivered 38,612 homes in the U.S. and generated consolidated revenues of $11.7 billion. During its 55-year history, the company has constructed more than 408,000 homes. In 2005, Pulte Homes received the most awards in the J.D. Power and Associates New Home-Builder Customer Satisfaction Study, marking the sixth-straight year Pulte achieved this distinction among America's largest homebuilding companies. Pulte operations were highest-ranked in 16 markets and were among the top three in 22 of 27 markets in which it qualified. Under its Del Webb brand, Pulte is the nation’s largest builder of active adult communities for people 55 and older (better).

Pulte Homes Announces Record Third Quarter Financials

Pulte Homes, Inc. (NYSE: PHM) announced record financial results for its third quarter (nine months) ending September 30, 2005. Third quarter income from continuing operations climbed 50% to $388 million. Earnings from continuing operations climbed 48% to $1.47 (per diluted share). Third quarter net new orders increased 33% to $4 billion (12,062 homes). Pulte Homes's consolidated revenues for the quarter totaled $3.8 billion, compared with $3 billion last year.

"Pulte's record third quarter results included a 48% increase in earnings per share, $4 billion in new orders and a backlog valued at $8 billion," said Richard Dugas, Jr., president and CEO of Pulte Homes. "Beyond 2005, Pulte's unique strategy of serving all buyer segments: first time, first and second move up and active adult, should enable the company to further expand its share of the U.S. housing market."

Third Quarter Results

Revenues from domestic homebuilding settlements for the quarter increased 32% to $3.7 billion, compared with $2.8 billion in the prior year. Higher revenues for the period resulted from a 21% increase in unit settlements to 11,747 homes, up from 9,669 settlements last year, combined with a 9% increase in average selling price to $317,000 per home. The higher average sales price reflects increases in selling price realized during the quarter and a favorable change in the mix of product delivered. Third quarter domestic homebuilding pretax income increased 44% to $618 million, up from prior year pretax income of $429.6 million. Pretax income for the period benefited from higher revenues partially offset by an increase in material costs, combined with a 160 basis point decrease in selling, general and administrative expenses as a percentage of home settlement revenues reflecting the company's continued efforts to drive greater overhead leverage.

Land sales during the quarter generated $25.1 million in revenues and $1.4 million in gross profit, compared with $69.1 million and $19.8 million, respectively, last year. Land sales are an important element of the company's domestic homebuilding operations, but can fluctuate from quarter-to-quarter depending upon the timing of individual transactions. Domestic net new home orders for the quarter were 12,062, an increase of 19% over prior year orders of 10,109 homes. Pulte's backlog as of September 30, 2005 was valued at $8 billion (23,666 homes), compared with $6.4 billion (20,400 homes) last year.

Florida’s Nursery Industry Slammed Again

While Katrina was the extreme focus of national attention, Hurricane Wilma, blew in next, just a couple of weeks after our editors and sales people left the ASLA show in balmy, serene Fort Lauderdale. According to Ben Bolusky, executive vice president of the Florida Nursery, Growers & Landscape Association (FNGLA), this was "a major event in the history of Florida’s nursery and landscape industry." Wilma blew across some of south Florida’s most concentrated nursery growing areas. The hardest hit were Miami-Dade, Broward, Palm Beach, Martin, St. Lucie, Hendry, Glades, Lee and Collier.

More than 2,600 production nurseries in these counties were in harm’s way, representing a third of Florida’s $9.9 billion nursery and landscape industry.

The nursery industry and their lobbyist are seeking disaster assistance. FNGLA reports "shade houses and greenhouses are literally flattened exposing many sensitive foliage plants. Many nurseries are also without power rendering needed irrigation systems inoperable." Many of these same growers were hit head-on by at least two of last year’s hurricanes.

Nursery growers in Miami-Dade County were rebuilding from the estimated $370 million in nursery crop losses caused by Hurricane Katrina. These losses were then compounded by Hurricane Rita just weeks before Wilma struck. FNGLA is working with its chapters and members to ship supplies and materials into the areas affected.

"Eight hurricanes in 15 months is an unprecedented challenge, but this is a big state and a big industry," observed Richard Carroll, FNGLA president. "Our growers will again pick up the pieces and rebound,” he concluded.

Gulf Rebuilding Will Push Cement Consumption to Record Levels

Rebuilding the Gulf region is pushing cement consumption even higher than current record levels. The Portland Cement Association (PCA) estimates rebuilding New Orleans will require at least four million tons of cement during the next four to five years. PCA notes that the disruption of the cement supply during the port closures in New Orleans had only a minimal effect.

Some estimates put property damage along the Gulf Coast in excess of $125 billion. "Normally hurricanes cause excessive wind damage, blowing off roofs," notes Ed Sullivan, chief economist for the PCA. "Water is responsible for most of the structural harm in New Orleans. Because of this bottom-up damage, high-concrete intensity building sections like basements and foundations will need replacement. In addition, more nonresidential buildings than normal were damaged by the floodwater and will need replacement."

According to Sullivan, an increase in demand for cement in the Gulf Coast region will not occur until clean up is completed. Cement will be needed not only for rebuilding, but to complete the jobs started before the hurricane.

The port of New Orleans is the nation's second largest import terminal for cement, processing nearly 10% of all cement imports. The Freedonia Group says demand increases will continue to outpace the global cement market, rising 5.4% annually over the next four years and reaching over one billion metric tons in 2008, benefiting from robust growth in the booming construction industry in China. Demand for specialty and other types of cement is projected to be the fastest growing cement category in China.

