February 17/24, 2020: Volume 35, Issue 17
By K.J. Quinn
Multi-family housing activity in 2019 can be best be described as lackluster, especially compared to the sales seen on the single- family side of the business. The dips and turns that contributed to softness last year is expected to continue for at least the first half of 2020, observers say.
According to Dodge Data & Analytics, multi-family starts in 2019 fell by 10% to 485,000 units, with dollar value dropping by 9% to $91 billion. Sarah Martin, an economist with the firm, believes the slowdown will continue well into 2020, with multi-family housing starts ultimately dropping 15% to an estimated 410,000 units.
Other experts agree. “Multi-family construction, which is 95% for-rent, is expected to remain flat in 2020,” said Robert Dietz, senior vice president and chief economist, the National Association of Home Builders (NAHB). “2015 was the peak year of apartment construction, and the market has leveled off since that time as momentum has generally moved to the for-sale side of the market, with the exception of late 2018.”
The reasons for the gloomy outlook vary from inflation heating up and interest rates rising more quickly to rent regulation reform amidst soft construction activity to close out 2019. Other economic indicators support the notion that market conditions are becoming less favorable for the multi-family sector. For example, after heady increases in the number of jobs created in the U.S. for most of the year, economists saw those numbers tick downward slightly toward the end of 2019, although the overall unemployment rate remains at historic lows. “As a result, we’ll see less income growth and consequent slowing demand for multi-family housing,” Dodge Data & Analytics’ Martin explained.
The news is not all somber. Multi-family housing starts in January 2020 reached 564,000 units (seasonally adjusted), up 14% from December, the Census Bureau reports. Observers warn, though, that December was a soft month for building activity so it’s important to keep things in perspective. Meanwhile, there has been much discussion around affordable housing to ensure a variety of units are available for those in need.
“In many areas, building permits aren’t being approved until an affordable housing requirement is met,” Martin said. “This trend will continue into 2020.”
For housing and real estate stakeholders, the increase in housing reform remains a major headwind. NAHB estimates one-third of new apartment prices are affected by regulations. ”Unfortunately, many communities are attempting to improve housing affordability with policies that do not work—i.e., rent control, inclusionary zoning or policies that increase the cost of housing,” Dietz explained.
Other factors that come into play include regional dynamics. The performance of the housing market varies geographically and by sub-sector. For example, 2019 was strong for the multi-family market in the high-rise sector in the Pacific Northwest, according to Randy Rubenstein, owner, Rubenstein’s Contract Carpet/North American Terrazzo, Seattle. “Obviously, strong market conditions will not be sustainable, and we expect that we’ll begin to see a downturn, but probably not for 18 to 24 months or so.”
Generational demographics play a role in reshaping the housing market as well. As baby boomers continue to age, demand for senior housing is expected to grow. Meanwhile, millennials are reportedly not forming households at the same pace as previous generations.
“Despite potential for growth in millennial homeownership, it is unlikely to impact multi-family demand through 2020,” Dodge’s Martin said. “In the short term, demographic trends, the allure of downtown living and lower incentives for homeownership will keep demand in this market strong.”
The housing market is important to the flooring industry, representing an estimated one-third of residential sales. The multi-family sector is a mixed bag, which includes everything from apartments and condos to senior-living spaces, student housing and factory-built homes. Of the 345,000 multi-family units completed in 2019, 341,000 were conventional apartments and 3,000 were townhouses, according to the Census Bureau.
Consumer preferences are changing, as more people work from home and communal spaces become increasingly important. Like the education sector, spaces that can be multi-functional and transform with ease are important, all of which impact flooring choices. “A living room may also be a workspace, a clubhouse may also be a cooking demo space,” said Michelle Carpenter, director of education and government, Shaw Industries. “Spaces need to transition from use to use with ease and functionally.”
As it turns out, size does matter when it comes to the scope of projects in multi-family construction. The share of large multi-family housing projects continues to be a key growth driver in this market. “In 2008, only 9% of multi-family housing starts were over $100 million, but they have reached 21% in 2019,” Martin noted.
Across the board, there is a movement toward smaller housing designs, stimulating demand for micro units. “While this affects buyers and renters, it’s not affecting the overall size of the buildings, just resulting in more units within the same building footprint,” Rubenstein said. “So there is no less square footage of flooring materials being purchased; they are just spreading it over more units.”
When it comes to flooring, the multi-family business is witnessing trends in buyer preferences similar to the single-family new home construction and residential remodeling sectors. Choices vary by region, but carpet remains the leading flooring, observers say, although market share is dwindling due to the growing popularity of hard surfaces. In areas where carpet is being placed—such as entryways and master suites—better quality products are specified to provide a more luxurious feel underfoot.
