Manufacturers must adapt

By Jerold Tuft President Schlage Lock Co.

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us will look back upon this year as the "golden year." Building products executlves seeking to repeat the success of 1986 will find that goal more and more elu- siveas the decade progresses. Although we have all enjoyed one of the best years of the decade, there have been some disturbing events taking place. For example, when you add up the construction statistics, most executives are surprised to learn that the best construction year of the decade was not 1986 but 19851 Real construction spending for 1986 is actually off .340/o! Current overbuilding in certain sectors, a weaker economy, and fundamental changes in the tax code all will combine to accelerate the decline that has begun this year.

Certainly, the non-residential sector contains the .greatest exposure to decline for 1987. With total non-residential constuction slipping 100/0, the "red flag" is up as to the true nature of next year's non-residential climate. Put plainly and simply, the traditional three year construction expansion was stretched into four years due to favorable tax laws and a growing economy. The market and the economy can no longer absorb excess non-residential capacity and thus, this sector is poised for a decline next year.

The non-residential sector for 1987 will see significant declines over present levels. However, behind the "doom and gloom" lies opportunities for savvy manufacturers who can successfully target their markets. For example, in a year where office starts could decline to half their level of 1985, institutional building, dependent on demographic changes, will remain close to current levels. The continued increase in the applicability of accessibility codes, particularly in the institutional market, lays the groundwork for a growth segment. Construction of retail buildings, because they follow housing starts, will actually increase 5% for 1987 creating yet another market niche.

Because of structural changes in the market, all of us will become more dependent on the housing market. With the continued lag of mortgage rates responding to recent declines in short-term rates, the stage has been set for further decreases in the mortgage rate next year. Thus, single-family housing will continue its three year growth strut.

Adding to this synergy is the continued single-family mix change away from starter homes toward

Story at a Glance

Success will be elusive . . . declining non-residential sector...institutional building steady .5o/o increase in retail buifding ... 12o/od-i-y growth.

move-up homes otlering construction products manufacturers a market with increased spending per home. Multi-family starts will be most affected by tax law changes and are expected to decline by 200/o in 1987.

The rehab market will also see fundamental changes next year. Removal of the Investment Tax Credit will have its primary effect on commercial renovation projects, pushing this sector down 25%. However, with the average age of a commercial building increasing to 23 years (versus 22years in 1985), the replacement market will continue to accelerate.

One of the prime beneficiaries of the strong housing market is the do-it-yourself sector. With 80% of d-i-y projects undertaken within two years of a house purchase and sales of existing homes approaching 3.7 million, the foundation has been laid for a continuation of the l2olo compound annual growth rate in the d-i-y market.

Compared to the past "golden year," 1987 will be a year offundamental structural change in the construction cycle. As the economy continues its slowdown, the construction industry will be challenged to respond to a different set of events.