Home Builder Update: In spite of COVID, or possibly because of it, builder business is booming - Aug/Sept 2020

By Jessica Chevalier

While much of the world ground to a halt during the second quarter of this year due to the virus, residential construction kept trucking after a brief pause-some experienced no pause at all-thanks to something of a perfect storm stoking demand. As such, the flooring contractors serving these builders have experienced a fairly brisk business. In addition, the virus lockdown altered the features desired by homebuyers, and while that hasn’t necessarily generated new trends with regard to what flooring is being installed, it has reinforced trends already at play.

At the start of the pandemic, there was a great deal of consternation of how COVID might impact the homebuying market. With the economy quaking, jobs at risks, furloughs and layoffs prevalent, and no vaccine in sight, it seemed reasonable that many homeowners would stay put, and the real estate market would lock down. Not to mention that open houses pose a risk of exposure for both the homeowner and the shopper, and of course, that the actual act of moving in a pandemic carries with it extra stressors.

On the other hand, the many hours trapped in the same four walls ultimately pushed some renters and homeowners toward greener pastures. If there is one thing all of America can agree on in this divided time, it is, perhaps, the importance of home: the place where we eat family meals, lay our heads down to sleep, keep ourselves cocooned from the risk of infection and, for many, now work and educate our children. For those spending 20+ hours in their house each day, it has become evident that these should be spaces we enjoy, a fact that has pulled many off of their couches and into the highs and lows of the house hunt.

With existing home inventory low, new home sales have reaped the benefits, rising by double digits year over year in January and February, falling in March and April during the heart of the lockdown, and rising 12.7% in May and 6.9% in June. And experts in the field expect the new home sales market to continue to show strength, barring any major disruptors.

“Business is fantastic,” says Jeff Stafford, partner at Finelines Flooring & Design, which has locations in San Antonio and Austin, Texas. “Builders are going crazy right now. I believe it is because rent is rising, and Millennials are realizing, ‘I can get free money [via low interest rates] and buy a house.’ We are really busy. We haven’t really felt a dip.”

“Builders have had their best year ever, almost in all markets, nationwide,” agrees Randy Smith, CEO of Heritage Carpet & Tile, which serves the southern half of Florida. “And it doesn’t appear that this is just a pent-up demand bounce. It’s new demand. People appear to be moving out of apartments and urban areas. They want a home. In our territories, we see people wanting a single-family home. Interest rates are at record lows. People just came through lockdown and came out of it saying, ‘I’m done with an apartment or townhouse. I want some space.’”

Says Pat Heine, chief revenue officer for Primera Interiors, which works in New Mexico, Colorado, Arizona, Nevada and California, “The outlook is good as long as interest rates are reasonable. We have a need for housing, but what we really have is a need for affordable housing in some markets. What we are seeing here [in Arizona] is a shift towards more of an entry-level buyer or a first move-up buyer.”

Bob Burton, president of Southwestern, which serves the Dallas/Fort Worth, Texas area, notes, “We have historically low existing-home inventory, which is great because we won’t get caught overbuilding like we did during the recession, combined with historically low interest rates and a pandemic causing people to desire single-family dwellings. Overall, the high activity level in homebuilding right now is a weird deal that nobody could have predicted. Of course, at some point, we will run out of buyers due to the fact that 40 million Americans are unemployed.” He points to the fact that U.S. Airways, based in Dallas, announced on July 15 that it needed to shed 25,000 jobs by October 1.

However, Fulton Homes, a builder serving the Phoenix, Arizona market, reports that it doubled its year-over-year performance in June 2020 and that, as of early July, it is up substantially over ’19. The builder expects business to stay strong for the foreseeable future.

Flooring contractors generally work with the same builders time and again, and they bid on work per community. Similarly, both of these entities generally work with the same group of flooring manufacturers repeatedly, somewhat unwilling to take a risk with a new manufacturer since a failure doesn’t mean replacing a single installation but a community’s worth. For that same reason, the builder business is generally slower to adopt new product categories. LVT, for instance, was prevalent in residential replacement long before builders were willing to take a chance on it in new construction.

