After a tough 2023, several factors contributed to a slower-than-expected rebound in the Flooring & Interiors market. While inflation has largely stabilized, the Fed’s posture of “higher for longer” meant interest and mortgage rates remained elevated for most of this year, challenging both the new home construction and residential remodel space. In addition, container prices rebounded from last year’s lower levels, adding cost and logistics pressures to importers. We predicted back in April that risks to the industry would peak in the first half of this year, and that appears to have materialized, with most distributors down 5% – 15% in the first half while July began to show incremental volume growth. Commercial interiors fared better this year, with many projects funded and started earlier in 2023 producing revenue throughout 2024.

Impending rate cuts along with pent-up demand in the sector from consumers delaying projects last year and earlier this year, however, point to a strong rebound in 2025. Owners and operators considering tapping the mergers and acquisitions (M&A) market should begin their preparations now, as declining interest rates and a recovering market will create a busy M&A market throughout 2025. Potential sellers, especially small to medium-sized ones, should consider getting out to market early and beating the rush to compete for buyer interest and attention.

• Macro indicators suggest the economy remains strong and is poised for a soft landing. GDP in the second quarter of 2024 grew at 2.8%, vs 1.4% in the prior quarter, primarily driven by consumer spending, inventory accumulation and business investment. This suggests consumers remain active despite stubbornly high interest rates and, importantly, that business operators are optimistic about the future (both near term in that they are investing in inventory for immediate future sales, and longer-term as they invest in their businesses). Despite this month’s downward revision of ~800K, job growth throughout the year remained positive. 
The revised figures may have proved to be a silver lining as they gave the Federal Reserve some assurance that the labor market is not as tight as they once thought, allowing room for larger and faster rate cuts. September’s meeting resulted in a 50bps rate cut which would be a shot in the arm to the building and remodel industries.

• There is significant reason to be optimistic about new single-family home construction. As of June 2024, the US remains underbuilt on housing by about 4.5MM units (about three years’ worth of supply at an average of 1.5MM units per year). Affordability remains an issue for many would-be buyers and inventory has remained especially tight. The average 30-year fixed rate stands at 6.5% today, and with rate cuts imminent that is likely to fall over the course of the year and into next. Builders suggest that demand will take off when rates hit the 5% – 5.5% range, which could be as few as two to three rate cuts away. Meaningful pent-up demand and declining mortgage rates set up the new housing market for a significant rebound as early as the first quarter of next year. We expect builders, especially early in the cycle, to continue to focus on costs and shift spending to lower priced finishes (e.g., laminate, SPC, engineered wood).
  
  
• Remodel and rehab market has been soft as consumers delay spending. Both The Home Depot and Lowes reported drops in same store sales in the second quarter, and third-party data providers suggest foot traffic is down at both. The pace of decline, however, appears to be slowing, suggesting we are at or near the trough. The Home Depot called out LVP in its earnings call as a positive comp to last year, which is certainly a bright spot. Consumers remained cautious with spending, especially on large ticket renovation projects. Homeowners, however, have been deferring projects for over 18 months now and the punch list of things they would like to do is getting longer every day. This represents significant demand that has not gone away, but simply been pushed to the right. We anticipate that as rates come down and lingering fears of a potential recession ease, this market is poised for a rapid takeoff in 2025, though it may be a quarter or two until those effects are fully realized. From a channel perspective, we are seeing more consumers and pro customers shifting to ecommerce platforms away from brick and mortar.
  
  
• Commercial and multifamily face incremental headwinds. While the commercial interior sector held up better than residential in the first half of the year, there are reasons to temper expectations for the remainder of 2024. Long-dated commercial projects that were funded and began last year continued to produce revenue in early 2024, but the pace of backlog replacement appears to be slowing as commercial and multifamily new construction is tapering off. Higher financing costs and slower rental growth are a hurdle to new construction. The multifamily tenant turnover and rehab business slowed as vacancies grew and higher numbers of tenants renewed leases, spurred by flat or declining rents. We see this trend as largely short-lived as the market absorbs new capacity and rental rates settle after years of volatile growth, and likely return to normal by the first part of next year
  
  
• Despite challenges in the industry, the M&A market remains accessible. While the rapid pace of consolidation from 2020 – 2022 has leveled off, deals are still getting done, especially by strategic buyers as they remain aggressive before a full market rebound when private equity will return to the market. Galleher, acquired by Transom in December of last year, purchased Virginia Tile in June of this year. In July, Phoenix-based Big D Floor Covering Supplies purchased Tarkett’s distribution arm, Diamond W. AHF, formerly Armstrong Flooring acquired two West Virginia saw mills this year to increase domestic production capacity. Strategic acquirers are focused on deals with ironclad industrial logic at decent value as they take advantage of less competition from private equity in 2024.
  
  
• Potential sellers should take this time to get the house in order and prepare for a strong market. All indications suggest that 2025 will be a meaningful improvement over 2024. While potential sellers may be uninterested in selling off of lower-than-expected 2024 results, the time to start preparation is now. There is significant pent-up demand in the system and once rates begin to decline, things will likely turn around quickly. Easier financing and capital markets will make buyers more aggressive, and sellers will need to contend with a potential rush of assets to the market once the skies have cleared. We encourage anyone considering a sale in the next 18 – 24 months to begin preparing in earnest, enabling them to better time the market.
• Buyers – be prepared to move quickly once the market opens. It has been a buyer’s market for over a year now, with acquirers able to take their time and be disciplined on value. We expect competition in auctions to increase as private equity comes back to the table in an improving market. Buyers should begin having conversations with potential targets early, position themselves well to move expeditiously and understand they may need to pay more for good assets than they have in the past several quarters.

As a trusted advisor to owners and executives in the Flooring & Interiors space, we leverage our 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.