Annual Report: In 2023, declines in residential business pulled down the total U.S. flooring market - May 2024

Introduction by Darius Helm, Statistics by Market Insights LLC

Last year, the residential market was down about 13%, and the commercial market was up marginally, driving total industry sales down 10.6% to an estimated $25.305 billion at mill sell, according to Market Insights. Sustained inflation and high interest rates have impacted both sides of the market.

2023 was a challenging year for the flooring industry, weak on sales, strong on innovation and product development and volatile in the supply chain. While both the commercial and residential markets were heavily impacted by inflation and high interest rates, most of the drama was on the residential side with the housing market floundering. Following the Covid years, which saw massive spending on home renovation and strong housing activity, a slowdown was inevitable, but persistent inflation, mortgage rates that have more than doubled in the last couple of years, and geopolitical instability has accentuated the correction. Flooring sales at Home Depot and Lowe’s, two huge channels for flooring, were estimated to be down about 15% last year. But fortunately, through March of this year, the market has started to show signs of life.

On the commercial side, the state of the corporate market has been the biggest challenge. The pandemic wrought huge changes in the workplace-most notably, the shift to working remotely-and the segment is still trying to figure out what the new normal will be. Added to the financial pressure of interest rates, it’s driving leaders in the segment to move cautiously when it comes to building new offices or reconfiguring existing spaces. Office vacancy rates were at a record 13.8% last year, according to CoStar Group, a leading provider of real estate analytics.

Last year, all flooring categories fell more in value than in volume, with the exception of commercial carpet, where the continued shift from broadloom to carpet tile helped stem losses in volume. Dropping prices across the board was the normalization of freight and the associated reduction in freight costs, which had soared massively during Covid. Supply chains in general, including for chemicals and materials used in flooring production, also started running more smoothly.

Many costs, however, have continued to rise, including energy costs. And there have been some significant impacts on supply, mostly from Russia’s invasion of Ukraine, impacting plywood sources in the engineered hardwood business and clay sources in the ceramic tile business. Also, there have been major shifts in supply away from China, due to tariffs and human rights issues, to neighboring Asian countries, though it’s worth noting that despite all these barriers, China remains a massive supplier to the U.S. flooring market.

The human rights issue, relating to U.S. regulations barring the import of products that use materials coming out of the Uyghur provinces (to prevent China from profiting from its mistreatment of Uyghurs, an Islamic population), has heavily impacted the vinyl flooring market. Not only did many manufacturers have to watch as their containers languished in U.S. ports, but they also had to retool their supply lines, shifting to Vietnam, Cambodia, India and other Asian nations.

A lot of these new suppliers, particularly at the entry level of the market, sought to establish themselves with low-cost goods. A rash of SPC failures have been attributed to these substandard products. India is a relative newcomer, but it is quickly moving to compete in vinyl and ceramic tile. In fact, it’s now the largest producer of ceramic tile by volume, but its prices are low and going lower. Last year, imports from India were up 43% in volume but only 5% in dollars.

Another issue impacting business has been excess inventory in the market in 2022 and well into 2023, with the market slowdown amplifying the problem. And a lot of that inventory was produced when costs, including freight, were higher. In some cases, it took much of the year to sell that product through the system. Well into the year, resilient flooring replenishment levels finally returned to normal levels, reports Russ Rogg, president of HMTX’s Metroflor.

OVERVIEW: FLOORING CATEGORIES
In 2022, the resilient category was poised to supplant carpet as the biggest flooring category, and then something unexpected happened. Carpet gained share for the first time in at least two decades, pulling away from resilient flooring. In 2022, carpet’s share was 30.5%, and resilient was 29.7%. But this year, carpet’s share climbed to 31.0% with $7.845 billion in mill sell prices, while resilient marketshare was unchanged at 29.7% with revenues of $7.508 billion. But there were lots of mitigating factors that strongly suggest resilient will surpass carpet this year or next.

