Commercial Market 2017: Gains in hard surface offset sluggish carpet sales - June 2017
Introduction by Darius Helm, Statistics by Market Insights LLC
Last year started off with growth in most commercial sectors, but in the second half of the year, uncertainty surrounding the presidential election and potential ramifications emanating from it amplified a slowdown in business, particularly in the corporate sector. A brief burst of energy after the election was followed by a return to subpar conditions, and that has continued through the first quarter of 2017.
Overall, 2016 was a sluggish year for the economy, with the GDP only managing to post gains of 1.6%. However, unemployment numbers continued their steady decline and the housing market made healthy gains. And select sectors in the economy did well, like banking, Internet software and services, pharma, IT services and biotechnology. The Dow started the year around 17,500 and ended over 19,700. And it broke the 20,000 mark within the first month of the new year.
The specified commercial market was up around 2.6%, and the total commercial market, which includes mainstreet sales, posted similar results, climbing to $6.052 billion in sales (at mill rate sales prices), according to Market Insights. The hard surface side of the commercial market led the way with 6.6% gains while commercial carpet sales were up marginally, mostly on the back of the robust hospitality and senior living segments.
The higher end of the market has often been a bright spot in the last few years, but that wasn’t so much the case in 2016. While the higher end has still been relatively strong, many manufacturers report that much of the market was driven by activity at the lower end.
This year, another factor influencing the market is raw material prices. For a range of reasons, many having to do with refining capacities, prices for synthetic materials and their precursors have been going up, and the market has become volatile for the first time in a couple of years. And it’s not yet clear how long it will take for some stability to return to the market.
For many manufacturers, this had meant that business has been better in dollars than in units. For some, business is up in dollars but down in units. For others, it’s down in dollars and down even further in units.
FLOORING CATEGORY UPDATE
Overall, one of the most important developments in the commercial market is that projects are increasingly done in multiple SKUs and multiple materials. This reflects not only the long-term share shift from carpet to hard surface flooring, but also the aesthetic direction in the A&D-designed built environment. This holds true across most segments, but is most visible in corporate, hospitality, senior living, higher education and multifamily. And flooring producers have responded by bundling hard surface and soft surface offerings.
In the carpet business, the major trend of carpet tile taking share from broadloom continues, though now the focus has shifted from the dominant sector, corporate-particularly the owner-occupied segment-where carpet tile has become very well established, to other sectors like hospitality, education, multifamily, the tenant improvement segment of corporate, senior living and mainstreet commercial applications.
The most alluring market is, of course, residential. Milliken took a stab at it a decade ago, but you don’t hear much about Legato and Tesserae any more. Interface made the most serious play, with Flor, targeting the urban environment, but earlier this year it closed the bulk of its brick-and-mortar Flor stores, despite a great raft of products and a strategy to compete against rugs and not broadloom. The Flor experiment is far from over, but it’s not yet clear what Interface’s next move will be. And earlier this year, Shaw unveiled its Floorigami concept, also focusing on an urban aesthetic, but this time with plank formats marketed alongside LVT in the same format. However, the firm has yet to roll out a formal program.
The other major drive in carpet tile has been to lower prices to effectively compete with broadloom at opening price points. This has helped drive growth in price-sensitive market sectors like tenant improvement and mainstreet. Shaw has recently introduced a new polyolefin backing called StrataWorx that it hopes will help it capture more of that market.
The other key challenge with carpet, its long-term loss of share to hard surface flooring, raises another overarching issue: carpet capacity. For some time there has been overcapacity in the carpet market. Mills can partially address the issue by retooling facilities to make carpet tile instead of broadloom, but that’s still a strategy that doesn’t solve the long-term problem. What we’re seeing more of these days is that mills are getting smarter with their investments, focusing more on capability and process efficiencies than on capacity, like advanced tufting machines that can do more with texture and color.
