Distributors Discuss the Heat Pump Market
May 26, 2008
In spite of a slow economy there remains some guarded optimism among HVACR distributors that the unitary and light commercial heat pump market will at least hold its own in 2008. But it appears to have flattened out for now.
At least those are the opinions of The NEWS’ distributor consultants. Their opinions are reflective of the most recent shipment totals, reported by the Air Conditioning, Heating and Refrigeration Institute (AHRI). AHRI reported that in February 2008, heat pump shipments totaled 123,122 units, a 10 percent drop from the same month a year ago.
For the year-to-date, heat pump shipments totaled 248,611, a 2 percent drop compared with the same period last year.
The reason for optimism and skepticism at the same time is because of the current residential and commercial new construction industries. Mike Michel of R.E. Michel Co. Inc. put the heat pump market into perspective, stating that in the 22 states his business serves, residential heat pump sales are down and light commercial heat pump sales are up only marginally.
“Our geography encompasses both strong and weak heat pump markets,” he said.
“On the residential side, our customers’ replacement business is soft. Opportunities are limited, and in certain cases, we see contractor tech positions being eliminated. Light commercial gives us a steady sales line because of committed inventory at strategic stocking depots as well as our central distribution facility that supports immediate replacement opportunities.”
Distributor consultant David Williams of Gateway Supply Co. sees a slightly opposite trend in his South Carolina market. “We are in a strong heat pump market and it is becoming stronger, especially on the residential side of the business,” he said.
“The reason for this is the ever-increasing gas prices as well as the seemingly higher performances from the newer R-410A heat pumps. The larger electrical demand of heat pumps is not a real factor on the residential side.
“Our sales are basically flat from year to year on light commercial heat pumps. I would have thought that the commercial heat pumps would have grown with the inflated gas prices, but I believe that owners are factoring in the installation cost; and since heat pumps require larger electrical services and wire size, we are still seeing the gas/electric units holding their market position.”
Michael Senter of ABCO Refrigeration acknowledges that the trade is challenged by current economic conditions, which should cause distributors to “intensify their sales efforts as well as to work diligently to identify features, benefits, or special product niches where we can increase sales in a market that possesses far fewer opportunities for growth than in the previous four years, especially with the dramatic downturn of residential new construction and the significant decrease in existing home sales.”
VIEWS VARY ON THE CURRENT MARKETSOne of the new members of the consultant panel, Mike Riley of Riley Sales, Plymouth Meeting, Pa., said that heat pump sales have been trending upward in his region of the country, piggybacking on the big jump in 2007 sales.
“Our sales of heat pumps are up 15 percent over last year to date, and I do see a trend as they were up 25 percent in 2007 as well. Oil and gas costs have people concerned. Electric does not seem to be as volatile.
“But we are in a weak market in the Northeast; it still gets below 32°F in the winter and the pumps are not as efficient. On a cold winter day, people like to feel heat coming out of their vents.”
Riley believes the HVACR trade as a whole could do a better job of selling efficiency and comfort, which should result in higher heat pump sales. “Our equipment sales overall have been affected as people are surprised by the cost of new 13 SEER units,” he said. “New units are much more expensive than customers were used to paying when they installed their equipment years ago; so now they choose to repair.
“As an industry, we have not done a good enough job showing the return on investment for installing high-efficiency equipment, let alone 13 SEER. With declining home values, new efficient equipment is a much better value than a home theater in your basement. Homeowners can feel good about themselves because they are doing their part being green and lowering the carbon footprint. They feel good, are more comfortable, and are saving green money in the long run.”
Kent Kendricks is in a strong heat pump market. The distributor from the Dale Supply Co. in Tennessee said that electric rates are holding their own in the area and that with the efficiencies of today’s heat pumps, customers are more frequently choosing either the straight heat pump systems or a heat pump hybrid system using gas heat as a secondary heating option.
But in spite of that optimism, “Sales of unitary heat pumps for the first four months of 2008 were flat,” he said. “The trend that we have seen over the last two quarters leads us to believe that the sales of all products will continue to be flat through the summer. With residential new construction at a stand-still, the replacement market will struggle to make up the difference.”
Kevin Morris of cfm Distributors Inc., Kansas City, Mo., is also a new member of the consultant panel. Morris said the trends tend to vary depending on the utility programs available in his market. He added, “Generally heat pump sales continue to be the same level in those markets that have favorable heat pump rates. Heat pump rates (especially those set to establish parity between nominal 13 SEER pumps and 80 AFUE furnaces) seem to be more important than rebate programs.