Market gains will be fueled by greater use of specialty cement types such as non-blended pozzolanic cement and aluminous cement. The blended cement market is also forecast to grow at an above-average pace. However, Portland cement will remain the dominant market, accounting for over 80% of cement demand in China in 2008.

Shemin Celebrates 50th Anniversary

Last year Shemin was one company we asked to give us a forecast. Shemin is a major supplier of landscape products to the professional trade, now with 30 locations through the Eastern and Midwestern U.S.

Shemin marked its 50th year in business with a gathering on October 8 at its flagship Greenwich, Conn. location. Manny Shemin, the founder of the business, modeled his company after the military commissary--a kind of "one-stop shop" for landscape professionals, aka, a wholesale landscape supply company.

"We emphasize QVAS (quality, variety, availability and service), explains Shemin CEO Steffan Burns. Burns said Shemin's longevity and overall growth of the wholesale landscape supply industry is a testament to Manny's vision.

This year, Shemin partnered with Habitat for Humanity by sponsoring the funding and construction of a new home. Shemin's goal is to raise approximately $100,000 and provide significant manpower to construct a Habitat for Humanity house for a family in western Connecticut.

The financial contributions are coming in from employees, vendors and customers. Once the targeted sum is raised, Shemin employees will lend a major hand in the physical construction of the home.

ValleyCrest Companies

Last year, we also asked ValleyCrest Companies for input into the forecast issue. The company was founded in 1949 and, in its own words, "is the nation's leading provider of landscape development and maintenance services and a major supplier of trees."

ValleyCrest Companies is privately held, with a workforce of more than 8,000 people nationwide and annual revenue in excess of $700 million. The company has five businesses. According to ValleyCrest, its landscape development division is the nation's largest landscape construction company, and the landscape maintenance division is the nation's leading landscape maintenance provider. The other divisions are golf course maintenance, Valley Crest Tree Company, the largest mover and producer of containerized specimen trees in the western United States with over 800 acres of growing grounds and a supplier of garden art pottery and foliage, and U.S. Lawns, which the company says is the fastest growing network of landscape maintenance franchises nationwide.

This year, as it seems every year, ValleyCrest has a new acquisition: RMV Landscape and Maintenance, a Loveland, Colorado landscape construction and maintenance company. Under the terms of the agreement, ValleyCrest has purchased substantially all of the assets of RMV and the company is within ValleyCrest's landscape development division. RMV was previously owned by Rod Bryner, who has joined the ValleyCrest team, and McWhinney Enterprises, a leading Colorado real estate development firm and a customer of ValleyCrest.

The acquisition expands ValleyCrest's operations in the important northern Colorado market. Rod Bryner, former president of RMV, has joined ValleyCrest Landscape Development as operations manager, and the balance of the RMV operations team has also joined ValleyCrest.

Jeff Hinners, vice president and regional manager, ValleyCrest Landscape Development, is responsible for managing integration of the business. "We are going to focus on making the transition smooth for RMV's customers and employees," said Hinners.

Bryner expressed excitement about joining ValleyCrest. "ValleyCrest has been an industry leader for decades, primarily because they focus first on satisfying their customers and second on developing their people.

Transportation Reauthorization Bill

On August 10, 2005, the president signed into law the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) with guaranteed funding for highways, highway safety, and public transportation totaling $244.1 billion. SAFETEA-LU represents the largest surface transportation investment in the nation’s history. The bill includes hundreds of millions in annual funding for trails and community transportation improvements.

McGraw Hill Construction Outlook 2006

McGraw Hill Construction held its Outlook 2006 executive conference the week of Oct. 17, 2005 to frame the upcoming business year for the construction industry. In an overview of home design trends, AIA Chief Economist Kermit Baker noted that 43% of respondents said they expected to see increases in upscale landscapes in the residential market. Additionally, 42% said they expect increases in outdoor living spaces in the next year. This, despite the fact that 38% of respondents said they expect residential lot sizes to shrink in 2005. These numbers, Baker said, indicate that there is a general trend toward bigger homes in most segments and toward property improvements that reflect an outdoor orientation.

Macroeconomic Picture

During the conference, Robert Murray, vice president of economic affairs for McGraw Hill, noted that the macroeconomic picture for the construction industry will center on post-hurricane rebuilding in the gulf region. He noted that much of the initial emphasis will be on rebuilding infrastructure, with housing and nonresidential structures to follow.

Murray predicted that the shuttering of military bases in the wake of the Base Realignment and Closure Commission will create new opportunities for construction. Murray also said that the recent Supreme Court decision on eminent domain that allowed New London, Connecticut, to replace rundown areas, coupled with a continued emphasis on downtown redevelopment, should keep urban construction humming throughout 2006.

Fertilizer Prices Are Going Up

LebanonTurf reports that fertilizer prices are going up. Katrina shut down commerce in the worlds fifth largest port and Rita closed refineries on the Texas coast. These two events alone, according to LebanonTurf, would have had long lasting effects to push up the costs of fertilizer raw materials and transportation. But even before these natural disasters, "there were global forces at work that were setting off alarms in the fertilizer supply chain." What follows is LebanonTurf's synopsis of the genesis of our current situation.

All of the basic raw materials used to produce fertilizers have gone up significantly in price. In addition, rising energy prices have increased the cost of production and transportation. In addition to higher nitrogen costs, the cost of potassium has made a significant jump. Here are some historical costs comparisons based on the port of New Orleans.

As you can see prior to 2003 potassium was very stable and urea fluctuated in a $50 range. Since 2003 urea has increased 165% and KCL has increased 69%.

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December 14, 2019, 7:52 am PDT

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