“There are parallels between multi-family and single family when it comes to carpet installs,” said Andy Hogan, executive vice president/CPO, FloorExpo/FEI Group. “Carpet is typically bedroom only, with exceptions. To put it bluntly, hard surface is king. On the contrary, carpet has never been as nice, beautiful and as well constructed as it is today, and it will only get better.”
As residents seek more aesthetically pleasing and affordable soft surface options, carpet tile is expected to emerge as a preferred choice in both rooms and public spaces. Plus, there are ancillary benefits, as tile can be selectively replaced as needed due to traffic patterns or staining. “This product category also has a more sustainable story regarding the product life cycle,” Shaw’s Carpenter noted. “Carpet tiles also offer more choices for design aesthetics of plank sizes, patterns and color.”
Hard surfaces continue to gain momentum, led by luxury vinyl tile. “We continue to see the influx of LVP in both market segments,” said Jay Smith, president, FEI Group. “We are even seeing laminates gain some play in builder.”
Ceramic tile also continues to carve a niche in certain areas of the home. “Where we have consumers making upgrade selections for mid to upper-end home builder, we are still realizing tremendous upgrade sales in the tile and stone categories,” said Dan Butterfield, vice president, residential, Dal-Tile.
Niche products such as polished concrete are also finding their way into some buildings. “We believe the demand for combined soft and hard surface floorings will continue to be, by far, the largest component of this market going forward, although the mix continues to change toward hard surfaces,” Rubenstein said.
Other dynamics are having an effect on product choices as well. For example, due to tariffs put in place in 2019, some product choices have shifted. There was a loss in price continuity between when materials were specified to the time materials were ordered and shipped, Shaw’s Carpenter noted. “This caused general contractors to look for alternatives that were closer to the initial budget pricing,” she explained. “Tariffs on Chinese products have made it difficult to hold specification in the new construction arena.”
Builders and property managers face unique challenges when choosing flooring for their homes and communities, such as quick turnaround times, product availability and dependability. This requires dealers and suppliers to be in sync with product, inventory and installation needs. “We offer reliable availability through recommended style lists in every category, which ensures the products listed will be available all year,” said Tom Cole, vice president distribution and builder at Armstrong Flooring. “For property managers, our innovative product technology allows for quick and easy repairs and better damage control.”
A major challenge facing commercial flooring contractors is maintaining adequate staffing to support high-rise multi-family projects over an extended period, considering general contractors usually lag behind schedule and jobsite conditions can be less than optimal. “It’s a challenge that almost everyone faces in this environment, and until the economy slows down a bit it is not likely to change,” Rubenstein said. “But we’re not asking for it to slow down, so we’ll just keep doing the best we can under less-than-ideal conditions.”
Whether it’s homeowners, designers, trade professionals, builders or property managers, flooring contractors must have the necessary resources and financial wherewithal to keep up with daily service demands. “If you can do them, which is not easy, you can make some money,” FEI’s Smith said. “That said, margins in [single- and multi-family housing] are always under significant pressure.”
To be profitable, builder dealers need to establish sound partnerships with segment owners, namely builders and developers. “Working closely together along with their manufacturing partners such as Dal-Tile, this three-spoke relationship should always be focused on the needs of the customer,” Butterfield said. “When we help our customers to be successful, we enjoy the same.”
Shaw Contract focuses on providing a single point of contact for multi-family builders and developers for new construction and capital expenditure (major refurbishment) projects. “Our goal is to provide a one-source solution for multi-family from public/amenity space to units and outdoor living areas, so ownership can feel confident that projects receive the design aesthetics and performance to enhance the value of their properties,” Carpenter said.
Service providers have evolved in all facets of the business, including installation, design center selections, field technical support, internal operations infrastructure, sales expertise and warehousing capabilities. “They have to be all departments to support their markets,” Larry Brookshire, Mohawk’s vice president builder and multi-family sales operations, observed. “Many flooring dealers have transitioned to providing cabinets, lighting, counter tops and other interior finishes.”
This centralizing of building materials has advantages for Mohawk from both a design and assortment perspective. “We know that cabinetry and paint selection, for example, are often paired with flooring,” Brookshire said. “So bundling non-competing products into packages has net gains for all parties.”
As a new decade dawns, the one constant, observers say, is dealers and contractors offering the best value proposition to builders will continue to thrive. “There is a lot of opportunity in the single-family and multi-family segments of the business,” Armstrong’s Cole said. “Being competitive with pricing and on-trend with design and innovation will enable builder dealers to be awarded projects.”