At this week’s FCICA Virtual Meeting, Pat Kelly, FCICA board chair and president of Synergy Flooring, based in Kennesaw, Georgia, interviewed Tim Baucom, president and CEO, Shaw Industries, about his outlook for the commercial market. Here are a few highlights from their discussion.
Kelly: What does the future of the commercial flooring market look like?
Baucom: It's very bright. I'm very optimistic about the future, but one of the concepts I want to introduce is that the lines between the commercial market and the residential market are starting to blur. We didn't know it at the time, but we kind of unknowingly made a bad deal. We started getting to wear casual dress on Friday, and then casual dress all the time, and we traded that all for being available 24-7. But now we are expected to be responsive to work issues around the clock. This bringing things together is creating great reshuffling. It's creating opportunity for us to rethink about things—but anytime there's disruption, there's opportunity for those who see quick and move fast.
We're seeing some people talk about the great reshuffling of people moving out of the cities to lower cost places to live. I want to caution: the cities will innovate. People have been calling for the death of cities for the last hundred years. And one thing that's true: cities keep growing and growing, finding new ways to satisfy needs—be it crime, be it pollution, be it public health. I think that this residential resurgence that's really been happening and has demographic when behind his back for the next five years.
We see the total flooring market this year being up about 15%, which is unprecedented. We see more than 5% next year. The residential market has already exceeded the 2019 peak, and commercial should get there in 2022, 2023 at the earliest.
The one caution is inflation. This inflation could be coming back, and something you need to really watch is the 30-year mortgage rate, which is hovering down 3.0-3.25% percent today. If it gets up to 4%, look at that as an inflection point, and big picture, housing and the commercial market are very tied together.
We're seeing real differences within segments. Multifamily, multi-use housing is hot now, but in the broader recovery track, when in-person services return. We’re already starting to see retail and healthcare boom. In hospitality, personal travel is starting to get really, really busy, but business travel—a lot of businesses say these zoom meetings are pretty efficient and effective. I think you’re going to see blends of virtual meetings and live meetings. Keep an eye on things like major indoor sporting events, major indoor theaters, and then even conventions to see how quickly people are comfortable.
But in the short term, government and education are seeing all kinds of money—there's infrastructure and jobs there. Even corporate will adjust. There's great opportunity in corporate while there's less face, corporations are looking for flexibility and higher quality. It gives a real opportunity to help corporations see new ways of bringing people back to the office.
Kelly: What do you predict will be the changing mix of flooring, product preference and demand moving forward?
Baucom: In commercial spaces, soft surfaces are still the largest—roughly half the market. We'll continue to see modular carpet tile displace broadloom. I think we'll see resurgence of rugs, which is really just a modular product. It has a lot going for it: it is the best value; it has the most benefits in terms of safety, slip resistance; it's easy to refurb. It’s also the least commoditized because it's both a functional and a design element—it's designed to be noticed. It is also the best opportunity for everyone in the supply chain to make good returns because it's predictable.
We’re seeing some short-term inflation really driven by raw materials and what I call the bullwhip effect. The bullwhip effect is really like what we saw with gasoline after Continental Oil shutting down for seven days. Even though most people had two weeks of inventory, the pipeline was down for seven days, and that panic created people wanting to carry more gasoline, which created shortages, which then meant that you depleted inventory, which created this bullwhip of more and more and more reaction. We're seeing that for sure in raw materials, as people are trying to operate with higher inventories all through the channel.
About a third of the market is resilient and that's the fastest growing, particularly LVT—again, modular products. This is about hyper innovation of hyper competitiveness. It’s really global. Design is generated in North America; the platforms, all this hybridization that's going on with new formulas and new composites that combine natural and synthetic products, is happening in Asia; and then the equipment and the technology to create clips and floating floors happening in Europe.
Resilient, particularly the modular type, will continue to innovate and grow much faster than the market. I can only imagine what it'll look like in the next five to 10 years. That's going to really require your team to really be students because these products require expertise in installation and maintenance. They're actually quite technical, and using the wrong product and the wrong application can really create a disappointment.
The inflationary pressures here are much different. Longer term, these tariffs of 25% have disrupted the natural flow of production coming to America. This is not typical where production thought in American move to Asia for cheapness. It actually started in Asia because of the rapid innovations and then it's being brought here. We're seeing global supply chains competing for goods. It's causing real costs, both in materials and scarcity. Inventory and logistics are the real differentiators to service and compete in the market.
Now, we at Shaw can talk the most about soft surface and resilient. I know that many of your members are very interested in ceramic and stone and hardwood, maybe even painted concrete. Those more niche products in aggregate have been losing share, but in total it can create great opportunity for your membership.