Regarding what production builders most value in their partnerships, Stafford of Finelines believes it comes down to price, quality and service. “Builders are willing to beat you as low as you can go on price, but they still want you to be there on time and do a fantastic job,” he reports. “The bigger the builder, the more they are squeezing every dollar they can out of the trades. Smaller or custom builders are looking more for quality and better products, as they will pass the price along to the homebuyer.”

Dennis Webb, vice president of Fulton Homes, explains there are three types of builders in the U.S.: those that care a lot about upgrades; those that care a little; and those that care nothing about upgrades (these builders generally offer only pre-established packages). Fulton falls in the first category, and Webb notes that “the most important category for upgrades is flooring” and that the third category of builders-those that offer no upgrades-wrongly assume that it takes more time to build a house with options. But Webb says, “If you upgrade one ceramic to another, it doesn’t take more time to install. The only thing that can take more time is if the buyer wants to change out the type of flooring in a room. Carpet is much easier to lay than tile, so the labor on the ceramic would add time. However, the amount of income you’d get for the time would make up for it.”

Fulton prices flooring by the room rather than by the square foot or yard (more on that in the Frank Talk box). The company’s typical house is between 1,500 square feet and 6,000 square feet. Within these homes, an 18”x18” ceramic tile (Daltile’s Parkway) is standard in the kitchen, entry and bathrooms with soft surface in the family room, bedrooms, and walkways. “We found that most buyers want hard surface extended into the family room and walkways, so we call those ‘suggested hard surface areas,’ and so that’s how we package the pricing,” Webb explains. As such, rather than giving the buyer a square foot price for the upgrade, they give a flat rate for transitioning all “suggested hard surface areas” from carpet to ceramic.

The company works the same way in transitioning buyers from the standard ceramic to a plank upgrade. “Plank tile represents 75% of our upgrades,” says Webb, and the company tells clients-up front and to the dollar-how much it will cost to make that change. “So, on a Pelican Bay floor plan, if the buyer wants to put a Daltile plank-style product in as an upgrade, it will be $8,347,” Webb says. “The most important category in our showroom is flooring. This is where most people are willing to invest in upgrades.” In fact, Webb reports that many buyers are willing to invest a significant chunk of change in tile upgrades. “We have some really expensive planks,” he notes, “an $18,000 upcharge for the suggested hard surface areas.”

On the soft surface side, Fulton offers upgrades from the standard broadloom offerings to Anderson Tuftex and Engineered Floors’ Dwellings program. For those customers who want to upgrade their soft surface to hard, the company is currently working on a plan similar to those outlined above.

All the flooring contractors with whom we spoke report that flooring is an important sales tool for new home sales and a key material for upgrades. “Of our three lines-countertops, cabinets and flooring-flooring is double the average selling price of cabinets,” says Heine.

However, as with so many other things, COVID has turned the selection process on its head to some degree. “We are running into a ton of builders limiting our opportunities for upgrades,” says Heine. “They are going with packages because of ease of convenience. The buyers aren’t excited about visiting a design center due to the virus. If a builder can offer three or four palatable packages and see sales increases, they see the value in that because they aren’t having to fill a design center with staff and product. Their average selling prices are a bit lower, but this is a trend we are seeing a lot in Arizona. We build 50 to 100 communities a month, and half of them are package communities or one-style-one-color communities,” meaning that homebuyers have no options with regard to finishes.

Smith notes that it is important for both the builder and flooring contractor to remember that selecting finishes represents one of the most fun parts of the process of building a home. And while many assume that buyers are driven by price in their finish selection, they actually buy based on style and color.

Whether or not it is scientifically true, many individuals perceive hard surface flooring to be cleaner than carpet because the fiber structure of carpet traps dirt. And while the carpet industry has long held that this is a good thing, as it holds particles until they can be vacuumed up rather than having them free floating in the air we breathe, Webb believes that amid the coronavirus pandemic, the desire for hard surface flooring has increased. “We kind of roll [this messaging] into our marketing campaign,” the builder explains. “We talk about the importance of having high indoor air quality. All our homes are certified Indoor AirPlus.

