Commercial Market 2013 - June 2013

By Darius Helm

In 2012, the commercial market was a bit hit-or-miss. Some market segments were up and some were down, and in certain cases the segments were influenced by specific factors not directly related to the health of the economy—short-term factors and others with longer trajectories. The election season kept the market cautious, and that had a slight impact across most sectors, as it has before. Pent-up demand drove sales in some segments, trends in workspace design drove others, and issues of funding held some segments back and led to gains in others. Even the enactment of the Affordable Care Act impacted the market.

It’s true that the economy is stronger, and that the key economic indicators suggest that greater growth lies ahead, but the commercial market is still far from robust, and the expectations for this year are for modest growth. However, there’s a sense among industry players that the ground under their feet has grown more stable. The crisis is over, and now that the aftershocks are becoming less severe, an underlying tension has begun to dissipate and the markets are starting to loosen up.

Even though there’s also good growth in some of the key international markets, there remains a lot of global instability. Several of the world’s biggest economies are still reeling, while others are stagnant. The European Union continues to be fragile, and there’s a sense that it will be a different looking union when the dust finally settles. But in the meantime, this global instability can still influence the U.S. recovery.

Domestically, it’s generally recognized that the commercial market will continue in this sporadic fashion and be held back from a true recovery until there’s a significant drop in unemployment and the housing market hits a healthy level. And what the unemployment numbers don’t reflect is that huge numbers of people have traded down in jobs—fewer hours, less pay, fewer benefits. So, for instance, this April’s 7.5% unemployment figure, part of a downward trend, actually reflects a working population with far less spending power than when we first crossed that mark at the beginning of 2009, part of the upward trend that hit 10% just nine months later.

FLOORING CATEGORY UPDATE
Last year, the commercial flooring market grew by an estimated 2.3% to $5.262 billion, with unit volume about flat. The dollar increase was largely due to passing on raw material price increases and activity at higher price points—led by the relentless shift from broadloom to carpet tile, where price points are higher.

Carpet revenues were up about 3.3%, representing a 68.9% share of the commercial flooring market. In recent years, a portion of that revenue growth has come from traditionally broadloom applications switching to carpet tile. A lot of that has been in the corporate office market, which is by far the biggest part of the commercial market.

Carpet tile now accounts for at least 50% of commercial carpet revenues. It’s the bulk of sales in just about every commercial segment, with the notable exception of hospitality. Carpet tile still can’t compete in upfront cost for guest room carpet, and the traditional public space designs are also generally broadloom. However, carpet tile has a good position in hotels with more fashion-forward sensibilities, and the new formats in public spaces like lobbies, which now serve a wider range of functions, are tending toward a modularity in design that lends itself to carpet tiles.

There are some applications for which broadloom is often more suited, and it’s generally at the higher end, like corporate boardrooms, high end retail and even senior living, where the public space areas share a lot of similarities with hospitality applications. But these days, when you’re talking about commercial carpet, you’re probably talking about carpet tile. The ten biggest commercial carpet mills are all major carpet tile manufacturers, and just about every mill that isn’t a hospitality specialist has a carpet tile program of some sort.

The largest hard surface category is resilient vinyl flooring, which covers a wide spectrum of products, from sheet vinyl in various constructions to vinyl tiles ranging from VCT, which is largely limestone and is the most affordable floor (in initial cost) on the market, to specialty tiles and luxury vinyl. The resilient market grew nearly 6% last year to an estimated $790 million, which represents a 15% share of the market.

Luxury vinyl tile and plank (LVT) is the fastest growing resilient category. What has happened on the carpet side is now taking place in vinyl flooring, except in this case it’s happening in both the residential and commercial markets. On the commercial side, LVT is taking share from VCT in some applications and from sheet vinyl in others. And because of its advanced design capabilities, it’s creating new aesthetic possibilities, offering realistic hardwood and stone looks for applications where real wood and stone might not perform as well. For instance, hardwood doesn’t perform well in restaurant environments, even though the look is well suited, and luxury vinyl planks now offer the same look. Ceramic tile and stone are unsuitable for many hospital and senior living spaces because their hardness presents risks in slip and fall situations but LVT can offer the required performance with convincing representations of the real thing.

