Multifamily Market Update: FEI's Howerton discusses key aspects of the market - June 2017

Interview by Kemp Harr

To understand the current dynamics in the multifamily market, we sat down with Graham Howerton-vice president of FEI Group, responsible for the network’s FloorExpo MultiFamily Solutions segment-to discuss trends in this active sector.

Q: I’m assuming that the lead flooring story in the multifamily segment must to be luxury vinyl tile, which is up 32.9% (in dollar value) across the board. What long-term ramifications does that have for the multifamily market?
A:
That number is actually low for multifamily, which has seen LVT growth of around double that figure. Ten years ago, a 1,000-square-foot, one-bedroom apartment typically consisted of 865 square feet of carpet and 135 square feet of sheet vinyl, give or take. Today, that same size unit gets 144 square feet of carpet and 856 square feet of vinyl plank.

We have customers today asking us to price the entire unit in LVT-no carpet at all-when they have a rehab project. It’s a dramatic change.  

While we, too, are fans of the new LVT products in the marketplace, the pendulum has perhaps swung too far, too fast. FloorExpo and its members continue to feel that a mix of hard and soft surface provides for optimal living conditions. The final decision is, of course, up to the customer, and today’s property management customer clearly prefers LVT. 

Q: What do property owners think the payback will be for going hard surface throughout?
A:
We believe style and design considerations are at least equal to economic issues with many customers. On the style side, our customers want the best-looking, most modern aesthetic to compete for renters. Hardwood and tile looks simply have more cachet with renters than carpet does. When the property next door features and markets a nice hardwood look, that then becomes the norm. That dynamic is definitely in play today. A carpet comeback wouldn’t surprise us, but right now the momentum is with LVT. 

On the economic side, today’s management companies and owners are paying just about double the price of carpet to have LVT installed, and at this point, they are betting on it lasting six to ten years versus nylon broadloom lasting three to four years or PET lasting one to two.

Q: Are there acoustic implications?
A:
Yes, but at this point aesthetics and rentability are winning out. There are a few programs providing deep discounts on area rugs-or even free area rugs-to residents for family rooms and bedrooms, but those are still few and far between.

Most apartment owners are not willing to pay the additional cost of sound underlayments. Sound issues are just a part of the puzzle today, a piece that is typically being managed by the property manager locally.

Q: If LVT lasts four times longer than carpet, how will flooring dealers replace that business?  
A:
On average, we are seeing LVT last about twice as long as carpet in most places. Remember, the initial ticket is about double what it is for carpet, and so contribution dollars are bigger for our FloorExpo members, of course. It is good business. That said, we do like to replace apartments with beautiful new flooring, so it’s really about managing your business in a different way today.

There is still much to be determined in relation to the final outcome of the plank dynamic, but it certainly seems to be here to stay, at least for a while. As I look ahead, I think some owners will migrate back to carpet to save money on each unit turn, and a few will turn to carpet due to sound issues.

Customers are also likely to replace LVT not because it’s worn out, but because it’s not on-trend with the newest style and design. With so many brand-new apartment units coming online, the existing stock must stay on-trend in color and design, or it won’t rent. That dynamic is forcing some customers to change out LVT much earlier than anticipated.

Q: What rooms are sticking with carpet?
A:
Bedrooms-only is the current trend.

Q: Is there a concern that the multifamily sector is approaching a saturation level and that adding more units could bring rental rates down?  
A:
The sector is still strong in all three important segments of our market-new, rehab and turns. It’s cyclical, just as it always has been. It’s also great right now because multifamily new construction is still strong, as are rehab and regular unit turns. We will ride the wave up, then back down again, just like the last three or four times.

Even with all the new units being added in 2016, vacancy rates still fell slightly-that’s impressive and exemplifies the high demand for apartment units. Rental rates remain strong, even if they have fallen slightly in some markets.

Of course, we will bump up against the point of saturation eventually, but, short term, the outlook is strong. Reaching saturation is taking longer than anticipated because the construction cycle is taking much longer. It used to take about 18 months to build a new apartment development, and now it’s taking over 24 months. That helps us in a lot of ways, but primarily with the number of units getting absorbed into the marketplace at any one time. The entire cycle is being stretched out, and that is helping us continue strong quarter-to-quarter growth as well as lengthening the time before we reach saturation.

Truthfully, FloorExpo is taking share in the marketplace, growing not just with the uptick in our segment but by taking business from the competition.

Q: What is enabling FloorExpo to take share?  
A:
We spend a tremendous amount of time in peer exchange groups with our MultiFamily Solutions members-members from all regions of the country and all backgrounds and experiences sharing with one another how to better run their businesses, better manage operations and better organize the sales team. We discuss and study every facet of the business in an effort to find a better way to operate, a way to be more efficient for our customers. It’s the little nuggets picked up along the way that ultimately make all of our members better operators.
 
Q: What is FloorExpo doing to support its MultiFamily Solutions members?
A:
As anyone who follows our company knows, we believe strongly in supporting our members in all aspects of their businesses-sales and marketing, operations and finance.  

On the sales front, we have a robust MultiFamily Solutions national account program, which we use to drive business to our members. Currently, we have over 600,000 apartment units the group services in that program.

On the operations side, we have just completed a series of regional meetings where FloorExpo members come together to discuss what is working in regard to labor, installation, hiring and job flow. Some great ideas came out of those sessions that were real actions for our members to take back to their businesses and implement.

On the financial piece, it starts with helping our members procure the right products at the right price to better manage the industry price increases and control operating and SG&A [selling, general and administrative] costs. We strive to help our members run successful, profitable businesses in the tough multifamily segment.

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