Many buyers embarking on a house hunt right now are, to some extent, seeking spaces that align with the new realities of COVID. Reports Builder Online, “Early evidence would seem to suggest that buyers are developing new priorities for their homes. Google search trends for ‘home office,’ ‘home gym,’ and ‘healthy home’ have remained high since the start of the pandemic, and respondents to a survey conducted by Realtor.com and Toluna Insight reported a growing fatigue with small spaces and a desire for outdoor space in their next homes.”

The builders with whom we spoke confirm this. “The new floor plans coming across our desk all offer home office/home school spaces,” says Smith.

Webb concurs. “Fulton has always offered a large number of options, including a home office option,” he says. “But maybe in the past, buyers wouldn’t have taken it. Our typical house is four bedroom, three bath, but buyers can make one bedroom an office or study. Today, they want the home office. And we can soundproof it; privacy becomes a real important thing when the office is at home.”

Stafford calls this a flex space and notes that he, too, is seeing it already increasing in popularity amid COVID.

Burton also confirms this trend, adding, “In our conversation with builders, we hear that maybe instead of a third garage space-which just ends up collecting stuff-buyers are opting for a home office or craft room or workout space. We are all spending more time at home. We know that this is temporary, but we don’t know how long or the long-term impact on the family dwelling.”

In fact, Heine reports that the desire for such a space is actually stoking demand, “People have been trapped in their homes with their kids for 120 days, and they are saying, ‘I need a place to work.’ I believe that is driving sales right now.”

The flooring contractors and builder with whom we spoke offered insight into their biggest headaches and what manufacturers can do to alleviate them.

Heine: Discontinues happen every day-and generally without much warning. On the cabinet side of our business, we may get an email today [in early July] saying that they will discontinue a finish effective January 20. That gives us six months to plan and work through the backlog, and, that way, I don’t have to contact buyers to re-colorize. That’s always a frustration I’ve had with the flooring business.

Webb: Discontinues are killing us. The main problem that we have is that the flooring industry thinks that the whole world is main street flooring stores. A good portion of their business is new homes, but they don’t realize that or treat us differently. A retail flooring store may work on a three-week lead time. We work on a six- to eight-month lead time. When a product is discontinued in that period, the buyers have to come back and reselect, and often that means that they have to reselect all the finishes, including cabinets and countertops, again.

Stafford: The biggest challenge we have had in the last six months is that COVID shut down some plants, so there have been supply issues. And with some ceramic tile manufacturers, there have been quality issues.

Burton: One of our biggest challenges right now is the supply chain. Disruption and inventory are the worst I’ve ever seen. Across the board, every manufacturer and distributor that we do business with has something that they are having an issue with that they’ve never had an issue with before. Since the rest of the world has done a better job controlling COVID, we do have products from overseas on the water. Domestic manufacturers will continue to have challenges-the biggest one being if they have an outbreak in their facility.

Webb: Flooring manufacturers need to listen to the customer more. Shaw got out of the ceramic business, but about four years ago, we said to them, ‘If you can give us a 7”x22” tile, we can hit the labor mark’-24” and up is more expensive to install-and they did. They came up with Ventura, and we sell $1 million of that one SKU a year as an upgrade to our standard square tile. We told [another manufacturer] the same thing, and they did nothing about it.” Ventura, a wood-look aesthetic, comes in five colors.

Burton: Flooring vendors do a poor job with forecasting because they don’t ask the right questions. If a buyer buys a home today and goes through the design center making finish selections, that flooring won’t be installed for at least four months. If manufacturers really took the time to understand this, they would see that what they call bestsellers today were actually bestsellers six months or more ago.

The overarching transition from soft to hard surface flooring in the residential space has been a great development for flooring contractors. Explains Heine, “The shift to hard surface means more revenues and more profits, $20,000 in ceramic versus a couple grand in carpet. That’s a big difference. We are seeing that come down a little with LVT, but the labor is also cheaper because it’s a lot quicker to install.”

