Commercial Market 2021: Last year, the commercial market moved into positive territory - June 2022
Introduction by Darius Helm, Statistics by Market Insights
Last year started slow in the commercial flooring market, with subdued activity in most market segments, but activity steadily grew through the final three quarters of the year, pushing the market into positive territory. Total commercial flooring revenues in the U.S. market grew 5.3% in 2021 to $5.799 billion, according to Market Insights LLC. The hard surface side grew 8.1% to $2.829 billion, and carpet was up nearly 2.8% to $2.970 billion. And so far, the commercial market has continued to strengthen in 2022.
In terms of commercial segments, the ones that didn’t fall as far in 2020, like healthcare, the mid- to higher-end of multifamily, and education, led by K-12, came into 2021 with larger volumes that underpinned growth for the year. Last year, education activity expanded with some gains in higher education, and multifamily, driven in part during the pandemic by construction of higher-end urban rentals from those largely unaffected by the pandemic and suburban gains from those fleeing the cities, started to broaden with more large-scale renovations and apartment turns. And healthcare, including acute care and medical office buildings, continued to post healthy growth.
Some of the markets that fell the most in 2020 started to come back last year at varying rates. Hospitality, driven by the return of leisure travel, began opening up in the second half of the year, and is positioned for a strong 2022, though business travel, the bigger driver in hospitality, is still lagging. Senior living, all but shut down for much of 2020, grew last year and entered 2020 with strong momentum. Retail has also been gaining as retailers renovate to capture returning customers, with larger national chains boosting the category. Some manufacturers report gains in the government sector, though activity last year seemed a lot lower than what is typical when there’s an incoming administration.
The biggest segment, corporate, which includes tenant improvement as well as owner-occupied spaces, has been strengthening but is still far from running on all cylinders. Pent-up demand and the need to reconfigure spaces for both the health and work flexibility of employees are poised to drive this critical segment to strong gains this year, which should help the commercial market return to full strength.
In the mainstreet segment, small businesses, shut tight during Covid compared to larger entities, started renovating last year, helping mainstreet outpace the specified market.
FLOORING CATEGORY UPDATE
Last year, carpet accounted for about 51% of commercial flooring revenues, down from 52.5% in 2020. The biggest gainer was of course resilient flooring, which grew 13.7% to $1.655 billion, making up 28.5% of commercial flooring. Resilient’s biggest piece is gluedown LVT, which has a growing position in every sector, though sheet goods and VCT still make up nearly 29% of the resilient category. Rubber, which has a strong position in the healthcare and education markets, was up nearly 10% last year.
The other big piece of commercial hard surface is ceramic tile, which managed 5% gains last year, making up nearly 18% of commercial flooring sales. Import bottlenecks reduced the flow of products, conferring an advantage to domestic production, which has grown in recent years. Ceramic’s expanded use in wall treatments, outdoor cladding and pavers has strengthened the category overall. And the relative health of the higher end of the commercial market is helping drive trends.
Price increases were prevalent in both residential and commercial flooring products last year. However, the far higher demand on the residential side amplified bottlenecks in material availability and the flow of products, so residential products had more price increases. Also, lower demand on the commercial side led to more reticence when it came to pricing. Unfortunately, this year has already seen additional price increases, and more are likely.
Over the last year, key players from manufacturers to contract dealers to A&D and facility managers have quickly adapted and come up with strategies to do their part in sustaining the flow of products. In the case of manufacturers importing products or components, the focus has been on increasing buffer stocks by securing multiple options for supply, and for domestic production, streamlining operations to maximize available labor and securing transportation. Some firms, like Shaw, offer live inventory, a searchable database of products available for delivery. And Mohawk has on occasion chartered freight planes for the delivery from overseas of key products and component materials.
While many manufacturers point to these sorts of supply strategies, as well as domestic capacity, huge stores of inventory or even outstanding service as key differentiators that drove business last year and gave them a competitive edge over other flooring producers, getting flooring to the jobsite in a timely manner often had little impact on getting the project completed, since projects don’t just involve one element. In terms of interior elements alone, there’s lighting, casegoods, electronics, wall treatments, to name a few. So, while it’s true that, in the current market, having flooring product in stock and quickly available through reliable transportation may help a flooring firm capture a specification, it doesn’t do much to shorten the timeline of the job’s completion if the casegoods are locked down in Shenzhen or entombed in the container hoard at the Port of Long Beach. And unfortunately, that’s exactly how today’s projects are running, with projects entirely unsynchronized and therefore completed on the timeline of the slowest elements.
In terms of 2022, many of the same problems remain, and manufacturers anticipate that a range of bottlenecks will persist throughout the year, hampering growth. Without a resolution in sight on Russia’s attack on Ukraine, oil prices will likely remain elevated. Prices for many polymers and other materials and components derived from fossil fuels continue to rise. And fresh waves of lockdowns in China are already choking the still-constrained flow of goods. And labor issues in the U.S. show little signs of improvement. Too many older professionals have left the workforce, and younger generations are proving hard to draw in, particularly when it comes to filling positions in installation, factory work and transportation. As one flooring executive put it, when asked if it could be true that some flooring producers had no labor issues, “Anyone who says they have all the labor they need either shrank a lot or lied to you.”
In terms of the lockdowns in manufacturing and other sectors across China, a May 11 article from the South China Morning Post indicates that even the companies permitted to resume operations during Shanghai’s lockdown-and that’s only a small fraction of the total manufacturing operations affected-have had trouble getting going. A survey by Shanghai Security News of 142 manufacturers showed them running at an average 30% capacity.
The good news is that there’s plenty of demand. In most segments, the pipeline is loaded up. There’s no shortage of pent-up demand in the corporate sector, from tenant improvement to owner-occupied renovations to new construction. Hospitality is coming back. Education and healthcare, including acute care and medical office buildings, continue to be engines for growth, and senior living is rebounding. Retail is stronger, but it’s uneven, with lots of activity at national chains.
One of the best indicators of future growth comes from the American Institute of Architects’ Architecture Billings Index (ABI), which reports A&D billings that typically translate to projects nine to 12 months down the road. Scores above 50 indicate growth billings. The ABI hit its low point in April 2020 with a score of 29.5, which steadily climbed throughout the year before stalling in the fourth quarter. Last year, the ABI crossed back into positive territory in February with a score of 53.3 and climbed to 58.5 in May before retreating somewhat but still staying in positive territory, ending the year at 51. And this year it has climbed again, hitting 58 in March and 56.5 in April. The ABI scores indicate a wave of projects starting in early 2022 (which matches what manufacturers are reporting) and stretching into 2023. However, it’s worth noting that, due to continuing supply chain woes, timelines may be attenuated.
For a close look at the Top 15 Specified Carpet manufacturers and Commercial Hard Surface manufacturers, see the June 2022 issue of Floor Focus Magazine.
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