In terms of design realism, developments on the heterogeneous sheet side have opened up similar design pathways, like hardwood looks in healthcare settings and other high performance markets. And this has helped keep vinyl relevant. At the same time, progress on the environmental front, though still in the early stages, lends hope to the notion that the resilient industry will follow the path developed by the carpet industry and make a serious commitment to the greening of its products.

Some progress is being made on the reclamation and recycling front, with programs from the three big domestic VCT producers: Armstrong, Mannington and Tarkett (Azrock). But it hasn’t been easy to create efficient VCT reclamation infrastructures. And meanwhile VCT is losing share to LVT and offers more design limitations and far higher maintenance requirements.

There’s been less progress in sheet vinyl and LVT reclamation, which is complicated by the lack of standardization of ingredients. Some of the ingredients are problematic, like various stabilizers and the phthalates used for plasticizers, which give sheet goods that flexibility and resilience. And there’s also a movement underway, led in the U.S. by Tarkett, to offer alternatives to traditional phthalates. There’s not much an environmentally focused resilient producer can do with a vinyl waste stream tainted with these plasticizers or stabilizers.

Some firms have also come out with PVC-free products that are equivalent to specific vinyl categories. For instance, Armstrong has had great success with its Migrations, and now Striations, which replace the 17% vinyl content in traditional VCT with a polyolefin and a small amount of bio-based content. And Mannington recently introduced Enlighten, a homogeneous sheet product, also made of polyolefin.

There’s been a movement among carpet mills to offer dedicated resilient lines. Mannington has been doing it for years, with great success. Now Shaw and Patcraft both offer commercial sheet and tile; and Bolyu offers LVT through a partnership with Canada’s LSI Floors. Tarkett’s acquisition of Tandus brings together two commercial flooring powerhouses. And there’s probably more to come from some of the other major mills.

Another important resilient category is rubber, which is used extensively in categories like healthcare and education. It’s notable for its long lifecycle and a fairly low maintenance profile. And it’s often a suitable alternative to vinyl products. There are several domestic producers, including Tarkett (Johnsonite), Roppe, Mannington, Flexco and Ecore. And while there’s no domestic linoleum production, the category continues to do well in the U.S., and as one of the greenest products on the market, it does well in green projects. Forbo is the market leader, and Armstrong and Tarkett also have extensive offerings.

The other big commercial hard surface category is ceramic tile, which accounts for 12.8% of the total commercial flooring market. Category sales last year were down an estimated 4.7% to approximately $676 million. There’s a lot of commodity tile in the market, much of it from China and Mexico, used in places like restrooms coast to coast. But there’s always been a market for higher end tile in more high-profile installations, and new design developments like digital inkjet technologies—and, more relevantly, the in-register textures produced by the better manufacturers—have raised the bar on both realism and aesthetic expression. In many cases, porcelain tiles are being specified instead of stone installations, because they offer higher, more consistent performance at better price points and with essentially the same visuals.

While most of the carpet and a lot of the vinyl that goes down in commercial installations is manufactured domestically, imports dominate in ceramic tile. However, there are signs of the rising profile of American tile. For one thing, one of the most high profile firms in the world, Marazzi, is now part of Mohawk, alongside Daltile, itself a massive operation. Three of the other top domestic producers—Florim USA, Florida Tile and StonePeak are owned by Italian parent companies. And another Italian firm, Del Conca, is building a facility in Loudon, Tennessee to serve its booming home center business.

Hardwood and laminate together account for only 3.3% of commercial sales, with wood about double the size of laminate. Last year, commercial hardwood was down 5.4% to an estimated $117 million, while laminate was up nearly a point to $56 million. Commercial hardwood tends to be a high end installation, and because so much of the commercial market requires high performance flooring, the maintenance that would be required for hardwood often renders it unsuitable. However, it is in demand in the education sector, where it’s a widely used sports flooring.