Stafford agrees and notes that the increase in LVT use is driven by homebuyers’ desire for it. “The proliferation of LVT isn’t a bad thing for us,” he says. “Five or six years ago, when this started, we were scratching our heads about it, but it’s not that difficult of a product to install, and we converted some of our tile setters to doing both. The margins on it aren’t bad.” Stafford has had some problems with end peaking in gluedown LVT installations but notes that manufacturers are tweaking their adhesives to minimize these failures.

Compared to ten years ago, Stafford’s Finelines is installing “more vinyl than ever before, lots of ceramic, about the same amount of wood, which is an upgrade, and definitely less soft surface. Vinyl is taking share from carpet. We used to put hard surface in wet areas only; the living room and dining room would get carpet. Vinyl has taken that part away. Carpet is now on the stairs and in the bedroom only. If it’s a one-story house, it’s only in the bedrooms.” Finelines works with production builders primarily, on homes from entry level to those with an average selling price of between $300,000 and $395,000. Custom builder work accounts for 10% to 15% of business.

In ceramic, plank is popular on Finelines’ projects and has been for years. Stafford says, “We are seeing lots of 12”x24” in a broken joint pattern. That’s very popular.” “We like to stick with 12”x24” or 6”x24”. We try not to install them longer due to bowing issues. I would say that 12”x12” is for base builders only.”

Webb says, “The other day, I was having a conversation with a colleague about why the flooring business is so archaic. Building, in general, is archaic, but flooring even more so. He had an answer that I’d never thought of before: there are two huge companies that control everything, and their management is all older.”

Webb reports that the outdated nature of how things are done in flooring relates to many aspects of the industry, including its manufacturing and the process through which products get to market. He continues, “Why do floors fail? We don’t have cars that fail, but we have floors that do. Don’t the producers check the products out before they put them in the market? And no one in the flooring industry knows how to market their products. They can’t even get a good picture of them sometimes.”

Another aspect of the flooring business that Webb believes is outmoded is sales. “How consumers buy flooring is how the flooring industry wants them to buy flooring,” he says. “We have done extensive research and buyers want to buy flooring by room. The industry wants them to buy by the square foot or yard. Why? Because it’s always been that way.” Ten years ago, Fulton Homes decided to price its flooring upgrades by the room and has seen sales of flooring rise dramatically as a result. In addition, the company attributes increased home sales to this practice, believing that it nurtures a reputation of transparency and trustworthiness that customers respond positively to.

Webb believes that the flooring industry should attempt to shed its stagnant ways by committing to younger leadership, “What needs to happen is that the industry hire leaders who are 35 years old, really brilliant and have their pulse on the future.”

Heine’s Primera works in all price levels of homes and 85% of its business is derived from single-family builder. Cabinets represent a larger portion of its business than floors, and the company is cabinets-only in some markets, though its ultimate goal is to have the same offerings in each. Primera has one retail outlet, affiliated with Carpet One, in Prescott, Arizona. In 2018 and 2019, the company’s flagship showroom in Tempe won the silver award in the best design category in the National Association of Home Builders’ The Nationals. “Our showroom is a very unique concept,” says Heine. “We carry many products but show very few. It’s very clean, light and white.” The company has additional showrooms in Las Vegas, Denver and Phoenix. In 2020, the company is experiencing record business in Arizona, and Colorado is also faring well after the worst annual start in 25 years. However, “Vegas is miserable,” says Heine. And the California market hit the brakes due to COVID but is now coming back.

Heine reports that plank ceramic tile is Primera’s bread and butter. “Probably 90% of flooring sales are plank tile of some sort,” says Heine. The company is selling more LVT these days, though finding LVT laborers is a challenge. Carpet remains the standard for bedrooms, but some of the builders that Heine works with offer ceramic as an upgrade.

“We try to limit the number of flooring manufacturers that we work with. If you leave the showroom doors unlocked, every rat comes in and secretly places product in the showroom-and then the buyer wants the product,” says Heine with a laugh. “As far as our preferred partners, many align with KBx or FloorExpo [part of CCA Global’s FEI Group]. We use all the big ones-Shaw, Mohawk, Daltile, Marazzi. We don’t really use a lot of off-brands, but a lot is dictated by the builders. If I am working with DR Horton, I know that I have to use Shaw for carpet and Daltile for ceramic.”