Last year, commercial carpet lost about a point in share to the hard surface market, down to around 63%, with specified carpet revenues up about 0.8% to $3.146 billion and total commercial carpet revenues up slightly less, 0.5%, to $3.790 billion. And while carpet tile continued to take share from broadloom, the strength of the hospitality and senior living sectors, which are still heavily dominated by broadloom, to some degree shored up broadloom business, at least for now.
The resilient flooring category grew 7.5% last year, with double-digit LVT growth held back by a progressively weakening VCT market. Until recently, there were three VCT producers in the market-Armstrong, the market leader, followed by Tarkett and Mannington. But Mannington just sold its VCT business to Armstrong, which was more than anything a way for Armstrong to limit the competition and sustain its share.
Sheet goods have fared okay, and that’s largely because sheet’s strongest sector is healthcare, where it has a near unassailable hold in sterile environments with its homogeneous products. Heterogeneous sheet, which is also strong in healthcare, competes with rubber and, to a lesser degree, linoleum, and these days also with LVT. But by and large it’s not facing the same assault as VCT, or as residential sheet goods.
However, there’s really only one story in resilient, and that’s LVT. It’s taking share in every sector and taking share from just about every product category. And its wood looks have also opened up design opportunities previously unavailable to the market, since hardwood itself can’t really perform sufficiently in most commercial applications. And now there is a new generation of LVT, rigid rather than flexible. The new sub-category, initially led by WPC (wood polymer composite) products-a concept pioneered by US Floors, which was acquired by Shaw at the end of last year-has since expanded to include a wider set of constructions. It’s a new frontier, and every month seems to see a new iteration of the concept.
In many ways, the whole LVT category is a new frontier. It’s a crowded market with lots of capacity, including a new wave of domestic capacity. Just about every sizeable manufacturer or purveyor of flooring now offers LVT, which means that a lot of businesses are selling product they’re not familiar with. And that includes all the major carpet mills, many of which are not used to being in the import business. And some of them are likely finding out that it can be hard to service a commercial business from off shore. And conditions are in place, at least for now, for some degree of commoditization.
Last year, the total commercial resilient market grew to $1.194 billion, accounting for 20% of the commercial flooring market, up from $1.111 billion last year.
The other major commercial flooring category is ceramic tile, which has an established utilitarian role throughout the market in bathrooms, wet areas and other high performance applications. And thanks to the design leadership of European tile producers, led by the Italians, ceramic tile has also secured a place in more high profile commercial applications. New technologies have enabled tile to offer classic stone and, more recently, trendy hardwood looks with remarkable authenticity in visuals and textures, which, like LVT, have created new aesthetic avenues. And in the last few years, tile has continued to reinvent itself, with large formats, thin tiles and dimensional wall applications.
Last year, the commercial ceramic tile market grew by 5.8% to $907 million, accounting for 15% of the total commercial flooring market.
STATE OF COMMERCIAL SECTORS
The corporate sector, accounting for over 60% of the commercial built environment, was flat last year-with transactional and one-off projects, which are often deferrable, reacting to the economic and political instability-but it is still extremely dynamic when it comes to its use of flooring. Transitions in the use of office space have all but eliminated the concept of internal walls. And more often than not, when there are walls, they’re transparent.
The lack of walls has elevated the role of flooring in the modern office. Now it’s up to flooring to define spaces, like corridors, work spaces, collaborative areas, quiet spaces, and social and recreational environments. And this is accomplished through design, color and material. No longer can a corporate space make do with the application of a single carpet SKU. Instead, several carpet designs are used, along with LVT, ceramic tile and even rugs. Functions are defined through color, texture and material performance. And without doorways and other traditional thresholds, transition strips are also becoming obsolete, or at best invisible. Increasingly, multi-category flooring producers go to great pains to make their carpet tiles and LVT in equivalent thicknesses, so that people can transition between them seamlessly.
The corporate sector is the leader in these design trends, but to varying extents they are taking hold throughout the commercial market. The education market is also going through an aesthetic evolution, more visibly in the higher education segment, where traditional spaces, from libraries to student housing to recreational spaces, are being reinvented to cater to the shifting demographics of its students-and also to the increasingly competitive marketplace.
