Commercial Market 2023: Following double-digit growth in 2022, the U.S. commercial market declined moderately last year - June 2024

By Intrduction by Darius Helm; Statistics by Market Insights

The U.S. commercial flooring market, specified and mainstreet combined, fell by 3.4% last year, going from $6.645 billion in 2022 to $6.416 billion, according to Market Insights estimates. While soft surface is still the bigger piece of the commercial flooring market, hard surface outperformed carpet in 2023, down 3.1% to $3.085 billion compared to carpet’s 3.8% decline to $3.332 billion. Resilient increased its share of the commercial flooring market by a modest 0.3%, while carpet’s share fell by an even smaller margin. Ceramic’s share was unchanged.

Many of the most challenging business conditions brought on by the pandemic-container costs, port congestion, trucking, raw material availability and pricing, access to labor, access to work projects-normalized in 2021, giving the commercial flooring market a powerful tailwind in 2022 and gains of nearly 12%. Rising interest rates and substantial inflation could not at first puncture that pent-up demand, but coming into 2023, the market started to pull back. Political instability on the home front and global instability from Russia’s invasion of Ukraine and the conflict between Israel and the Palestinians have also added to the environment of uncertainty.

Also, challenges with products imported from China, including a range of stiff tariffs, have transformed the Asian manufacturing landscape-mostly impacting resilient flooring, ceramic tile, laminate and hardwood-shifting production in Vietnam and Cambodia, and now India. Nevertheless, China remains the biggest flooring importer to the U.S.

MARKET SEGMENT UPDATE
When it comes to commercial market segments, the biggest is corporate-owner-occupied and tenant improvement-and it’s largely the performance of this sector that has held back the overall commercial market. The dust has yet to settle on the corporate landscape from that sudden surge toward work-at-home and the partial rebound back, so there’s no real clarity on how best to design the space for workers, how to engage them most effectively-never mind how to adjust the square footage of office space.

These issues are coming to a head this year and next, with a wave of commercial real estate loans coming due, so a lot of businesses will have to make big decisions, whether they’re ready or not. “As more of those leases come up for renewal, there’s a lot of companies that are going to say, ‘Hey, I just don’t need this much space anymore,” contends Kermit Baker, chief economist for the American Institute of Architects (AIA), in a FloorDaily podcast last month, adding, “Unfortunately, I don’t think we’ve hit the bottom yet.”

Most other segments have fared better. “In 2023, hospitality was king,” says Jeff West, Shaw Contract’s vice president of commercial marketing and product development. It was the strongest segment last year, somewhat buffering firms like Shaw and Mohawk that have substantial hospitality business from corporate declines, and boosting the smaller hospitality specialists, which ended up being the only producers that made gains on the soft surface side. This year, by some reports, the segment is still healthy but not growing at the same rate.

With the exception of hospitality, the general rule of thumb over the last year or so, when it comes to the impact of inflation and high interest rates, has been hesitation in the private sector, with public projects more immune. Mike Gallman, president of Mohawk Group, points out that public sectors like education, government and a portion of healthcare have been performing consistently, adding, “But private money like workplace, retail and high-rise multifamily are more interest sensitive and tied to the economy, and they were choppier.”

The education sector was a bright spot last year, more so in K-12, but there was plenty of activity in higher education, as well. K-12 relies heavily on public funds while the bulk of higher education funding is private. K-12 work, now entering its busy summer season, still looks good, but funds are starting to dry up. Many flooring producers also report that government projects were up last year.

Another healthy segment has been acute care, notably medical office buildings, which use an increasingly wide range of hard and soft flooring finishes. Retail was hit and miss, as it has been for the last couple of years-like corporate, that’s another segment in the midst of redefining itself. And while some producers reported gains in senior living, none said it was driving growth.

Also, the pace of multifamily new construction has slackened. Last year started strong and ended soft, and that trend has continued into this year. The segment has experienced practically unbroken growth since the Great Recession, and while the current slowdown will likely keep the segment in negative territory this year, it is not expected to be prolonged.

One segment that’s on the rise is life sciences, which includes everything from biotech labs and medical research firms to the developers of cosmetics, nutritional products and high-tech products. These sorts of operations are no longer confined to institutions like universities; it’s sweeping through the private sectors. Growth is largely regional, with hubs like Boston, San Francisco and San Diego leading the way. Technical resilient products are in high demand in these environments, like static-dissipative tile.

FLOORING CATEGORY UPDATE
Last year, the carpet category fell at a slightly faster pace than the rest of the market, down about 3.8% to $3.332 billion, and share slipped to 51.9% from 52.1% in 2022. Considering that ten years ago carpet’s share was 68.5%, last year’s loss in share is far below the average rate of loss over the last decade, suggesting it’s flattening out.

