Annual Report 2023: Commercial gains offset residential losses last year, driving another year of industry growth – May 2023
Introduction by Darius Helm
Last year, the U.S. flooring industry posted 3% growth for a total of $28.195 billion at mill sell, according to Market Insights LLC. Strong activity in the commercial market helped offset losses from the second half of the year in the residential market.
Events in the first few months of last year-most notably, the rapid increase in interest rates, destabilizing global events like Russia’s invasion of Ukraine and escalating inflation-had a chilling effect on the residential flooring market. Not only is flooring renovation a deferrable expenditure, but a lot of the residential market had already spent much of the last couple of years doing just that, renovating. The economic downturn was enough for many to pull back and postpone.
Business began to slow significantly in the second quarter and continued to decline for the balance of the year, with both residential remodel and single-family builder business tailing off, while the multifamily market was still active with remodels and apartment turns, less so with new construction.
The commercial sector, coming off a strong second half of 2021, entered the year with a head of steam, and business was strong throughout the year, with just about every commercial segment posting gains.
As the year progressed and demand faltered, many of the biggest barriers to business began to come down, including shipping costs, port congestion, raw material availability and raw material pricing. And this created a problem with inventory in some of the flooring categories. Supply chain constraints coupled with heavy demand in 2021 led to a frenzy of import orders. In categories like laminate, engineered wood and area rugs, people were ordering anything that resembled a flooring product. Then supply chains started to clear and product began to flow through the ports and across the country-just as demand dried up-leaving flooring businesses, saddled with huge volumes of product and too few customers to buy it all, distressed and vulnerable.
In terms of residential channels, home centers like Lowe’s and Home Depot, which saw business surge in the first couple of years of the pandemic, lost some ground last year as flooring business retreated faster for them than it did for independent flooring retailers.
The higher end of the market, which is more immune to economic cycles, outperformed last year, while the lower end, where all the volume is, saw business recede at a faster rate. But it was the middle of the market, already shrinking, that underperformed the most.
While some of the conditions impacting supply chains and the flow of goods have improved, others have not. Inflation and interest rates are still too high, but just as importantly, labor issues in the U.S. remain critical. In terms of flooring, that means not enough drivers to transport product, not enough workers to operate the facilities and, critically, not enough experienced professionals to install the products.
OVERVIEW: FLOORING CATEGORIES
Last year, resilient did not quite oust carpet as the biggest flooring category, but it came close. Total resilient sales were an estimated $8.415 billion compared to carpet’s $8.484 billion. The results for 2023 will most likely show carpet surpassed for the first time as the leading flooring category in the U.S.
In dollars, carpet was up marginally last year, with low double-digit growth in commercial making up for single-digit residential declines, but a lot of that was from price increases. In volume, both segments of the market were down.
While carpet continues to lose share, it is doing so at a decreasing rate, suggesting that it may be finding its equilibrium in the market. On the residential side, carpet has lost share to hard surface in both multifamily and single-family homes. In multifamily, entire units in gluedown LVT are becoming commonplace. And the single-family rental market is also starting to see homes that are entirely hard surface. Nevertheless, bedrooms and other private parts of the home are still a stronghold for carpet.
The low end of the residential market is mostly PET, which is also starting to infiltrate higher price points with elevated design and enhanced performance. Nylon, which is mostly nylon 6 now that Invista exited the fiber business, is largely at the medium to high end. New designs, textures and constructions continue to keep the category current. At the higher end, the demand for decorative carpet is livening up the market. A lot of it is custom cut into bound broadloom rugs.
On the resilient side, the bulk of the growth continues to be with rigid LVT, led by SPC. In the commercial market, gluedown flex LVT remains the product of choice and it also has a strong position in multifamily units.
SPC has become a challenge in the independent retailer channel, where too many retail sales associates (RSAs) drive consumers, including those originally looking for real hardwood, toward the lower-priced SPCs. It’s not just that it’s an easy sell with its low price, performance attributes and visuals, but it’s also a quicker install, so RSAs get paid quicker. Part of the issue is the installation crisis. Installing carpet or hardwood requires a higher degree of expertise than what is required to install click-system flooring, and those installers are in high demand, with projects often backlogged, while it’s a lot easier to find installers for rigid LVT.
Rug category sales were down last year by about 11%, though a lot of that related to over-inventory from imports the previous year. Apparently, there are a lot of rugs languishing in warehouses amid diminishing demand. Sales at the retail level were likely stronger than market numbers indicate. There’s also a growing market for custom-cut rugs fashioned out of broadloom designed to fit custom dimensions within homes (that market is captured in the broadloom numbers). It’s a higher end market, with most of the custom cutting and binding taking place at the retail level.
