Contract: State of the Industry 2022
Despite all the challenges facing the commercial contract market today—the residual effects of the pandemic, sky-high inflation, ongoing supply chain challenges and the war in Ukraine—key end-use sectors for commercial flooring are showing signs of recovery, stimulating hope that market conditions will improve in the second half of 2022.
“Early in , there was little investment in office and hospitality segments in particular,” observed Greg Mather, president of Crossville. “The good news is that as the year progressed, the A&D design activity increased across segments and this started to result in growth later in the year, which is expected to continue into 2022.”
Specified contract, a sector which—according to preliminary FCNews research—represents approximately 70% of the estimated $6.3 billion commercial flooring business, rebounded in 2021 as sales were relatively flat after posting a double-digit falloff the prior year. “I think as we start going back to work and traveling again, everyone will be more aware of their surroundings and feel safer in a clean environment,” said Catherine Del Vecchio, vice president of marketing – flooring division, American Biltrite. “And facilities, hopefully, will pay attention to keeping their spaces clean and replace flooring [if needed] to give this sense of a clean environment.”
Some key economic indicators are finally pointing in the right direction. For example, the unemployment rate in May held at 3.6% for the third consecutive month, the U.S. Bureau of Labor Statistics reported. Notable job gains occurred in hospitality, professional and business services and in transportation and warehousing. However, the National Association of Home Builders’ (NAHB) Multifamily Production Index—which measures builder and developer sentiment about current production conditions in the apartment and condo market—dipped below the break-even mark of 50 for the first time in three quarters.
“The decline in the MPI indicates incipient caution on the part of multi-family developers,” stated Robert Dietz, NAHB chief economist. “This caution has not shown up yet in the multi-family starts rate, which remains quite strong, but the MPI typically leads changes in starts by one to three quarters.” Hard surface surge
Hard surfaces continued to surpass carpet in 2021, a feat considered unthinkable only 10 to 15 years ago, when most retailers utilized “carpet” in their store names with no mention of resilient or tile. Commercial sales ranged from $3 to $3.5 billion and volume approached 3 billion square feet, according to preliminary FCNews research. A little more than half of the volume is from specified contract while dollar sales are more evenly split with Main Street applications.
Statistics show resilient represents approximately 30% of hard surfaces sales, followed by ceramic (15%) and hardwood (5%). LVT/P continues to be the shining star, posting double-digit increases in sales and square footage, and market share is approaching 40% of category sales, according to industry estimates. Advances in styling, performance and maintenance are said to be contributing to boosting market share primarily at the expense of carpet.
The three largest commercial segments for hard surface sales are corporate (38%), healthcare (33%) and education (14%). Many floors make up the category—from sheet goods, WPC, rigid core/SPC, LVT and tile to hardwood, laminates and polished/stained concrete—and market share and growth rates vary by sector and region.
For example, tile remains a preferred product for specified contract, despite sporting modest growth rates.
“Tile is a fashionable and durable product that can withstand heavy traffic for several decades,” Crossville’s Mather pointed out. “Tile clearly provides a high-design, long-term solution for owners.” A bugaboo hampering more widespread usage is the shortage of qualified installers, which is also contributing to higher installation costs and longer project lead times, observers note.
A longtime workhorse resilient product, VCT, continues to offer value for certain commercial applications, namely education and retail spaces. Market share continues to dwindle, however, as the product is being replaced by LVT.
Meanwhile, niche specialty products such as rubber and linoleum continue to maintain strongholds in education, where they are predominantly specified for their longevity, sustainability and ease of customization. “Growth of rubber will come from the sustainability attributes, its durability, sound management and comfort attributes,” American Biltrite’s Del Vecchio said.
Linoleum sales are estimated to be around $100 million, with volume coming in at roughly 50 million square feet, according to preliminary FCNews research. Education is the bedrock segment and, combined with healthcare, represents more than 80% of total volume.
But the category is not without its challenges. “Raw material and supply chain issues are major concerns affecting stability and price,” said Denis Darragh, vice president North America, Forbo Flooring. “There are also inflationary impacts on overall construction activity and a shortage of available labor.”
Soft surfaces showed flat to low single-digit gains in contract, with approximately $3 billion in 2021 sales, according to industry estimates. While more than two-thirds of carpet sales come from specified contract work, volume is fairly even. Carpet tile, however, maintained its position as the dominant product—driven in large part by its modularity, design capabilities, installation ease and speed—while broadloom remains the preferred soft surface for hospitality applications.
Segment activity varies widely
The five major commercial sectors each face macro issues, which, in turn, affect flooring sales growth and projects. The pandemic triggered seismic shifts in market share, as sectors such as corporate/offices are only now showing signs of recovery. This segment saw its share of specified contract erode the last two years as businesses shut down, reduced office space and saw a significant number of employees work remotely.
“Early in the year there was less travel and fewer people in the office,” Crossville’s Mather explained. “As time progressed, both of these areas improved but remained even below 2020 levels.”
As a result, businesses and organizations are rethinking the interior design and layout of their office spaces in order to provide a safer, more functional environment. Open-office spaces now include smaller, private areas and “pod areas” with ample workspace, seating and outlet access. This allows employees to make phone calls, participate in video conferences or work on research safely. Furthermore, many companies are opting for hard surfaces and design elements that can be easily cleaned, sanitized and properly maintained.
