M&A Market for Flooring and Interiors Buoyed by Handful of Marquee Deals, Despite Market Recovery Taking Longer to Materialize than Expected
The M&A market in the flooring & interiors space was led by a couple of larger deals in distribution led by Transom-backed Galleher, now known as Artivo Surfaces. In addition to the acquisition of Virginia Tile—creating a large presence in the Midwest and expansion into the ceramic tile market—the group also completed the acquisition of California-based B.R. Funsten/Tom Duffy. The Funsten/Duffy acquisition dovetails nicely with the tile business, giving the combined company access to an established installation supplies platform and creating a true powerhouse in flooring and supplies distribution.
The rest of the market remained largely quiet in 2024, as persistently high interest rates for most of the year combined with election uncertainty presented headwinds to both consumer and investor confidence. With interest rates beginning to drop in September and the election resolved in November, operators and capital providers are turning their attention to 2025 with significant optimism.
As a trusted advisor to owners and executives in the Flooring & Interiors space, Anchor Peabody leverages its unmatched industry knowledge and M&A expertise to achieve best-in-class outcomes for founders and owners. We welcome a confidential conversation to discuss your options and strategy in this rapidly consolidating market.
- New home construction hampered by high rates, but signs of turnaround emerge. For most of 2024, new residential starts averaged around 1.34MM units annualized, below 2023’s pace of 1.42MM units, as rates remained high, and would-be-buyers sat out waiting to see if or when affordability might become better. Builders have signaled that the sweet spot for demand is around the 5.5% range for 30-year fixed rate mortgages, well above today’s numbers floating around 6.5%. Still, builders have had success buying down rates with points and offering other incentives to move units. Builder confidence reversed its backward slide in September and has currently posted 3 consecutive monthly increases. Assuming inflation remains under control (though there appear to be risks in achieving the “last mile” getting us down from the low 3s/high 2s) and interest rates continue to fall, the new home construction market should benefit from significant pent-up demand and better financing conditions in 2025. Industry research firm Zonda is forecasting an approximately 3% growth rate in new home construction in 2025, with markets like Georgia, Virginia, North Carolina, and Arizona outperforming the national average.
- Multifamily flooring business takes its lumps. After a banner 2023 with record starts and units under construction, new multifamily construction slowed meaningfully in 2024. While many flooring installers and distributors were able to harvest 2024 revenue on deliveries to units started in 2022 and 2023, the backlog isn’t being replaced at a level necessary to sustain that in 2025. As financing costs for developers rose, rents stabilized, and significant new units were delivered, developers pulled back on new construction in 2024, which will impact 2025 deliveries and revenue. Starts with 5 or more units hit a trough in March of 2024 and began a lumpy recovery later in the year but remain well below prior years’ levels. We remain bullish on multifamily long term as single family remains out of reach for a significant portion of consumers and demographic trends favor people living in rental units for longer.On the multifamily turns side, this once predictable business turned on its head this year. As managers saw vacancy rates tick up and renters renewed leases at higher rates, the unit turns business suffered. We see this as somewhat of a flash in the pan (similar to COVID-era times when eviction moratoriums and a massive decrease in moving velocity temporarily impacted the relay business). Once the market has absorbed the new capacity that has been built and rental rates stabilize, this business should come back to normal levels of growth and predictability.
- Industry structure shifts toward product and end market diversification. The previously mentioned Gallaher/Artivo – B.R. Funsten/Tom Duffy deal, as well as Big D Supplies’ acquisition of Tarkett’s Diamond W business are two examples of recent combinations of supplies-focused business with floor surfaces distributors. These two lines of business have historically been relatively independent, but distributors are looking to capture more of the customer wallet share by being a one-stop shop for both surfaces and installation supplies. We expect to see more of this horizontal consolidation across the various products lines as distributors compete to offer a full suite of products to the contractor customer.In the installation business, some acquirers had been laser focused on pure-play multifamily relay businesses, avoiding acquisitions of companies that also had significant builder and commercial practices. With the cracks exposed in predictability of the turns/relay business this year, we expect consolidators will begin to take a more friendly posture towards diversified installers, seeing the benefit of multiple end-markets to reduce risk in the volatility of any one given installation sector.
- Inflation risks persist. Inflation has come down significantly from its June 2022 peak of over 9% but ticked back up in October, moving from September’s 2.4% to 2.6% and still above the Fed target of 2%. This could be temporary, or possibly suggest that the last mile of inflation correction remains stubborn. Additionally, the Trump incoming administration’s proposed tariffs on China, Canada and Mexico (the US’s three largest single country trading partners) could raise costs to consumers on imported goods, threatening higher prices in 2025. We will have to wait to see the actual level of tariffs executed when Trump takes office in early 2025, what, if any, exceptions are provided, and how domestic manufacturing capacity responds to understand the full effect, but anything that puts upward pressure on prices may limit the Fed’s ability to further cut interest rates into next year. On the plus side, the Trump administration plans to take a more business friendly approach to regulation, including on independent contractor rules and business income taxes, which should be favorable to business owners.
- Institutional and strategic buyers are poised for action. Despite 2024’s volatility and the unexpected lag in recovery, private equity and strategic buyers appear ready to call a bottom and are actively seeking out deals going into 2025. Businesses with heavy import exposure may need to wait for clarity on trade policy, but the rest of the industry should be prepared for M&A activity to take off in the new year. Most investors familiar with the space see multiple years of growth ahead in both new build and remodel markets, and buyers are looking to put money to work before things get busier and more competitive.
- Advice to potential sellers. Potential sellers should consider timing carefully; assuming a recovery continues to materialize in the first quarter of 2025, they should be ready to move before competing assets come to market, vying for buyer attention and resources. If results in early 2025 head in the right direction, there could well be a feeding frenzy as buyers gobble up assets in anticipation of a multi-year growth cycle. We are encouraging clients to start preparation now and monitor business results and market conditions over the next 3 – 6 months, so they can opportunistically pick their timing.
Surfaces 2025 – Las Vegas: If you are in flooring business, we’d love to see you at Surfaces 2025 in Las Vegas in January. If you’re interested in an on or off-site meeting, please reach out to me at [email protected] or call at 917.520.2256