Commercial Market 2021: While all commercial segments lost ground last year, they are rebounding at different rates in 2021 - June 2021

By Intrduction by Darius Helm; Statistics by Market Insights

After a strong start, the commercial market stalled in the spring of 2020 and remained depressed for the rest of the year, and while it looks like growth may be elusive in 2021, there are signs of increased activity, depending on the segment and the region. Last year, the U.S. commercial flooring market fell 19.6%, according to Market Insights, from $6.36 billion in 2019 to $5.11 billion.

The hospitality segment had the earliest and fastest decline as travel ground to a virtual halt and hotel chains quickly hunkered down and put a hold on renovations. The retail and corporate segments were close behind as the shelter-in-place declarations rolled out.

Higher education slowed more than K-12, where projects already funded were, in some cases and to varying degrees, able to proceed. Senior living institutions, housing those most vulnerable to Covid, sealed themselves off from the world. Government and public space projects also slowed significantly.

Multifamily, surprisingly, was a mixed bag. For instance, apartment turns, which are served by residential dealers, stopped turning. Particularly at the lower income levels, which is where most of the multifamily volume resides, nobody was moving, and a national eviction moratorium, while keeping a roof over renters’ heads, put increasing pressure on property owners. However, among those buffered from the economic impacts of the pandemic, there was more movement. A lot has been made of a rush to the suburbs, though it turns out that was only the case in some metro markets, but certainly in places like New York City, the suburbs have been flooded with demand for new and existing homes. But in many cities, apartment building has continued, and several flooring manufacturers reported that multifamily new construction and public space renovation was their strongest commercial segment last year.

Healthcare, comprising acute care, clinics and medical office buildings, also slowed, but there were pockets of activity as some healthcare providers sought to adjust their interiors to reduce coronavirus transmission risks. Also, temporary spaces for testing and even for patient care drove some business.

FLOORCOVERING OVERVIEW
In terms of commercial flooring, three categories dominate the landscape: carpet, which has a 56.5% share of the market; resilient flooring (mostly vinyl and rubber), which accounts for another 23.1%; and ceramic tile, which makes up another 17.2%. The remaining 3% comes from hardwood and laminate, which both have limited applications in the commercial market due to moisture issues and surface wearability.

Carpet was down over 23% last year to $2.89 billion, largely because the markets with the highest proportion of carpet compared to hard surface flooring were hardest hit-most notably, corporate, which is by far the largest market, and hospitality. For most of the carpet mills, business in the corporate sector was stronger in owner-occupied spaces than in tenant improvement.

Broadloom fared more poorly than carpet tile due to impacted sectors, most notably hospitality, and to a lesser extent, retail.

The resilient category was down 12.3% to $1.18 billion. The biggest piece of that category, LVT, was only down marginally, in part because of its continued marketshare gains over other types of flooring, but also because the carpet-heavy sectors were down the most. VCT, the smallest piece of the resilient category, and the most quickly shrinking, was down significantly. VCT has a strong position in retail, where there was little activity last year.

Sheet goods, however, fared better, down only by single digits. While there’s anecdotal evidence for an uptick in demand due to its lack of seams and ability to be easily cleaned and sterilized, the bigger impact was likely from its demand in pop-up testing and treatment centers.

Commercial ceramic tile was down 14.5%. Ceramic is an essential flooring in every sector, and its particularly strong in segments like hospitality (including restaurants), healthcare, retail and public space, most of which were heavily impacted last year.

Carpet lost share to the other categories, falling from 59% to less than 57%, with share gains by ceramic tile and resilient flooring about evenly split.

LOOKING AHEAD
So far, this year has been sluggish but somewhat improved over last year. The corporate segment is still fairly quiet but other segments are starting to show signs of life, including education and healthcare. Some regions are stronger than others, though, with better results in the Southeast and Southwest, and the Northeast lagging behind.

Few industry leaders are willing to make predictions about how 2021will turn out, but most feel they will be grateful to come out of the year flat, and they’re already looking ahead to 2022 for a robust return to business.

Nevertheless, most signs are pointing to improving conditions. In February, the American Institute of Architects’ Architecture Billings Index jumped into positive territory, at 53.3, for the first time in a year, followed by 55.6 in March-the highest score since before the Great Recession-and it went even higher in April, to 57.9. Regionally, the Midwest and South were strongest, with the Northeast and West lagging behind, but all were in positive territory-any score above 50 indicates an increase in billings.

Also, according to Dodge Data & Analytics, nonresidential building starts were up 13% in March. Institutional starts rose by 15%, led by gains in the education, recreation and public building segments. And commercial starts were up 11%, with gains in all segments. However, for the 12 months ending in March 2021-essentially covering the full breadth of the pandemic so far-nonresidential building starts fell 28% over the prior 12 months, with commercial starts down 30% and institutional starts down 20%.

While there are encouraging signs of increasing activity, the flooring industry will have to wait at least six months to start feeling the impact, so most of the gains won’t move the needle until next year.

A slow ramp-up does have some silver linings, though. For instance, the supply chain is stressed right now due to a range of interconnected conditions: ports are clogged; container prices are escalating; raw material shipments are delayed, and capacity is constrained, driving up prices; suppliers are issuing force majeures; workers are scarce; and shifts in production driven by tariffs on Chinese goods add to the disequilibrium. Some of these conditions are already starting to improve, like the impacts on petroleum byproducts arising from the February Texas freeze, while others, including shipping and workforce issues, may take much longer to resolve.

The faster business bounces back, the more pressure it puts on these already strained supply chains and on flooring manufacturers already unable to find all the workers they need. A slow and steady ramp-up could help prevent the creation of more bottlenecks and supply crises in the business and help flooring operations run more smoothly.

However, it’s worth noting that whenever there is a shock to the market that significantly impedes business, there’s always pent-up demand waiting at the exit. After all, businesses need to regularly remodel because of wear-and-tear, changing needs and design trends, and new and growing businesses need to move and build. The volume of pent-up demand never adds up to what was lost, with many businesses attenuating their renovation cycles rather than rushing into new investments, but at the same time competition is fierce in a recovering economy, and commercial enterprises need to put their best foot forward. So 2022 and 2023 should see solid gains in the commercial flooring market, and the first wave of the rebound will likely be felt by the end of this year.

For a close look at the Top 15 Specified Carpet manufacturers and Commercial Hard Surface manufacturers, see the June 2021 issue of Floor Focus Magazine.

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