Colorado Springs, Colo.—No one is expecting floor covering distributors to post banner sales numbers for 2023—certainly not in an environment marked by high inflation and a slumping new home construction market. However, there’s good news on the far horizon as some forecasts predict a mild recovery in some bellwether market segments.
That was the main thrust of a pair of informative economic keynote presentations delivered by ITR Economics earlier this month here during the North American Association of Floor Covering Distributors (NAFCD) 2023 conference.
In one presentation at the NAFCD 2023 conference, titled “Piercing Through the Noise,” Brian Beaulieu—a familiar face at past NAFCD conferences—painted a cautiously optimistic outlook on the housing market, a segment of critical importance to floor covering distributors.
“The housing market will begin to stabilize as we go through 2024 and begin to show more appreciable signs of recovery in 2025,” Beaulieu told the capacity crowd. “If you’re on the non-residential side of the street, you’re going to be doing very well in 2024 but you’re going to see some pain in 2025.”
Known for its high accuracy rate (94%) when it comes to economic forecasting, Beaulieu admitted that the firm was off the mark by 10 percentage points for 2023. ITR Economics underestimated, he said, the impact of high inflation rates on the U.S. economy, particularly the housing market.
“Looking back at 2022, we knew mortgage interest rates were going to be going up, but we did not know they were going to continue to rise as fast as they went up,” Beaulieu explained. “This had a more negative impact on the housing market than I was anticipating.”
In the keynote session that preceded Beaulieu’s talk, “Economic Trends in Construction and Consumer Markets,” Connor Lokar, senior economist with ITR Economics, expressed similar concerns about the impact of a weak housing market—especially low housing starts—on the distribution industry.
Defined by ITR Economics as a “leading indicator,” single-family housing continues to be hamstrung by high mortgage interest rates (a byproduct of stubbornly high inflation), low inventories and low housing starts. But the silver lining in all this, according to ITR, is we may have already seen the bottom.
“The housing market is actually starting to recover,” Lokar told the jam-packed audience. “When I spoke at this conference last year, the market was in freefall, trending negative and was getting worse by the week. As of the third quarter this year, we’re starting to see single-family housing starts beginning to turn the corner.”
However, the term “recovery,” by ITR Economics’ standards, means conditions are becoming worse less quickly. “We’re not posting monstrous increases year over year, but we’re seeing some favorable conditions compared to this time last year. Many of you in the audience today have probably had an ‘OK’ year so far.”
Lokar also cited issues of concern on the multi-family side of the business. He shared statistics showing starts in this particular sector of the market are down 28.1% points in the last three months alone. At the same time, he said the existing new home construction market has stalled as builders continue to face pricing pressures. “We need the housing market to come back to life—to be more dynamic,” Lokar told attendees. “But that all depends on interest rates. The rate threat remains a concern.”
While the Federal Reserve has held rates steady during its past few meetings, that doesn’t necessarily mean we’re going to see a dramatic turnaround when the calendar turns to 2024. “We expect marginal reductions in mortgage interest rates in 2024, but not the 2.5% rates we had back in 2019-2020. You’re probably looking at more like 6%.”
The sentiment of distributors who attended the sessions at the NAFCD 2023 conference were largely in sync with what the economists were predicting. But by no means are wholesale flooring executives throwing in the proverbial towel. Kyle Gorny, who handled outside sales at Crown/Blakely Products—a company that was acquired by All Surfaces last year—saw the residential business beginning to taper down earlier this year. However, he said the commercial market in his territory of Michigan stayed strong throughout the rest of the year. “We were expecting a downward trend for the second half, but we’re doing all right. We’re surviving. Looking toward 2024, I do believe [Beaulieu] is right. We’re seeing interest rates drop a little bit, so that’s going to be good for the new builds.”
For other distributors like AJ Warne, vice president of sales and marketing at Abraham Linc, based in West Virginia, market conditions also began to soften in 2023. “We describe 2023 as our rocket ship coming down for a landing,” he explained. “Every year since 2019 has exceeded our wildest expectations, but we’ve never been anywhere close to our budget until this year. We’re actually ahead of our budget still this year, but we are right about flat in dollars.”
Unit growth in 2023, Warne reported, is “fantastic. Product to product growth is still very good. We’re seeing a lot better growth in units in the commercial space. Multi-family replacement has been good, but not as good as new construction. And then, obviously, residential replacement was kind of dragging everything down, with the mixed results there for our customer base.”
While many economic forecasts call for a mild downturn in 2024 with a more robust recovery long term in 2025 and beyond, some distributor executives are a tad more upbeat about the prospects. “We’re really optimistic about 2024,” Warne said. “If you look at residential multi-family starts, and then we add the proper amount of time for them to get the sticks in the ground and the roofs on top and ready for us to put some flooring in, I feel like that’s going to drive some strong growth through 2024 for us.”
The key to succeeding in these trying times, according to Beaulieu, lies in leveraging one’s competitive advantages.
(Look for more on the conference in future editions of FCNews.)
