Builder Market Round-Up: Residential contractors discuss market conditions - Jun 2016

Interview by Jay Smith, FloorExpo

The builder sector is on fire. New home sales hit the 619,000 mark in April, a stunning 16.6% increase from March and 23.8% over April 2015’s rate. All those new homes have a positive correlation to flooring sales, and flooring contractor businesses serving that market are experiencing strong growth—and predicting more to come.

To get a closer read on the single-family builder, we reached out to FEI Group president Jay Smith to moderate a discussion with three of the group’s members focused on the single-family builder market: Mike James, COO of Metro Carpets, which serves the Nashville, Tennessee market; Jim Gunckel, president of Residential Design Services, which serves California and Reno, Nevada; and Steve Chesin, CEO of Las Vegas-based Carpets N More. These select panelists, all of whom service the single-family builder, offer their views of current market dynamics in this vibrant sector.

Q: How is business?
Mike James: The past four years have seen good growth for our company, and this year is even stronger than last. Our customers are confident in their projections for the next 12 to 24 months. We continue to improve service and operations, which is a reflection of our ability to grow and our great people. We are on track to exceed our 20% projection of growth for the year.

Jim Gunckel: Here in California, we are working on a solid platform right now. We’re hitting our projections. For the West Coast, we are looking for double-digit growth this year. The market is saying 12% to 15% overall, and we will beat that.

Steve Chesin: I am happy to say that current conditions in Las Vegas are fairly robust.

Q: Other than general market conditions, what is contributing to your improved performance?
James: The variety of homes in production is helping our mix. Single-family price ranges, both high and low, are selling, as are condos and new multi-family buildings—and all are better than last year. The product mix is a big part of our increase; many consumers are willing to spend more for custom-quality flooring, wall tile and custom showers.

Chesin: We’re picking up more products within the same house. Whereas we once only supplied the flooring, we now have cabinets, countertops, shower surrounds, window coverings and even closet organizers. FEI is a big proponent of this approach.

Q: Based on what you hear from your customers, have we yet reached the peak in this builder recovery?
Chesin: Our pipeline is really strong. I give it two years. After that, I believe it is just too cloudy to make a projection. In Las Vegas, we have the land to support continued growth.

Gunckel: I try to prepare for whatever gets thrown our way. As for now, it feels like this cycle still has significant legs. We are looking for three to five years of growth before a potential downturn.

James: Everything we are hearing is two to three years, then possibly a drop back down to 2013 levels. Time will tell.

Q: What is holding us back from an even higher pace now or from a longer sustained run?
Gunckel: Well, for California, there is a scarcity of affordable land. Another big issue is all the restrictions and entitlements in the state. They make it very hard to build cost effectively. Even though labor restraints may prevent a much higher productivity, they don’t really keep builders from building homes; it just takes longer to get them out and completed. However, land cost, entitlements and the new Environmental Protection Agency requirements in the state of California are pretty strict, and that is definitely a deterrent to affordability.

Chesin: The thing that is holding us back here in Las Vegas is framing and trusses, which delay the houses and the construction schedule. As far as the labor goes in the finishing trades, we are not nearly as challenged as we were the last couple of years. The Las Vegas market depends a lot on the Bureau of Land Management to release property so that builders can buy bigger parcels. That said, we do see a lot of activity with infill property, which is smaller parcels.

James: Land availability is a challenge in our market as well. Nashville is having to go further out of the city to develop, and some areas are more costly due to natural features such as hills, rock, etc. We hear that developed lots are not what our customers want this year, but land in the pipeline under development will be a boost next year. Labor is a concern, especially with specialty wall tile; finding A-quality subcontractors is the biggest challenge.

What’s more, customers—even in the track or semi-custom market—are demanding custom options. A couple of years ago, we had one to one-and-a-half days scheduled in the house for wall tile; today, with some of the same builders, it is taking five to ten days due to custom requests, and we are given three to four days, to complete the work. Quality installation labor is a challenge and concern now—and even more so as we move forward.