“Regardless of the trend of remote work continuing for most companies, we’re still seeing a lot of new commercial office development, as companies sell off superfluous spaces or downsize,” stated Rocamador Rubio Gomez, director for Tile of Spain in the U.S. “The new spaces are focused on flexibility and providing outdoor spaces when possible.” Carpet tile and resilient are among the most prominent floors specified for these spaces while hardwood, porcelain tile and polished concrete are preferred for certain parts of the office where fashion and functionality are required.
Conversely, one of the fastest growing commercial segments the last two years is healthcare, with clinics, assisted-living communities and urgent care centers showing the greatest activity, according to published reports. “The growth area here is private, specialized facilities for elective procedures and other lifespan optimization treatments,” Rubio Gomez noted.
As Baby Boomers age, healthcare facilities are looking to grow, expand and keep up with the rising number of people coming through their doors. As a result, facility managers are rethinking what a healthcare space looks and feels like. Because this is a healthcare setting, whatever flooring is selected must be easily cleaned and durable enough to withstand spills, messes and wheelchair traffic.
“Usually a relatively insulated market, many healthcare projects had to at least take a temporary pause during the pandemic,” observed Bill Anderson, CEO, Karndean Designflooring.
“For the most part, all of those—and then some—have started back up again as healthcare spending continues to rise. A lot of facilities needed to make changes because of the pandemic in terms of layout, resources, patient flow, etc.”
Healthcare is creating new experiences and interactions between patients, caregivers and technologies that will enable healthcare institutions to pursue design strategies that merge virtual and in-person care delivery. One of the biggest trends is creating home-like designs. To achieve this look, designers are taking traditional residential elements and incorporating them into commercial spaces, resulting in a welcoming environment.
Healthcare remains an important segment for resilient sheet goods and rubber, especially in areas requiring high sanitary levels, such as emergency rooms, operating rooms and treatment areas. An increasing amount of LVT is finding its way into non-critical areas such as corridors, waiting rooms and patient rooms. Meanwhile, natural materials such as ceramic are considered healthy choices while premium products are scattered throughout facilities.
Hospitality slow to recover
There are similarities between healthcare and hospitality, as both sectors saw major remodeling investments to help them compete for customers. The latter segment was especially hard hit the last two years as countries closed their borders and introduced travel restrictions in response to COVID-19. To put this in perspective, consider the 1 billion fewer international arrivals in 2021 translated into a loss of $1 trillion in total export revenues from international tourism, according to the World Tourism Organization.
“Hospitality has been the slowest sector to come back from the pandemic,” Karndean’s Anderson pointed out. “But focused service hotel guest room specifications have been rebounding.”
All hospitality segments—which include food and beverage, travel and tourism, lodging and recreation—are expected to rebound this year, as companies rearrange their operations and restrictive containment measures are relaxing nationwide. People are coming back to work as evidenced by the addition of 84,000 leisure and hospitality jobs in May, the Census Bureau reported. “Hospitality improved through the year as travel and entertainment activities increased,” Mather said.
Floor design varies widely, often depending on end use. For example, an estimated 25% of commercial carpet is sold into hospitality spaces, the majority of which is broadloom. Hospitality is among the largest commercial segments for tile, representing roughly 50% of commercial sales, preliminary FCNews research shows. More designers are incorporating hardwood and products that resemble natural materials in hospitality spaces, vendors report, while LVT is being specified for its visual appeal and sound-absorption qualities.
Education going strong
Education surpassed hospitality as the second largest commercial segment for carpet, representing nearly one-third of sales. This segment is dominated by carpet tile, namely because of its installation and replacement advantages.
On the whole, specifiers agree that campuses and the overall educational experience will look a bit different than in previous years. Safety is understandably a major concern in K-12 and higher education, as schools reconfigure classrooms to accommodate fewer students and seek products and design elements that are easy to clean and maintain.
“Projects have started back up as students return to campuses and spending comes back,” Karndean’s Anderson stated.
There is a diversified amount of flooring specified in education, a market driven, in part, by approval of government bonds and public funding to support school construction and renovation. K-12 retains the biggest piece of the pie, accounting for approximately 75% of flooring sales, with the rest from higher education, according to industry estimates. Most applications require hard surfaces, representing more than half of flooring sold to K-12 spaces.
The retail sector—particularly physical stores—has arguably taken the longest time to recover since the onset of the COVID-19 pandemic. Whether it was groceries, restaurant food delivery services or a host of various online purchases from the likes of Amazon, consumers shifted their spending habits away from brick-and-mortar operations. That, in turn, gave mall developers and business pause when it came to investment projects. Also, sadly, many retail establishments shut their doors due to a dramatic drop-off in business. However, many projects that were on hold are now moving forward—particularly those that involve mixed-use spaces.
Retail is increasingly focusing on enhancing safety and the in-store experience for shoppers. Flooring choices in retail run the gamut from hard to soft surfaces, with ceramic, wood and carpet often specified in high-end retail spaces.
“Stores like Apple and Lululemon have paved the way in creating a customer experience that is unique, suited to the brand and harmonizes with the design,” Tile of Spain’s Rubio Gomez said. “Individual stores are paying more attention to the finishes and their lifespans to better amortize the investment.”
U.S. retail sales were up nearly 1% seasonally adjusted from March and 8.2% year over year, according to the Census Bureau. “April’s retail sales data is encouraging because it shows consumers are taking higher prices in stride and remain resilient,” stated Jack Kleinhenz, chief economist, National Retail Federation. “High gasoline prices, rising interest rates and price pressures across the board continue to be headwinds to spending, but wage and job gains are offsetting that with a tailwind that should bode well for moderate-but-steady spending growth.”