Laminate has a small sliver of the commercial pie, and most of it comes from only a handful of producers. The commercial market has always been challenging for laminate flooring, with specifiers skeptical of its performance, and now that commercial LVT, which essentially offers the same visuals, has established itself in the market, the laminate category faces a new set of challenges.

COMMERCIAL SECTORS
The hospitality sector fell further than any other sector during the recession, but thanks to pent-up demand, which should last through 2014, the market has been growing stronger over the last year, and it’s still gaining. The high end is particularly strong, both domestically and internationally. Hospitality is broadloom’s biggest market, though carpet tile is steadily finding its place there.

There seems to be a movement among leading lodging chains to focus on products made in America. Many of the prominent players want that as a key message in their brands. These days the patriotic theme has a lot of resonance, and on top of that, the purchase of domestically manufactured products supports American jobs. And many of those products have a valid green story, if for no other reason than that they are locally manufactured and therefore have lower embodied energy.

Senior living is also strong. The market, which shares commonalities with hospitality in terms of what flooring types are specified, basically cannot slow down if it is to accommodate the aging baby boomer population. To that end, some hospitality manufacturers are setting their sights on senior living. The senior living market is expected to grow for the next 15 or 20 years.

Acute care work is also generated, in part, by the baby boomers’ needs. Obsolescence and new healthcare design models are driving healthcare projects as well. Last year, the Affordable Care Act caused some providers to pause in terms of renovations and other capital investments, since it was, and is even still, an unknown with regard to what changes it will bring to the business.

The corporate market, which is the dominant commercial sector, was uneven last year. Whereas the market was showing its greatest strength on the tenant improvement (TI) side as the economy was emerging from the recession, the owner occupied segment has been more active over the last year. However, at least one manufacturer reported that the TI market has been very robust.

There’s also evidence of lease terms lengthening, which can pave the way for renovations. And high end corporate business is robust. Strength in large accounts, including global corporations, and tech companies are part of what is driving the sector. Some manufacturers are seeing a wave of rebranding, the result of changes in the corporate landscape over the last few years.

Also, it looks like we’re seeing the beginning of a new long-term trend in office design, in part as a reaction against the trend of telecommuting. Companies recognize the value of personnel working together in office spaces, and this is leading to a rethinking of how offices are set up. The open work space remains a great environment, but it has to be balanced against needs for privacy, and it seems to many that the cubicle format accomplishes neither goal, so we’re seeing a trend away from cubicles. Modularity and flexibility are central to the development of 21st century work spaces.

The education sector is a mixed bag. Higher education, vying for students, remains strong, but K-12, which relies on government funding, is slow. Because of both birth rates and immigration, there is a growing population that must be served, so education, like healthcare, will be unable to stay inactive for long.

Like hospitality, retail is customer facing and driven by pent up demand. However, while hospitality is in large part business driven, retail relates more directly to the residential consumer. There are signs that retail is strengthening. This year, some retailers held off on projects in January and February, following the holiday selling season, which is often an active time for renovations, but in March and April activity picked up.

The government sector is generally down, and the uncertainly of the sequester will likely keep it slow. However, some manufacturers report that federal work is more active than state and municipal work. On the municipal level, there are more bonds being issued, which indicates that in a year or so, if the trend continues, there should be an uptick in local government work. There is still some activity in the GSA, which is the single largest purchasing entity of commercial flooring.

It’s worth noting that the high end of the market, be it corporate or hospitality or higher education, is different from the high end before the recession. These days, budgets are still challenging, and the last few years have taught people that value is more important than ever, even for those high-end jobs. So today’s projects are more thoughtful, taking into account aesthetics, budgets, sustainability and performance attributes.

For a close look at the Top 15 Specified Carpet manufacturers and Commercial Hard Surface manufacturers, see the June 2013 issue of Floor Focus Magazine.

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