However, commercial carpet was down nearly 9% in volume, and the delta between value and volume can’t be bridged with the shift in share between broadloom and carpet tile alone-and as it happens, last year broadloom likely didn’t lose share to carpet tile because of growth in hospitality flooring, just about the only segment where broadloom still dominates.

Rather, some industry experts contend, Class A office buildings are doing better than Class B, so there has been more demand at higher price points in the corporate market. And others point to the price increases of 2022, when commercial carpet was up by double digits in dollars but down in volume-an even bigger delta than last year-noting that a lot of those price increases were not fully realized until the first part of last year.

Aside from wool in various niches, like Axminister hospitality carpet, the commercial market is dominated by nylon fiber, most of it solution-dyed, and most of it nylon 6, as opposed to 6,6, which is only made by independent fiber producers. Most of the big mills have their own nylon 6 extrusion. And there’s still very little PET in the commercial market-it’s almost entirely confined to the mainstreet segment.

Resilient flooring was the best performing category last year, with sales down 2.5%, and it grew its commercial marketshare to 28.3% from 28.0% in 2022. LVT is where all the growth has been for several years, but this year, manufacturers report that other products like homogeneous sheet, specialized high-performance tiles and even VCT have been holding their own. Adding to the dynamism of the category has been the drive to develop PVC-free products. These alternatives to vinyl are in high demand in the A&D community and among a large swath of environmentally oriented end users.

The ceramic category held its own last year in terms of marketshare, with revenues down about 3.5% to $1.116 billion from $1.156 billion in 2022. The category is well positioned in the current market with its stronger activity at the higher end due to demand for its aesthetics in lobbies and other prominent interior settings. Ceramic, often in the form of large gauged panels, are increasingly used on interior walls as a lower-cost alternative to natural stone, with cutting-edge technologies offering convincing replications of high-end marbles and travertines. And its use on exterior walls as cladding and as outdoor pavers is also driving gains in the category.

Wood and laminate combined have a 2.4% share of the market. Architects and designers love natural materials like wood, but it typically only performs well in limited applications-and laminates are even more limited, due to moisture susceptibility. But now that the two developers of higher-performing compressed and hardened wood-AHF Products and Välinge’s Bjelin-are taking their products to the commercial market, the hardwood category could be poised for some long-awaited traction in segments like corporate and retail.

LOOKING AHEAD
One of the best indicators of the state of the commercial market is the AIA’s Architecture Billings Index (ABI), and those billings tend to reflect the state of commercial flooring nine months to a year down the road-and sometimes more, depending on the scale and type of project.

Typically, ABI numbers don’t go beyond the low 40s and high 50s, with anything above 50 indicating an increase in billings, but it plunged at record speed to 29.5 in the early days of the pandemic. Within a year, it was back in positive territory, and there it remained until October of 2022. Since then, the ABI has not gone above 50 except for a brief stretch in May and June of last year. The ABI for this past April was 48.3, the ninth consecutive month of declining billings.

What this means for the commercial flooring market is that business will probably be under pressure at least through the rest of 2024 and most likely through the early months of next year. According to Baker, there are no signs yet that design activity is starting to rebound, adding that shelter costs and energy prices are still substantial pressures on the market.

However, there are countercurrents at play, including compelling signs that market conditions are going to improve later this year. For one, the Fed is expected to drop interest rates later this year at least one time, maybe more.

Also, there’s some encouraging news when it comes to inflation and pricing. Consumers have been hearing for months about how the rate of inflation is slowing, yet most prices seem to have remained stubbornly high, but this could be starting to change. News reports toward the end of last month highlighted how several large companies, including Target, McDonald’s, Wendy’s and Ikea, have started to lower prices-Target has dropped prices on 5,000 frequently bought items-in an effort to win over consumers struggling with tight budgets who have started watching prices more carefully and hunting for bargains. New car prices are dropping, too.

While it might seem counterintuitive that inflation can be brought under control simply by putting smaller numbers on price tags, it’s worth noting that, despite tough market conditions, what hasn’t deteriorated at the same rate as value for the dollar is corporate profit margins-consider the performance of stock markets-suggesting that a lot of providers of goods and services are well positioned to lower prices, and even that inflation is, well, inflated. Whether this becomes a full-fledged price war remains to be seen. Stay tuned.

For a close look at the Top 15 Specified Carpet manufacturers and Commercial Hard Surface manufacturers, see the June 2024 issue of Floor Focus Magazine.

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