LVT and carpet tile are taking a lot of share in the education market, and in K-12, where VCT use has atrophied. The higher education market was, by most accounts, fairly robust last year, and that momentum has continued into 2017. The K-12 market is more of a mixed bag, with lots of regional differences driven by state and municipal budgets. However, most manufacturers report that K-12 business has shown some growth.
One of the strongest markets over the last couple of years has been hospitality, another sector redefining itself to attract key demographics, most notably Millennials. Carpet tile has gained significant traction, even if it still accounts for perhaps 10% of carpet use. And LVT is also making big gains, mostly in guest rooms. These efforts to target specific demographics is driving renovation activity and leading to a lot of design experimentation, and it’s also segmenting the market.
Also, occupancy rates are high, sometimes so high that hotels have trouble fitting in renovations. And that’s helping drive a modest wave of new construction. The sector is expected to continue to make gains for the next few years.
Most manufacturers with a strong position in hospitality report that much of the activity is at the medium to lower end of the market. The higher end tends to be more traditional, with large-scale customized Axminster designs on the public space side and commoditized patterned broadloom in guest rooms. Most of the action is at three stars and below, and among the new brands and the boutique hotels.
Another strong sector has been senior living, which shares many of the same characteristics. Often, the public space in senior living has a hospitality feel, though living quarters tend toward residential looks. But today’s senior living facilities are more like small villages, with retail space, recreational areas and even education environments. And that means a wide range of flooring materials.
The other big growth sector has been multifamily, which is robust though perhaps not growing at the same rate as in recent years. But it’s worth noting that in the major cities, most of those cranes rising up into the skyline are for high-rise apartments and not corporate buildings. For example, the tallest building in New York City, if you discount the antenna tower rising from the World Trade Center, is a Park Avenue apartment building.
The bulk of these new urban dwellings are at the upper end of the market, though many metro markets have urban zoning requirements mandating that a certain proportion of new multifamily dwellings have to be affordable. But there’s still a lot of renovation activity, and new turns, across the entire spectrum. And in most of these units, broadloom is losing share to LVT and carpet tile. Even in the public space side, hard surface flooring is gaining measurable traction.
One commercial sector experiencing some uncertainty is healthcare, from acute care to medical office buildings. Most manufacturers report that the Affordable Care Act had until recently been an economic stimulus, driving a lot of renovation and new construction because of the addition of millions of Americans into the healthcare network. Also, it’s a sector plagued by obsolescence, and new healthcare models and evidence-based design have been retooling the healthcare landscape. But uncertainty about the future of the healthcare system seems to have slowed the transformation of this sector, at least for now.
Nevertheless, the long-term outlook for the healthcare sector remains strong, both because of the need to upgrade facilities and the aging of the Baby Boomer population.
Perhaps the sector under the most pressure is retail, because there seems to be nothing that can stand in the way of the consumer’s desire to shop online. The larger and more traditional retail outlets like department stores are being decimated by the online shopping model, and that includes the discount chains. Many American malls are becoming ghost towns, as retailers and property owners desperately try to redefine the shopping experience to keep it relevant and entertaining.
However, it’s not all bad news. Some retailers are getting by, like home centers-as packed with product as any online store-and some tech stores, along with a range of specialty stores, particularly those with a heavy service component. And bank branches, which many manufacturers consider to be in the retail sector, since they are customer environments, are also doing fairly well. And overseas, like in the Middle East, the American mall concept is alive and well. Retail stores that find ways to reinvent the brick-and-mortar shopping experience will survive, but the long-term declining trajectory of the category will continue unless some sort of social counter trend emerges that drives people from their homes into these public environments.
For a close look at the Top 15 Specified Carpet manufacturers and Commercial Hard Surface manufacturers, see the June 2017 issue of Floor Focus Magazine.
Copyright 2017 Floor Focus