Nevertheless, carpet’s gain is significant because it reflects how carpet, at least on the residential side, has arrived at its new equilibrium in the market. Its position in bedrooms and other private, low-traffic areas of the home is fairly unassailable compared to the share it readily lost to hard surface throughout the rest of the home. In the commercial market, where broadloom is still being replaced by carpet tile, though at a diminishing rate, carpet has a much larger share of the square footage.

While residential carpet is mostly PET, it’s still largely nylon in commercial. Lines between nylon 6 and nylon 6,6 are blurring, with part of that due to Invista getting out of the nylon 6,6 carpet fiber business and taking its prominent brands (Stainmaster and Antron) with it. Higher-end residential carpet is still largely nylon, with decorative carpet also coming in wool, polypropylene, polyester and some other synthetic fibers.

Resilient revenues were about close to flat in the commercial market and down strongly in residential. A lot of the losses on the residential side were due to the drop in pricing and over-inventory. Imports were down by double digits, while domestic production was up by double digits, thanks largely to huge investments in the construction of domestic rigid core facilities.

Over the last few years, SPC has dominated the market over WPC, which was the original rigid core construction introduced to the market 11 years ago by US Floors’ Coretec. SPC is cheaper, thinner and denser than WPC and offers the same straightforward locking systems for installation, and it has been driving the category toward commoditization.

However, talk of SPC failures has grown louder over the last year, and it has driven resilient producers to focus more on their better goods, including WPC, thicker SPC and value-added products like direct digital printed planks and locking systems for herringbone and chevron installations. It’s also helping to drive the development of hybrids, many of which use modified laminate components and chemistries (coreboards and melamine).

Despite the impact on the market of low-cost tile from India, the ceramic category performed better than all the others last year, falling just 8.2% to $4.013 billion. This number also includes wall tile, in part because, while there’s plenty of wall tile that can’t go on the floor, like glass mosaics and 3D tiles, just about any floor tile can go on the wall, and it often does. While imports fell by 13%, domestic production was actually up by 1.7%.

The ceramic industry is also working hard to diversify beyond interior floors and walls to outdoor pavers and exterior cladding. And it’s worth mentioning that it has also developed thin gauged panels for wall applications, offering aesthetics traditionally confined to high-end stone.

Last year, the U.S. hardwood market declined by 13.4% to $2.384 billion. Imports plunged nearly 20%, about the same as in 2022, while domestic mill shipments were only down 8.5%. The category has been battling against lookalike products for years, and the last decade, with the wave of rigid core products inundating the market, has seen its share loss deepen. It’s been particularly tough in the builder market, where hardwood used to dominate, and now it’s all about SPC. However, these recent reports of SPC failures may drive some builders and homeowners back to wood.

Most of the market is engineered hardwood, which performs better across a range of climates and also enables hardwood installation on slab constructions where there’s no subfloor, thanks to its dimensional stability. And even though there’s a lot of engineered wood capacity in the U.S., most of what is imported is engineered. And in terms of U.S. supply, decline in the domestic furniture industry has reduced hardwood lumber volume by 65% over the last decade, stressing the market, and demand for white oak, which dominates the market but is in short supply compared to red oak, had added additional pressures.

The laminate category was down 12.9% last year to $1.11 billion. Laminate is another category that has lost share to rigid core, but over the last few years, laminate producers, led by Mohawk, have worked to improve the water resistance of their products and have invested in marketing their enhanced laminates, and this has helped stabilize the category, which has been on a downward trajectory since 2008. Hybrids are blurring the line between laminates and LVT, moving toward a continuum of sorts. The next few years will likely see this hybrid category take substantial share in the market.

Area rugs, down about 15% last year to $1.961 billion, is a bit of an outlier. For one, it’s the only category that goes down over other flooring categories, and it also requires no installation, which has enabled its sale outside of traditional flooring retailers. Ecommerce now controls the bulk of the market, though some brick-and-mortar retailers, cognizant of how the growing square footage of hard surface often needs softening with rugs, still do a good business in the category. Most area rugs are imported.