Q: The first-time homebuyer segment isn’t playing in a big way in this recovery, and it is key to a healthy market. What are you seeing locally?
Gunckel: An inexpensive home in California right now is going to be in the $300,000-and-up range. That is significant at the entry level. Plus, there is not a whole lot of activity in that price point range. It definitely makes it tough for first-time homebuyers here. We need to get this figured out, because it is preventing new homebuyers from coming into the California market. That, ultimately, is going to prevent new job creation in the state, because nobody can afford to move here to work.

Chesin: It is kind of the opposite in Las Vegas. There are starter homes here, which are pretty simple houses that you can get into for $150,000. But the market is really driving the $300,000 to $600,000 range.

Q: What are the trends in your design centers today?
Chesin: We are selling less carpet. Typically, we’re just putting carpet in the bedrooms today; however, we are installing a much better carpet. Rarely are we installing the standard, unless the homebuyer is taking the included product and planning to tear it out after they close. Overall, upgrades have really taken a step forward. I attribute this, in part, to ratios. Instead of only being able to upgrade $15,000, now homebuyers can upgrade $30,000 because home appraisals are up.

Gunckel: In California, there is a higher income bracket, and they can afford upgrades. In the high-end areas like Orange County, San Diego and many coastal communities, we are involved with projects where the price of the home is two million to four million; believe it or not, these homes are selling quite well, and upgrades relative to the price of the home are doing just fine.

In communities that are more entry- and step-up level, the buyers are tapering off on upgrades. In places like San Bernadine County, which is one of the largest counties in the U.S., the cost of a home is so expensive relative to income levels that folks are just barely qualifying for their loans. In those cases, upgrade sales are challenging.

James: Gunckel and Chesin said it well. Depending on the sub-market, we are seeing some of everything they described.

Q: What trends are you seeing in product? LVT is hot overall, but it has been slow to take significant share in new home construction. Is that changing?
Chesin: We do very little LVT. But we are starting to see it installed in place of sheet vinyl in lower-end homes, so that could be the start of a shift. There are certainly some very beautiful products out there.

Gunckel: Yes, we have it in our design centers. We put it into some of our entry-level packages; it is a great value.

Our higher end buyers are still looking for hardwood and ceramic. Hardwood is a really big seller. We stay on top of California trends, and that helps us increase our sales. For example, in hardwood, we are seeing a lot of the rustic look. French oak is becoming very popular. Wide planks, anywhere from 6” to 10“, with long lengths; rustic knots looks; and grey and beige tones are also hot. The darker tones are starting to lose steam out here, whereas I spoke to a FloorExpo member from Texas, who told me dark tones are still very popular in his markets. There are so many regional differences.

As for ceramic tile, the wood plank look is in high demand. We’re selling it everywhere. Now, the planks are getting longer, and the joints are getting closer, so it looks more like an actual wood floor. The long-term durability of the product is appealing to buyers. That is our most popular tile right now.

James: We are using a lot more LVT than we used to. We use a lot in town home projects, and I see its growth into single-family detached as well.

The hot looks here are random widths rustic woods, wood-look tiles, larger format tiles, grey colors. For upper-end homes, I see the same upgrades as Chesin and Gunckel, hardwood and ceramic tile.

Q: What do Millennials look for in a home?
Gunckel: Millennials are looking for smaller, more efficient homes. We’re seeing them coming into the market buying 1,200 to 1,800 square foot homes; even in our multi-family projects, the theme is smaller but nicer units. We are seeing a lot of LVT going in there. I think even in the future, you will see smaller homes and smaller lots, but located nearer to shopping, theaters, fitness centers, recreation, pharmacy, restaurants—because that is what it is all about with Millennials. When they get home from work, they want to park the car and walk to wherever they are going.

Europe is building homes, condos you might call them, as small as 400 square feet, but within the facility, there is a fitness center, a theater, library, swimming pool and so on. People look to European trends, so I think we are going to see those sorts of communities here too.

Chesin: The work-live environment has certainly picked up here in Las Vegas. People don’t want to get in the car. They want to be able to walk where they are going and work from the house. We are starting to see a trend towards mixed-use buildings, with retail, office and living space.