There has been a great deal of discussion that the COVID-19 virus is pushing homebuyers to the suburbs’ bigger homes and yards. Certainly, the high rate of activity that builders have experienced supports this. However, single-family builders generally work in the suburbs, where land is more plentiful, so they have little in the way of comparison between in-town and suburb business currently.

Smith, however, does report that the migration from the Northeast to Florida is going strong and believes that, perhaps, the virus has played a role in that as well, suggesting that buyers who were planning to move to the Sunshine State eventually took the opportunity of the COVID slowdown to relocate earlier than previously planned. Whether you chalk that up to a pandemic-induced seize-the-day mentality, the evolutions of the virus job market granting retirement earlier than expected, or simply the fact that the lockdown provided the time and boredom to plan a move, the flight to Florida is creating demand for new homes.

Heritage Carpet & Tile, which became a part of Artisan Design Group in July 2019, has design centers in Boynton Beach, Fort Pierce, Naples and Port St. Lucie, Florida. The company works with all major builders in its markets and focuses solely on for-sale housing builders, and it prefers to view itself not as a subcontractor for its builder partners but as a “their flooring division.”

Says CEO Smith, “The early 2000s were what I like to call the golden age of tile. Everyone had moved away from vinyl and carpet in living areas and gone to ceramic. Ceramic tile was 18”x18” with a pillowed edge and very easy to install. We installed it by the millions of feet in thousands of homes. From 2012 on, manufacturers learned how to make [photorealistic tile in new formats]. With that came massive installation challenges. A builder would meet with manufacturers and see all the pretty new products and large sizes: 12”x24”, 24”x24”, 32”x32” and 24”x 48”. These massive pieces of tile are very difficult to install. It requires a whole different skill set, more expensive setting materials and more knowledge. It was a tough transition for flooring contractors. Now we are over that hump, and ceramic is still going strong, but the latest trend in three years is LVT. I didn’t think anything about LVT. I hated it. It’s just a vinyl floor. But suddenly it took the market by storm. It’s everywhere. If I walk into a bar, sit next to someone and tell them that I’m in flooring, they say, ‘Tell me about this new LVT.’ Again, installation was a major learning curve. The subfloors have to be perfectly flat. It’s not a forgiving product. Everyone wants to jump on it, but the installation curve takes a while. There was lots of substandard product, and there were lots of failures. We are at the end of the struggle now. Most new construction is getting LVT throughout, class A and B homes. In our markets, it is replacing carpet in bedrooms. In two-story homes, it’s tile on the first floor and LVT on the second and stairs. We are often running tile into the bedrooms in a single story. In about 35% of the homes we do, there is no carpet.” Smith reports that LVT is generally three times the price of carpet, so the fact that it is taking share from soft surface is good for business.

Family-owned Southwestern works primarily in the move-up builder business (meaning when buyers move from an entry-level home to the next tiers). It does a little entry-level work and prefers to avoid custom construction. In addition to flooring, Southwestern offers window coverings, design services and garage floors.

Materials-wise, Burton reports that carpet’s battle against hard surface was lost years ago. Carpet is now relegated to the stairs and bedrooms, where buyers will upgrade for softness and patterning, but not much beyond a $10/yard price point unless they are really enamored by a particular product.

Texas is traditionally a hardwood market. Until recently, 70% of that was site-finished 2-1/4” solid, but in the last five years, that has transitioned to engineered product. Today, only 5% of Southwestern’s work is site-finished solid hardwood.

And, of course, LVT moved in and took a bit of share from hardwood and a bit from ceramic. Two years ago, Southwestern was installing no LVT. This year, it will install twice as much as it did last year. In spite of this, “profit margins are relatively the same,” reports Burton. “We were installing nail-down solid hardwood for $10/square foot, then engineered for $7/square foot, now LVT for $5/square foot. The profit margins are relatively the same, but we are losing $5/square foot in revenue. I think unfortunately, though, it’s always a race to the bottom. When you do that in new construction and products fail, they fail not just in one house but in hundreds. So it’s costly to go to the lowest common denominator, but we have done it time and again. There are lots of issues with the really thin LVT products, but the looks are better and better.”

