An October 20th Industry Report from Jefferies Equity Research highlights the non-residential construction sector, and suggests that “muted growth” is likely to be the scenario that plays out over the next few quarters, in a note titled ‘Is it the End of the Construction Boom?’. Jefferies analyst Laurence Alexander and colleagues summarize their perspective in the introduction to their report: “Our analysts generally agreed that structural changes in the way people shop and work, combined with the overhang of properties built and planned in the last cycle, mean that investors shouldn’t expect a return to past peak construction spending anytime soon, but that there is still some room for improvement from here.”

Non-Residential Construction

Limited room for brick and mortar retail expansion

Non-Residential Construction

The Jefferies analysts point out that the continued growth of ecommerce is having a serious impact on retailers construction plans. They argue that even if consumer sentiment improves, mature retailers such as Target Corporation (NYSE:TGT), Kohl’s Corporation (NYSE:KSS), Whole Foods Market, Inc. (NASDAQ:WFM) and the like are unlikely to rush into new development. These businesses understand that ecommerce is growing faster, and are more likely to focus on upgrading their business models than on building new locations.  Moreover, Alexander et al. believe Dollar store growth will also start to level off as consolidation and integration play out. They also note that Home Depot and Lowes “seem content to flow more through the existing base and let operating margins rise.”

The report highlights that smaller store base stories like Five Below Inc (NASDAQ:FIVE) and Container Store Group Inc (NYSE:TCS) will continue their rapid build out, but are not likely to further increase the pace of new unit construction. The analysts also note that office supply retailers will continue to shrink their brick and mortar footprint as they focus on ecommerce, and note that “consumer electronics is more likely to shrink than to expand footprint for the same reason.”

Non-Residential Construction

Recommended non-residential construction-related stocks

Machinery Sector —

United Rentals, Inc. (NYSE:URI) saw a strong 15.6% Q3 rental revenue growth, “benefiting from continued structural shift to rental (from ownership) and growth in non-resi construction.” Jefferies analyst Justin Jordan remains confident that we’re in the early innings of this non-residential construction cycle and notes that almost 45% of URI’s revenues are driven by non-residential construction.

The report also points to Ingersoll-Rand PLC (NYSE:IR) as a “good play on the replacement, upgrade and, ultimately, growth in the commercial and residential air conditioning markets. Trends in these markets have been highly correlated with overall commercial construction and are thus earlier in their cycle.”

Senior Housing –

Alexander and colleagues note that 25,000 senior housing units are currently under construction, but that at least 40,000 units will need to be built annually in order to meet the growing demand from seniors. Brookdale Senior Living, Inc. (NYSE:BKD) will likely be a beneficiary from this trend, and “also from the Emeritus acquisition, which can drive rates as the portfolio re-prices.”