2023 Flooring Market Update and 2024 Outlook

This past year has certainly been an interesting one for those of us in the flooring & interiors industry. Just as COVID and its follow-on demand and supply chain effects moved squarely into the rearview mirror, consumers were faced with record inflation and unprecedented increases in interest rates to combat it. Consumer sentiment dipped in the face of rising prices and increased economic uncertainty. Existing home sales evaporated due to dramatically rising mortgage rates. Both dynamics hit the single-family remodel market hard, with consumers delaying and deferring projects.

Bright spots for the year included the multifamily and commercial markets. On the multifamily side, record units under construction and longer project times contributed to solid results, as apartments continued to provide a release valve to single-family affordability. Commercial markets, both remodeling and new construction, continued to benefit from post-COVID demand and extended project cycles, leaving a healthy backlog that benefited 2023 results.

Notable Deals

The collective impact of inflation, rising financing costs, challenged performance and macroeconomic uncertainty represented a significant headwind to deal making activity in 2023. That said, there were a handful of marque deals, especially in the back half of the year, that indicate the market is showing signs of resurgence heading into 2024.

In July of 2023 Rainier Partners purchased Consolidate Flooring (formerly SCI Flooring) from Corridor Capital. Rainier subsequently added United Carpets in November of 2023, adding to and expanding the footprint in the Midwest.

In August of 2023, HD Supply, a subsidiary of The Home Depot, purchased Redi Carpet, a leading installer focused on the multifamily market. The acquisition added the important flooring relay business to HD Supply’s existing Renovations Plus business, which performs facilities maintenance, including turns and upgrades, to multifamily, hospitality, and institutional customers. The deal represents a significant cross-selling opportunity for Renovations Plus, and a disruptive entry into the already competitive space for multifamily turns M&A. Expect HD Supply to continue efforts to consolidate this industry, along with other major platforms like ILG, ADG, Real Floors, and Impact Property Solutions.

The installation services space was by far the most active in 2023. Other deals include Impact’s acquisition of Arizona-based Interior Concepts and Rasa Floor’s purchase of Floors First Nashville and combination with Martin Greenbaum.

In the commercial space we saw consolidator Diverzify return to the market with its acquisition of Phoenix-based Wholesale Floors. Diverzify, backed by private equity firm ACON Investments since 2021, has been the leading consolidator in the commercial flooring installation market, and a top performing business in a growing market like Phoenix represents an excellent win for that platform.

On the manufacturing side, AHF Products, backed by Paceline, acquired Crossville, Inc. in October 2023 marking their entry into the tile category. This makes AHF a full hard surfaces provider with a comprehensive product line of virtually all non-carpet surfaces.

In December of 2023, Transom Capital, a private equity group out of Los Angeles, announced its acquisition of California-based Galleher, LLC, who focuses primarily on hardwood and LVT. Galleher was previously owned by Quad-C.

Also in December of 2023, Anchor Peabody announced the sale of Encore Building Products, a wholesale distributor of flooring, lighting, and interior products, along with lumber and framing materials, to Builders First Source.

The retail market and distributors that serve it saw much lighter M&A activity, largely due to the issues discussed above. We expect at least one near term announcement in the space and for 2024 to be far more active as the economic picture gets better and performance rebounds.

2023 Performance

Performance for new home and retail leveraged businesses suffered in 2023. Home Depot noted in its Q3 earnings call that large ticket (>$1,000) projects, which include flooring, were down 5.2% compared to last year. While Lowe’s didn’t quote a figure for the category, they noted that appliances, flooring and kitchen and bath saw increased pressure as consumers delayed and deferred major purchases. Lowe’s saw 3Q 2023 top line comps fall 7.4%. Floor & Décor saw same store sales by 9.3% from the prior year period. Some distributors serving the market have seen even more substantial declines, with numbers ranging from minus 5-10% to up to 30% declines.

It’s worth noting however that performance has been uneven across the board. Some poorer performing distributors lost product lines that were transferred to competitors. Market share gains by top performers helped mitigate the general downturn for certain players. I expect those who gained share in 2023 to be prime M&A targets as the market recovers next year.