For Southwestern, ceramic has managed to largely hold its place with standard sized squares (12”x12” and 13”x13”) as the standard and planks a popular upgrade.

Webb reports that in Fulton Homes’ homes, ceramic is actually taking share from LVT. “When we first started with ceramic planks five or six years ago” he says, “LVT was going really well, but ceramic planks just left LVT in the dust. It’s a great material for this [Arizona] climate.”

Fulton lists Shaw, Daltile, Emser and Bedrosians as some of its closest manufacturer partners. Webb notes, “We do very little wood due to the extreme temperature fluctuations here. We could have a day in January with a high of 85 degrees and a low of 20.”

While the transition to hard surface flooring has been good for flooring contractors’ profits, the same can’t be said for flooring retailers. Whereas a homeowner may previously have upgraded their carpet after a handful of years, today’s hard surface floors last much longer, and that means fewer replacement cycles for local retailers.

Within the builder market, the ownership and use of product showrooms varies greatly. In some cases, the builder uses their own showroom. In others, they send homebuyers to the flooring contractors’ showroom. In yet others, a flooring contractor’s employees will staff a builder’s showroom. The structures are as unique as the relationships themselves.

Burton believes that, while so much shopping is done online today, showrooms remain an important part of the builder business. “We see a lot of upgraded materials for the master bath and kitchen,” says Burton. “People spend a lot of time making those decisions. While there is a lot online today, when it comes to making selections for the $400,000 home of their dreams, it remains a touch-and-feel transaction.”

Finelines takes a hybrid approach. According to Stafford, “We have a showroom by appointment only. Smaller builders will sometimes send buyers in, but larger builders have their own showrooms. We will help them maintain those, but generally they do it on their own, send us the buyer’s choices, and we knock it out. Our builders typically partner with one of the big boys-Shaw or Mohawk. We do have some input on the flooring products, but mainly they are locked in.”

Primera also works to serve their builder clients in whatever way suits them best. “A couple of builders have pretty sizable projects where we will build them an on-site design center that we will run and staff,” says Heine. “We expanded our Tempe showroom by 7,000 square feet for one builder.” Primera has two addition showrooms that are under 2,000 square feet.

Heritage believes that operating its four design centers gives it a chance to see buyer preferences and trends firsthand. “And it’s very helpful for us,” says Smith. “It used to be that the builder had their own design centers but now, for a quarter of our business, we handle design.” Smith notes that “money is cheap,” and buyers aren’t afraid to get what they want, reporting that some customers who could afford the biggest house in a community opt for moving down a step or two and loading up with options and adding that “it’s not unusual to have a $600,000 house with $150,000 of options.” And resale is a big driver in finish decisions, the contractor notes. Smith reports that Heritage has great relationships with Mohawk, Shaw, Daltile, Emser and a long list of other manufacturers, but that builders are the sole decision-makers on what products are offered.

Fulton Homes has its own 13,000-square-foot design center with a significant flooring presence.

While the pace of business has continued at a steady pace within many areas of the U.S., the ways in which business is done have clearly changed. Mask wearing, social distancing and cleaning are now daily practice in the showrooms where homebuyers make their selections. But some buyers remain reticent to venture into the physical showroom, and, in these cases, technology is playing an important role in ensuring that business continue to roll on.

“COVID clearly has had a large effect on how homebuyers make selections for their new homes,” says Michael Vogel, president and CEO of Bridgeway Interactive. “More specifically, COVID greatly accelerated a trend that has been building in recent years which is the use of technology to create a more convenient, homebuyer friendly, and efficient option selection process for homebuyers.

Copyright 2020 Floor Focus 

Related Topics:Tuftex, Carpet One, Anderson Tuftex, Shaw Industries Group, Inc., Mohawk Industries, Creating Your Space, Marazzi USA, Coverings, RD Weis, FEI Group, Artisan Design Group, Engineered Floors, LLC, Daltile