Relative to the post-Covid economic rebound beginning in 2021, the Construction sector declined leading into 2023, having been unable to recover from the overarching macroeconomic factors following the pandemic. High interest rates, decreasing consumer confidence, and an ever-rising unemployment rate have significantly impacted activity and revenue generation within the construction industry, namely commercial construction. Residential construction remained relatively strong through 2021 due to the lower interest rates at the time. This revenue stream slowly returned to a decline in 2022 as new construction for both commercial and residential projects came to a screeching halt.
As 2023 winds down, consumer interests have diverted from the idea of new build construction to a preference for improvement and remodeling, though demand for new builds remains commonplace for young homeowners. Over the next five years, restoration and infrastructure construction are forecast to lead Construction industry expansion as niche businesses will strategize new approaches to counteract the decline in traditional market demand.
The Benefits of Aging Houses & Cyclicality of Design
The share of aging houses across the United States signifies both the aging population’s rise in houses for sale and the contrast between new and old construction builds. Below, areas in red and orange represent greater opportunity for door, window, siding, and roofing replacements. Most homes built within these areas date from before 1980. Conversely, the areas in yellow and green are newer builds due in part to a combination of three key factors: population movement to the Western United States; lack of resources in the desert making population density slim; and reconstruction efforts in locations susceptible to recurring natural disasters.
Fenestration and Construction Opportunities in the US³
Based on Share of Aging Houses
There is a positive de-urbanization trend, with new homeowners electing to invest in new property builds and repairing or remodeling older homes with greater acreage¹. According to 2023 US Census Bureau data, 66% of US residents are homeowners, up from 65% in 2021. Specifically, the Midwest accounts for the highest percentage of home ownership per resident at 70.3%, the South follows behind at 67%².
Fenestration
In the fenestration industry a few objectives are actively discussed in the pursuit of new construction or remodeling opportunities: price, aesthetics, security, indoor air quality and energy performance¹. With windows and doors representing a significant element in the building process, there are a handful of trends that will affect the production and distribution of fenestration products over the next five years.
- Inventory Holding¹ – Supply chain disruptions following the pandemic have continued to strain build deadlines and material availability. Contractors and manufacturers have continued to remain innovative and creative when planning, especially since these logistical challenges are not forecast to dissipate any time soon. The current mindset for fenestration business owners is “buy and hold,” to acquire excess products now to defer supply chain bottlenecks and rising costs in the future. Construction materials are currently selling at a discount but are expected to rise into 2024. However, only 43% of remodelers are expecting to complete projects that include new windows and doors, meaning the discounted costs are being underutilized. Projections within the industry must remain conservative to withstand overestimations for new projects.
- High Impact Resistant & Energy Efficient Windows¹ – As energy efficient windows can lessen the financial strain of utility bills, consumers also value impact-resistant windows to bolster resale value and save money over time. Impact-resistant windows are beneficial in the reduction of potential natural disaster damage while acting as an additional security measure. Higher wind zone areas within the United States are expected to demonstrate increased demand for impact-resistant windows as 2022 marked the seventh consecutive year of above-average hurricane and severe weather activity.
- More Aesthetic Options¹ – Window function has improved greatly over the last several decades and now homeowners, architects and builders are seeking a greater selection of components available within the building project. Options include but are not limited to a wider range of colors, styles, and applications – with greater demand shifting toward products and brands that offer large window walls and convertible space capabilities.
Impact-resistant windows purport the efficacy of energy efficiency due to improved window seals and stronger glass panes. These two variables decrease the potential for household dust, the contamination of air by bacteria, air pollutants from outdoors (i.e., smoke, dirt) and household pet dander among others. Young homeowners and those with children tend to be more concerned about their residence posing a risk to health, safety, and accessibility.
New homeowners in the United States are forecast to increase fenestration demand, giving businesses within the industry more opportunities to generate revenue.
- Mergers and Aquisitions¹ – Though revenue generation is projected to increase, many larger industry players are looking toward strategic acquisitions as a means of decreasing overhead costs, generating greater margin gaps and achieving market share growth. Raw material prices have fluctuated and posed a challenge for manufacturers, contractors and consumers in 2022. Commodities like steel, PVC and resin increased in price causing smaller independent window manufacturers to get pushed out of the market as they are unable to compete with mass window production companies. Vertical integration of local window businesses, whether wood, vinyl, or metal, is expected to increase as larger players look beyond distribution network acquisitions. Niche glass manufacturing mergers and acquisitions have slowly increased in number over the last year with multiples ranging from 6.0x to 7.6x in the last 8 years.
Glass Product Manufacturing Made of Purchased Glass Multiples⁴
2006 - Present
Glass and Glass Product Manufacturing⁴
2005 - Present
Roofing & Siding
Following the COVID-19 pandemic, Roofing and Siding revenue grew despite the economic shutdown as low interest rates prior to 2022 enabled customers to start new construction and renovation projects. A backlog in orders has allowed for continued manufacturing and wholesaling as producers work to keep up with demand and supply chain disruptions. However, wholesalers have pushed up the price for materials as roofing and siding manufacturers grapple with material shortages and additional supply chain disruptions.
In conjunction with the fenestration industry, demand from residential spending on home improvements continues to generate the largest portion of industry revenue. In the short-term, any interest rate hikes by the Fed will continue to put a strain on the purchase of raw materials and construction projects both new and restorative.
Local Distributors Losing Steam
The roofing and siding industry is highly fragmented, with products including nonwood roofing and siding, insulation materials, vapor barriers and gutters among others. As the roofing and siding industry saw growth during the COVID-19 pandemic, the need for local wholesalers increased immensely.
This brought a surge of employment opportunities and chances to gain market share within a $60 billion industry. As Q3 2023 ends, the once vibrant local economies are being forced to downsize as a means of combatting the volatile cost of overhead and raw materials.
Industry Outlook
Demand from construction will rebound though concerns regarding the cost of borrowing on new financing for housing starts will remain. High interest rates and historical inflation rates will continue to limit investment, more specifically, for home improvements⁵.
As these economic variables continue to enable a downturn in industry production, price-based competition among wholesalers will intensify, forcing the underperforming businesses to merge with their more profitable competitors. Similarly, wholesalers will need to find ways to cut costs to salvage profits as large competitors acquire competing businesses. Both buy- and sell-side activity is forecast to remain strong within the construction industry as the overall industry expects only a slight CAGR increase of 0.7% into 2028⁵.