Residential Building Products
Date June 2016
By The Numbers
- Favorable homebuilding and remodeling trends have buoyed values for building products wholesalers
- Major retailers continue expansion into pro builder market
- Industry revenues: U.S. wholesalers – $85.9 billion (lumber); $38.6 billion (roofing, siding and insulation)
- Major product categories: Lumber, roofing, siding, millwork, insulation
- Significant companies: Builders FirstSource Inc., BMC Stock Holdings Inc., ABC Supply, Beacon Roofing Supply Inc., Allied Building Products, SRS Distribution Inc.
- Market share of top: The top four lumber wholesalers are expected to generate less than 10 percent of industry revenue in 2016
- Recent sales trends: Revenue of lumber wholesalers is estimated to grow at 3.9 percent in the five years to 2016 while roofing, siding and insulation wholesalers enjoy 7.1 percent growth (IBISWorld)
Homebuilding and remodeling up: Seasonally adjusted housing starts fell 0.3 percent in May while residential building permits, a leading indicator, rose 0.7 percent over the prior month. While this metric was up for the month, building permits authorized during April and May lagged 2015’s pace, indicating potentially softer demand for building products heading into the third quarter. Year-to-date, seasonally adjusted housing starts were 9.5 percent higher. These numbers continued to support the housing industry’s steady recovery since 2011. However, some analysts point to the recent see-saw in housing starts as a sign of an idling recovery. With interest rates in June at their lowest in three years and unemployment at 4.7 percent, economic conditions remain generally favorable for home ownership. These positive trends are expected to drive demand for building materials. However, higher wage growth is needed to support a more substantial uptick in growth.
Regionally, the West recorded a 14.4 percent monthly increase in new privately-owned housing starts during May followed by a 1.5 percent increase in the South. Midwest starts fell 2.5 percent and Northeast starts declined by a notable 33.3 percent. Lenders should be aware of variations in regional demand as most building supplies are consumed locally due to high transportation costs.
In conjunction with new housing demand, remodeling rose during the first quarter of 2016 and spending is expected to increase 8.6 percent by year end, according to the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University. The Leading Indicator of Remodeling Activity (LIRA) examines impairment of repair activity to the owner-occupied stock of the national residential remodeling market. Strengthening home values and home sales are encouraging owners to invest in larger improvement projects, and ready access to affordable credit is making the decision easier for some.
Lumber prices strengthened during Second Quarter: One of the largest and highest recovering categories for many building products distributors is lumber. Random Lengths’ framing lumber composite price had trended up since February 2016; however, it began falling at the end of May. A similar trend was observed for structural panel products. The average price of framing lumber during the first six months of the year was down 2 percent year-over-year; structural panels were down 4 percent. Composite prices were lower during the first quarter compared to 2015 but rose during the second quarter.
Lenders should keep in mind that while industry publications can provide regional market trends, actual printed prices are not necessarily representative of transactional activity. Prices generally represent full truckload quantities with FOB mill freight terms. Long-term supplier relationships, volume discounts and freight logistics can impact the actual gross recoveries in the event of an orderly liquidation.
Ranking recoveries: While other inventory categories are not as straightforward to value, there are some general rules of thumb to keep in mind. Shingles, insulation, wallboard and other commodity-like products are commonly standardized and widely marketable, meaning that gross recoveries are typically strong. However, drywall is typically lower recovering because it has slim margins, has high transportation costs and is prone to breakage. Other items such as fasteners, moldings, windows and doors are marketable but have specific applications, resulting in higher discounts. The least marketable and lowest recovering categories include anything that is colored such as siding, composite decking or moldings with custom profiles. While there is a market, it’s much more limited and buyers demand steep discounts.
Some building products are made-to-order including roofing and flooring trusses, custom millwork, kitchen countertops and bath vanities. Special orders can be high or low recovering depending on the circumstances. If they are backed by an order, they usually have a high recovery value because it is assumed the customer will take them for a project that’s underway. However, special orders that are abandoned, refused or returned are typically very low recovering. Lenders should look to appraisers to understand the nature of special orders. It is recommended that any inventory with a deposit against it be made ineligible. Work that is in-process, such as custom hanging doors or roof trusses, is not typically converted. Rather, it’s assumed these items would be sold to competitors at a steep discount.
Expenses can add up: In general, gross recoveries are high for building products distributors, but oftentimes the biggest surprise for lenders is the liquidation expenses that, in some cases, can be as high as 20 percent. Most sell to either retailers or pro builders, which rely on delivery of products to stores or job sites. In such liquidation scenarios, costs to maintain that delivery fleet are typically included in the liquidation expenses and can be as high as seven percent. For companies that rely heavily on salespeople to maintain customer relationships and market products, an additional commission expense may be built into the liquidation scenario. Depending on whether buildings are owned or leased, real estate may also contribute to the expense burden.
Seasonality swings: Unsurprisingly, building products is a very seasonal business; April through October is typically the high selling period during which time as much as 70 to 80 percent of sales may occur. However, variations in the weather can shift this timeframe from year to year, which is why a high-low analysis is always recommended. Values can swing by as much as five to fifteen points between seasons. Appraisers can help lenders understand the additional risks associated with low season liquidations to mitigate exposures.