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Surging multi-family housing market translates into opportunities for retailers

January 16/23, 2017: Volume 31, Number 16

By K.J. Quinn

 

Screen Shot 2017-01-13 at 1.16.04 PMThe housing market lately has been a tale of two cities, as long-term growth prospects for new multi-family homes lags behind single-family startups. Nonetheless, the sector remains important and lucrative for the flooring industry, especially for hard surfaces, industry members say.

“The single-family builder market and multi-family market performed as forecasted,” said David Holt, senior vice president of builder and multi-family/retail and hard surface, Mohawk Industries. “Both segments were up in the 7% to 10% [growth] area, and we continue to see a shift of the percentage of the floor to the hard surface side.”

In October multi-family production catapulted nearly 69% from the previous month to a seasonally adjusted annual rate of 454,000 units, the U.S. Department of Housing and Urban Development and the Commerce Department reported. The National Association of Home Builders (NAHB) Multifamily Production Index (MPI), which measures builder and developer sentiment about the current market, posted gains in the 2016 third quarter, an indication more respondents believe business conditions are improving.

“The health of the market is evident from builders’ optimism about the current state of the housing market and their short-term outlook for construction,” said Anne Thompson, economist, Dodge Data & Analytics. “Builders are also optimistic about the current and future state of the remodeling market as those who cannot afford to purchase new homes are spending more on upgrades to their existing properties.”

Lower unemployment rates and a healthier economy coupled with rising household formations are expected to help sustain growth into the New Year, according to published reports. “In the Pacific Northwest, interest rates remain low and demand high for residential, so there continues to be strong growth in the construction of new apartments and condominiums,” said Randy Rubenstein, owner, Rubenstein’s Contract Carpet/North American Terrazzo, Seattle. The multi-family housing market includes low-rent units, market-rate rental units and condos.

Whether multi-family construction can maintain its current growth rate beyond 2017, however, is debatable. There are economic indicators that reveal the market may already be softening.

“2018 could see quite a slowdown in comparison to the robust market we have had,” said Elizabeth Hurley, director of strategic accounts at Tarkett. “Already indicators show rent rates are slipping and vacancies are creeping up.”

In October multi-family housing permits—which represents the pipeline for new home construction—dropped 3.3% to 467,000, according to published reports. “We expect a small decline for multi-family starts as that market seeks a balance between supply and demand,” said Robert Dietz, NAHB chief economist. Demographics, most notably recovering household formations, are reportedly driving demand for rental apartments.

Flooring sales impacted
A major hurdle facing developers of multi-family housing is finding enough buildable lots to keep up with demand. “There remains an under-supply of housing in this country, and that reality, along with the current trend toward a more urban lifestyle, have combined to foster demand,” said Scott Rozmus, president, Florstar Sales, a Romeoville, Ill.-based flooring distributor.

Screen Shot 2017-01-13 at 1.16.22 PMTightness in construction labor is contributing to keeping both the single- and multi-family housing markets from being overbuilt. “If the new [presidential] administration eases tight credit and provides tax incentives to small businesses, homebuilders will benefit,” Dodge’s Thompson said. “However, limiting immigration and rising rates of deportation would further impede the already tight market for construction workers.”

The average multi-family property is reportedly getting smaller, following years in which builders disproportionately constructed high-end homes. This trend may be short lived as older millennials settle down and start raising families. “Their perceived preference for more urban living, where zoning and land cost issues tend to limit the size of homes, may constrain growth in homes,” Thompson said. “Downsizing by baby boomers, however, may have the opposite impact.”

While carpet is the leading surface for multi-family spaces, flooring choices are trending more toward hard surfaces and higher-end goods, suppliers report. “New technologies in sheet and especially LVT have gained traction in the multi-family environment, which also sees frequent use of hardwood, laminate and ceramic products, along with carpet,” Florstar’s Rozmus explained. “Opportunities vary by developer, owner and market.”

LVT and WPC products are among the most sought after, experts say, as buyers covet their high performance and good looks. “LVT is growing rapidly and WPC is a significant part of the share shift as well, both at the continued expense of broadloom,” said David Gheesling, CEO, FEI Group, a Marietta, Ga.-based network of flooring contractors, cabinetry and countertop dealers, and decorative hardware and plumbing businesses. “While we obviously participate in all these surfaces, the initial concern was the longer replacement cycle this trend could produce for our industry. That is indeed taking place, but we’re pleased to already see replacements generated by changing color and style trends.”

Plank looks are among the most popular in hard surfaces, according to vendors. “Our visuals and technology at Mohawk are so innovative that it is almost impossible to tell wood from plank, sheet vinyl or LVT,” Holt said. “The surface is determined by cost and property use.”

While multi-family is part of the builder segment, it is a distinctly different channel than single-family homes. “New construction—whether it be single- or multi-family—is a specialized market and requires special talents and business models to excel and make large profits,” Holt said. “It requires a lot of money, labor, operational and organizational skills.”

The timing may be right for dealers to enter the business, considering the multi-family sector is expected to thrive at least over the next 12 months, based on the latest housing data and economic forecasts. “At the recent NAFCD (National Association of Floor Covering Distributors) conference, speakers indicated the current population and housing trends would continue to favor the multi-family sector,” Florstar’s Rozmus explained. “So it would seem prudent for retailers and contractors to seek opportunities, develop contacts and acquire product knowledge and training that will allow them to maximize the benefits available from the current tailwinds.”

The price of entry, however, is fairly steep, which helps explain, in part, why this segment remains highly specialized. Market demands are similar to what residential flooring contractors encounter in the single-family builder market, experts say. “The overwhelming majority of the residential contract arena is serviced by large, highly sophisticated, well-financed specialists,” FEI Group’s Gheesling said. “The operational aspects alone are significantly different from the retail business, and it’s not something most retailers are set up to tackle.”

Screen Shot 2017-01-13 at 1.16.10 PMIndeed, inventory, pricing requirements and service timelines are all significant factors and require a substantial commitment in time, resources and investment just to make par. “You have to have a commitment to inventory on hand, something most dealers are trying to get away from,” Tarkett’s Hurley said. “Multi-family customers continue to challenge dealers with not only, ‘how quickly can you get it here,’ but also, ‘how quickly can you install it.’”

Similar to the retail business, the shortage of qualified installers is a thorn in the sides of builder dealers, an issue further compromised for those servicing multiple market segments. Between tenants and trades coming in after the flooring is installed, dealers often need to make several return visits to address issues on jobsites.

Nonetheless, the multi-family channel represents a lucrative opportunity for dealers who are well positioned to service the needs of end users and builders. Vendors attempt to do their part by developing products that are easier to install, so mechanics get in and out of jobs quickly. “Certainly, this trend provides opportunity for flooring retailers and contractors to gain traction, particularly with products like Armstrong’s FasTak LVT, whose all but unique installation methodology provides a huge competitive advantage in the multi-family arena,” Florstar’s Rozmus said. “Products like these provide the realism that residents desire while offering the ease of installation, repair and maintenance that owners and facility managers demand.”