Hardwood business, which is primarily residential, was down about 10% last year. Activity was high at the beginning of the year, but supply chain issues caused bottlenecks. And as demand quickly cooled, oversupply from 2021 hit the market, including from imported engineered woods that had been stuck in transit. That oversupply of engineered wood imports impacted demand for domestic production and also led to a plunge in imports last year of about 21%.
The flooring type that posted the highest growth last year was ceramic tile, which was up about 14%. Unfortunately, it was largely due to price increases; units were down a little over 1% for the year. Ceramic tile has been more vulnerable to price inflation than other categories, in part because so much of the supply comes from Europe, where the price of natural gas, which is used to fire kilns, for a time was ten times higher than normal. Now it’s still double where it stood before the Russian invasion.
Laminate flooring posted 5.5% growth last year. Under pressure from rigid LVT, the category has made great gains in recent years in terms of increased water resistance, as well as acoustical abatement. And we’re starting to see products that in many ways are a hybrid of laminates and rigid LVT-see Innovation and Hybridization starting on page 81.
Producers of other hard surfaces, as well as carpet mills, are increasingly adding laminate lines, much like they have done with rigid LVT in recent years, though not at the same frantic pace. Nevertheless, it’s a sign that the category has succeeded in staying relevant in the face of the rigid LVT onslaught.
HOUSING AND CONSTRUCTION
Last year, housing numbers started off on a downward trend. Existing-home sales in January 2022 were up 6.7% from the previous month but down 2.3% year over year at a seasonally adjusted annual rate of 6.5 million. Conditions steadily deteriorated and by late summer the annual rate was below five million, and year-over-year numbers were down by over 20%. The low point was probably January of this year, with numbers down 36.9% year over year to a seasonally adjusted rate of about four million homes.
In terms of new-home sales, there was more variability month by month, but the overall trend was downward in both year-over-year and month-by-month sales until late summer. In January, sales peaked at a seasonally adjusted rate of just over 800,000 sales, and the bottom came in July, which was down 12.6% from the previous month and down 29.6% year over year, with an adjusted sales rate of only 511,000 sales. Late in the year, sales started to go up month by month, and through March of this year were down 3.4% year over year.
Builder confidence in the market for new single-family homes, as reported by the National Association of Home Builders (NAHB), started the year at 83-any number over 50 indicates that surveyed builders on average consider current sales and sales for the next six months to be positive. By August, numbers were in negative territory (49) and crept down to a low of 31 in December.
On the commercial side, the American Institute of Architects’ Architecture Billings Index started the year in positive territory at 51.0-anything above 50 is positive-and reached a high of 58.0 in March, then started to inch back down. The last three months of the year were in negative territory. There’s a lag of nine months to a year or more between billings and flooring installation, so it looks like commercial business should be healthy for through the summer months but may begin to slow toward the end of the year.
The good news is that some numbers are starting to stabilize. Though still in negative territory, builder confidence has steadily increased, with a score of 45 in April. New-home sales have shown monthly increases since October, though they’re still down a lot year over year. And there are signs that existing-home sales are not falling at the same rate.
According to Lawrence Yun, chief economist for the National Association of Realtors, “Home sales are trying to recover and are highly sensitive to changes in mortgage rates. Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”
Alicia Huey, chair of the NAHB, says, “For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates.”
And Robert Dietz, NAHB chief economist, notes, “Currently, one third of housing inventory is new construction, compared to historical norms of a little more than 10%.”
The expectation is for both builder and residential remodel business to be off this year, but market data suggests that the market could see some improvement late in 2023, absent any new market disruptions. Early indications are that residential remodel may be down in the first quarter of this year as much as 10%.
According to the Leading Indicator of Remodeling Activity (LIRA) by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, homeowner expenditures for home improvement and maintenance will fall 2.8% year over year through the first quarter of 2024, driven by high interest rates and substantial downturns in existing-home sales and single-family builder activity.
“With ongoing uncertainty in financial markets and the threat of a recession, homeowners are increasingly likely to pare back or delay projects beyond necessary replacements and repairs,” says Carlos Martín, project director of the Remodeling Futures Program.
Commercial business is healthy for now, though the outlook is still unclear. But in a positive sign, the Architecture Billings Index pushed back into positive territory in March of this year with a score of 50.4. For more on the state of commercial business, see next month’s Commercial Market Report.
For the complete Annual Report, see the May 2023 issue of Floor Focus Magazine.
Copyright 2023 Floor Focus