Other 2023 Story Lines

Other major items impacting the industry this year include:

  • SPC Import Issues out of China – Enforcement of the Uyghur Forced Labor Protection Act (UFPLA) led to major delays at port working through chain of custody issues on PVC sourced for SPC and WPC product. This drove product availability issues and further decoupling from China and seeking alternate product sources
  • SPC Quality Issues – SPC for years was promised as a near-perfect resilient flooring solution with premium waterproofing and reliability. Quality control became an issue this year with thinner sourced product and installation problems causing consumer backlash against the product. Branding and consumer and installer education are becoming paramount with this product category and will only be more important going forward
  • Builder and Consumer Trade Down – facing higher due to rampant inflation and stubbornly high home values, builders and consumers traded down to lower priced products throughout the year, causing mix shift for manufactures and distributors that lowered top line and put pressure on margins
  • The Rise of Laminate – Laminate, once considered a cheap and dying product, has made a significant comeback as visuals and performance have attracted interest from builders and homeowners. Distributors without existing lines rushed to launch them this year and existing products outperformed the broader market.

Outlook for 2024

The good news is there is a lot to look forward to in 2024. We believe single-family new construction is currently hitting its trough in 4Q 2023 and will rebound strongly next year. Permit pulls, which lead starts and revenue, are up in the Southeast, Southwest and Midwest. While the Fed has taken a cautious approach to inflation, the last few readings have been promising and we haven’t had a rate increase since July of 2023 and we expect rates to remain flat and then come down in 2024. Housing inventory remains tight, and prices elevated, signaling strong demand. All of this predicts a strong housing market this coming year, with NAHB predicting starts to grow at 5% in 2024.

On the residential remodel side, we are also bullish, but perhaps more cautiously so. The gap between existing mortgages (with 70%+ of homeowners at 4% or lower) and new mortgages at or above 7%, will continue to put a governor on existing home sales, a key driver of repair and remodel spend. That said historically tight inventory over the past two years put a number of homeowners into homes that did not meet all of their buying criteria. As prices stabilize and the macroeconomy recovers, there will be a lot of pent up demand for remodel spend, and we believe this market troughed this year and has nowhere to go but up. Wall Street analysts expect remodel bellwethers like Home Depot, Lowe’s and Floor & Décor to post better results in 2024 than 2023.

Multifamily markets in 2024 will depend on where businesses are positioned. We expect new construction nationally to contract after this year’s boom in new apartment starts. Strong backlogs will keep some contractors fed during much of 2024, but new projects will slow as rising financing costs and slowing rental growth take their toll. That said, certain markets, namely Texas and the Southeast, will continue to benefit from strong economic growth and in-migration from higher cost of living geographies.

In the tenant turnover space, the massive number of new units coming online is unequivocally good news. More units mean more tenant turnover on a larger installed base. Given the asset light nature of this business, strong margins, high cash flow, predictable revenue base, and strong consolidator interest, we expect M&A activity to continue at a strong pace in this sector.

In the commercial market, we expect to see some moderate contraction. If single family starts are a leading indicator, commercial activity is a lagging one. This past year’s performance was solid, but similar to multifamily, financing costs and the hangover from the past year’s boom will moderate activity in this sector, though less dramatically than in multifamily.

M&A Drivers

With buyers and sellers largely sitting on the sidelines in 2023 (with the exception of activity in the multifamily turn sector), 2024 is setting for a marked increase in activity. Buyers have continued to approach us over the last quarter on what may be coming to market in 2024, signaling an increased appetite for acquisitions.

Sellers, after weathering the 2023 storm, are beginning to explore their options. Many remain hesitant to approach the market, especially if last year’s performance was understandably lackluster. Still, we believe buyers understand the landscape and will look to 2024 anticipated numbers for valuation, especially if the recovery plays out early in the year the way we expect. We believe many potential sellers will be ready to test the market after a few months to a quarter of 2024 performance demonstrating a meaningful rebound.

We expect consolidation in multifamily turns to continue unabated, especially with a well-capitalized and aggressive buyer in The Home Depot joining the market. On the distribution front, a recovering single-family construction and remodel market will get buyers back to the table exploring ways to add geographies and scale. Commercial activity may decline somewhat, but acquirers like Diverzify, One Source and Inside Edge will continue to be active.

Next Steps

Potential sellers should begin conversations early. Even if 2023 suffered, the window for M&A is on the upswing and buyers are increasingly willing to lean in and compete for deals, with an eye toward a 2024 recovery. Those who wait for a complete turnaround may miss the opportune timing as the market opens this coming year.

If you have any interest in discussing any of the above in further detail, have ever thought about selling, or simply want to talk about the market in general – please reach out to Aaron Toomey at [email protected] for a confidential discussion anytime.

Anchor Peabody serves the middle market building products market, and no one is more plugged in than we are.

Good luck in 2024.