January 8/15, 2018: Volume 33, Issue 15
By K.J. Quinn
Builders and residential contractors experienced a rollercoaster ride serving the multi-family housing market in 2017, observers reported, as this volatile business saw demand fluctuate by quarter and macro issues impede growth.
“When the final data come in, we expect multi-family starts to be down almost 10% over the course of 2017,” said Robert Dietz, senior vice president and chief economist, National Association of Home Builders (NAHB). “We expect multi-family development to record additional, slight declines [in 2018].” Multi-family housing includes low-rent units and market-rate rental units in addition to condominiums.
Multi-family housing starts and permits (five or more units) declined 12% in October 2017 compared to the same month in 2016, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD). Additional construction data from Dodge Data & Analytics—which includes some units the Census Bureau and HUD consider single family—provide further evidence the market is in decline. “The [numbers are still being crunched for 2017] but we’re on track for multi-family housing starts as they are measured by Dodge to decline 7% to 475,000 units,” Kim Kennedy, manager of forecasting, said at the end of 2017.
Like peeling an onion, additional layers must be uncovered to view construction data in its entirety. The latest Census Bureau and HUD housing data reveals multi-family housing starts consisting of five or more units jumped 37% from September to October to a seasonally adjusted annual rate of 393,000 units. Authorization of building permits in housing with five units or more rose 13% to 416,000.
New multi-family construction saw fluctuations in market conditions influenced by such factors as Mother Nature, the economy and changing homebuyer demographics. For example, the supply of apartments and condominiums surged in recent years as builders responded to rising demand fueled in part by young Americans who preferred to rent rather than purchase a home in the aftermath of the recession, according to published reports. “Rental housing demand should remain solid, but it is no longer growing as it did in the year immediately after the Great Recession,” NAHB’s Dietz said. “Thus, the multi-family sector is currently seeking a balance between supply and demand.”
The market recovered approximately 96% of the previous, bubble-induced peak of 508,000 housing starts set in 2005, Dodge’s Kennedy observed. “Because multi-family recovered quickly beginning in 2010, it is also peaking earlier than single-family housing for this construction cycle. The 2016 level is very likely the peak for this cycle.”
Macro issues such as escalating building materials and labor costs are contributing to rising home prices while leaving less discretionary money for buyers to spend on flooring upgrades. Finding enough buildable lots to keep up with demand remains a major hurdle for the construction industry. And perhaps the biggest issue of all is a tightness in labor nationwide, which is reportedly contributing to keeping single- and multi-family housing markets from being overbuilt.
“Multi-family is solid, but there is some slowdown in new construction in certain markets,” noted Jay Smith, president, FEI Group, a nationwide network of interior finish contractors and showrooms that includes MultiFamily Solutions by FloorExpo.
One trend expected to continue is the movement toward smaller home designs, which traces its roots to around the time when the housing bubble burst. The average multi-family property is reportedly getting smaller, following years in which builders disproportionately constructed high-end homes. This situation may be short-lived, however, as multi-family developers build more for-sale housing units in the years ahead and older millennials settle down and start raising families.
“There is a trend toward smaller units but this only means more units and not less square footage as overall building sizes aren’t decreasing,” explained Randy Rubenstein, owner, Rubenstein’s Contract Carpet/North American Terrazzo, a Seattle-based flooring contractor. “But one trend we’re noticing is the increase in amenity floors trending with higher-end finishes.”
Demanding but lucrative
The overwhelming majority of residential flooring contractors are large, highly sophisticated and well-financed specialists. While multi-family housing can be a lucrative business given the amount of volume and growth prospects, it requires the necessary resources and financial wherewithal to keep up with daily service demands. “The overhead costs often exceed the margins,” noted Ron Dunn, co-founder and co-CEO of Alliance Flooring, the parent company of brands CarpetsPlus/Color Tile, Carpetland USA Color Tile, Floorco and Clean Touch Pro. “Most flooring dealers that are doing property management work typically specialize in it, and it is their main business model.”
Production building is a highly transactional business that requires builders’ dealers to pay close attention to managing their daily operations and overhead. If they cannot provide timely, cost-effective, turnkey service, builders have more options at their fingertips. “Dealers [serving] these markets will need to bring speed of service, high levels of productivity, modern systems, deep capital position, the appropriate facilities and readiness to satisfy very demanding customers,” FEI Group’s Smith said.
While the segment is highly specialized, there are similarities with the commercial flooring business. “It’s really no different than any other major commercial construction project, with all of the same challenges since the major high-rise multi-family projects are being built by the same large general contractors who are also doing non-residential work,” Rubenstein said.
Finding and maintaining installation crews who can quickly install flooring in large projects is a major challenge given the restricted labor market and higher wages paid to skilled workers. “Dealers need a lot of installation crews and operational assets to service multi-family builders,” said David Holt, Mohawk Industries’ senior vice president of sales. “If they screw up with those builders, they’re going to go out of business.”
Similar to a doctor, dealers are always on call as notifications for next-day installations can be received in less than 24 hours. “This requires manufacturers and flooring dealers to be in sync with product and inventory needs like never before,” said Brad Christensen, vice president, business strategy, builder, Shaw Floors. “Flooring dealers, in an attempt to become more efficient, have inventories as lean as possible and, as a result, they have been very savvy with the management of their SKUs and do their best to avoid duplication.”
Working with flooring suppliers who provide high-quality products and, when necessary, are there to help minimize the impact of installation callbacks is imperative. “That way, the builder can continue to look forward to knowing you are there to take care of any problems,” said Rob Brockman, channel marketing manager for contractor, builder, developer and property manager at Armstrong Flooring. “Building a strategic partnership focused on the builder’s needs is the challenge that is built over time on a foundation of trust.”
Flooring choices evolve
Whether it’s inside a dealer or builder showroom, multi-family homebuyers are given opportunities to upgrade to better quality flooring. The incentive for builders and dealers to encourage upgrade purchases is two-fold: It ensures customers receive a good-looking, high-performing product that meets their expectations and profit margins are considerably higher than base-grade products. “Consumer knowledge and education result in higher sales dollars for the same amount of work,” Alliance Flooring’s Dunn pointed out. “It’s a win-win-win for the builder, the homeowner and the flooring dealer.”
Most flooring upgrades are allocated for kitchens and baths, experts noted, because both areas offer the greatest return on investment and time spent in the home. “Large kitchens and open-concept design are still things that homebuyers seem to want,” Armstrong’s Brockman said. “This creates an opportunity to sell upgrade flooring as there is no real separation of spaces in these open plans.”
While flooring choices vary by region, carpet is the leading surface for multi-family spaces, though hard surfaces and higher-end goods are trending up, suppliers reported. “In multi-family homes, many people have pets,” Mohawk’s Holt noted. “So carpet is being replaced more frequently, usually within four to five years.”
New hard surfaces such as LVT and WPC are reportedly gaining coverage in multi-family environments. “Buyer preferences are leaning toward hard surfaces—mainly LVT—because of their great looks, durability and water resistance,” Brockman added.
Homebuyers still desire natural products such as ceramic tile and hardwood, which studies indicate add value to the home. Upgrades to these higher-priced products are becoming more prevalent given looser loan standards that help customers secure additional financing. “We’ve seen strong growth in town homes and patio homes in which higher quality floor coverings and better finishes are being selected,” Alliance Flooring’s Dunn said.
Looking ahead, the multi-family housing channel represents a lucrative opportunity for dealers who are well positioned to service the many needs of builders and homebuyers. “FloorExpo [believes] the multi-family and builder segments to be the most challenging in flooring,” FEI Group’s Smith said. “If done right, dealers can be very successful.”