Producers report that the higher-end rugs have been outperforming the lower price points. But just like with higher-priced flooring projects, area rug purchases can be easily deferred, and that has led to some declines. Also, at the medium to higher end, homeowners are often turning to bound broadloom rugs, in part because they can be custom cut to fit perfectly into their spaces.

HOUSING AND CONSTRUCTION
Sustained inflation and high interest rates kept many consumers from big ticket purchases last year. While monthly existing-home sales spent most of 2023 down by double-digits year over year, new-home sales started to tick up in April and by summer were regaining lost ground, but it wasn’t enough to stop builder flooring business from ending the year down by double digits. High home prices kept a lot of buyers out of the market.

Residential remodel didn’t fare much better. Many of those people not buying new homes were hanging onto their existing homes, most of which were financed at much lower rates than the 6% and 7% 30-year fixed rate mortgages buyers had to face last year. And the Covid wave of renovation of existing homes in prior years satisfied part of the demand.

Multifamily business started the year strong but tapered off. With rent rates high, consumers were less likely to move to better, bigger apartments, reducing apartment turns and unit renovation. Vacancy rates increased by double digits last year to 6.6%. Just like on the single-family side, financing for building new properties has become costly, and that has helped keep rents high. The slowdown in new construction started to be evident toward the end of last year.

Following a strong 2022, the commercial market weakened last year, ending up close to flat. The corporate sector, the biggest piece of the commercial market, remained uneven, while education and healthcare remained strong. (We’ll provide a more indepth analysis in next month’s Commercial Market Report.)

2024 OUTLOOK
The residential flooring market started the year in negative territory, and so far, business continues to be soft, though not as much as last year. By the second half, conditions are expected to improve, but likely not at a rate to pull residential business into positive territory. The Fed was expected to lower rates a few times this year, but due to persistent inflation, it continues to waver on that decision. The longer it waits, the more it will delay rebounds in the market, though some homeowners have resigned themselves to these high rates and decided to move ahead with purchases anyway. Suffice it to say, most of that activity is among that more affluent segment of the population.

Multifamily completions are still in positive territory, though not by much, but it’s still helping drive business. But multifamily starts are steadily going down-starts in March were down 43%-and multifamily new construction flooring business is expected to dip this year, but most experts anticipate that it won’t be severe, and the market should strengthen next year, buoyed by the sustained shortfall in housing for the population. However, financial services company Truist contends that, following three years of activity that’s about double the 35-year average, a prolonged downturn could be in the cards.

New home sales rose 8.8% in March, 8.3% year over year, and pending home sales were up 3.4%. However, March existing-home sales declined 4.3% from February and 3.7% year over year, and median existing-home prices rose to over $393,000.

The Architecture Billings Index (ABI) gives a good indication of how the commercial market will fare. It started off 2023 in negative territory at 49.3 in January and 48.0 in February-anything over 50 indicates an increase in billings-and briefly inched into positive territory before flattening in July, then declining to a year-low of 44.3 in October. Since then, the ABI has stayed below 50. March’s ABI was 43.6, with the institutional market remaining strong and multifamily weak.

Architecture Billings generally foretell conditions in the commercial flooring market nine months to a year down the road, sometimes longer for certain projects. With eight months of declines in the books, commercial flooring is likely to start to soften this summer with evident declines by the end of the year.

There’s a volume of commercial office building loans coming due in the next year or so, and higher financing costs could put a lot of commercial real estate in jeopardy of default. According to a report last month from The Wall Street Journal, “Defaults are reaching historical levels in the office market, as a growing number of owners capitulate to persistently high interest rates and weak demand.” The report points out that $18 billion in office loans converted into securities are maturing this year, twice the volume of last year.

Nevertheless, while commercial business slows, leading indicators point to the residential market, which is twice as large, strengthening late this year and into next year, driving flooring industry growth into positive territory.

For the complete Annual Report, see the May 2024 issue of Floor Focus Magazine.

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