“Sales depend on the programs. Even within cities, where geography changes the regulation, the picture is variable. For example within Kansas City, heat pump sales as a percentage vary due to the rate (regulatory differences), which are strong on the Kansas side with our local utility, but weaker on the Missouri side where there is not as favorable a rate structure.
“With that being said we are seeing a slight trend up.”
The third new member of The NEWS’ distributor consultant panel is John Staples of US Airconditioning Distributors, City of Industry, Calif., which serves nine states in the West and Southwest United States.
He said that the media is partly to blame for the downward trends in heat pump sales throughout his markets. “Sales are down about 10 percent,” he said. “Residential new construction is off about 50 percent, light commercial is down about 5 percent, and the replacement market is flat.
“The economy is slowing, with all the bad press. Companies are pulling back and homeowners are only buying when they have to. At this time I see this trend continuing.”
Senter sees a slowing of commercial new construction in metropolitan New York City, “where so much of our economic welfare is determined by the performance on Wall Street. With the commercial banks and investment banking community facing wrenching economic turmoil in the wake of the subprime mortgage crisis, we are seeing a slowing of new projects in the works for near-term future development.”
A BREAK IN THE CLOUDS?Consultant panel members believe that the remainder of 2008 and into 2009 will be a mixed bag for the heat pump market.
Kendricks said his customers are still seeing a high number for replacements being made as home and business owners are opting for the higher-efficient units and the energy savings. “The repairs being made are small and/or routine maintenance,” he said. “When larger repairs are needed, most consumers are opting for a new unit.
“I believe the current trend will carry through the first quarter of 2009. Many homeowners are electing to make life more comfortable in their current home. This will increase the number of units sold in the replacement market. Still, with the soft new construction market, a net decrease could be seen versus 2007.”
Riley sees an uptick in the geothermal heat pump market, a trend that will continue, “until the United States has a sensible energy policy.”
Morris sees a growing heat pump market because of the dwindling supply of fossil fuels and the related costs. “I think that heat pumps will continuously evolve to take over the air conditioning market,” he said.
“In a world that is experiencing tighter and tighter fossil fuel supplies, reverse cycle [heat pumps] are the most cost-effective solar heating system available in the world. When mated with a fossil fuel system, they provide the best use of both sources of energy for a truly long-term comfort solution.”
Williams said that his light commercial market will continue to remain strong, adding, “Commercial work in general has shown little or no slowdown as compared to the residential market. I think servicing an existing unit is always the end user’s first option, and I do not think this is different from the norm. In my opinion the commercial market is status quo with the exception of end users trying to use R-410A refrigerants as much as possible.
“Light commercial has remained status quo because light commercial units are used on small to mid-size retail establishments. These types of establishments must maintain conditioned spaces in order to keep their businesses going, therefore this is why this market is less affected by the slow economy. Of course, the longer the economy slumps the more these units will be affected.”
Michel said his company is not “hunkering down to weather the storm” despite the economy. He plans to aggressively look for new business opportunities. But he is also realistic about the overall economic outlook.
“Weak residential sales are the result of a contracted residential new construction market and a stagnant economic situation that adversely affects the add-on/replacement market, Michel said.
“We do not see a marked improvement for residential new construction this year and a slow recovery could put that well into 2009. The current economic situation, including mortgage foreclosures, is keeping available home inventories high, which doesn’t bode well for an on- the-horizon uptick in residential new construction.
“Consumers, not knowing if they are going to be able to put groceries on the table or gas in the car, aren’t anxious to replace or upgrade home comfort systems. 2007 U.S. Census Bureau statistics show a slight decrease in expenditures for home improvements. Adjust that for inflationary price increases and I bet that decrease is more significant. I am also willing to bet that those same first-quarter 2008 statistics show a more dramatic decrease.
“The economic situation will determine how long the current trends last. Oil price speculation and the resultant mess caused by ill-conceived alternative fuel policies have sent everyday commodity prices escalating. Until commodity prices stabilize and then remain stable, our industry is most likely in for a tough, long haul.”
Senter noted that in the early 1970s the local electric utilities had offered attractive programs in the residential market to provide incentives for homeowners to switch from gas- or oil-driven systems to heat pumps driven by electricity. However, once the incentives were exhausted or eliminated, the costs of operating heat pumps once again increased.
He said, “Today, heat pumps again have an opportunity for popularity because the costs of operating fossil fuel-based systems and electricity based systems are so much closer. Today, some electric utilities again are offering incentives and are making sure to be clear about the realistic benefits.”
Senter added that new technology is helping to shed a new light on heat pump popularity. “New generation multiple evaporator ductless systems, driven by inverter compressors, have achieved remarkable reductions in the ambient temperature at which these systems run at 100 percent capacity,” he said.
“The practical efficiency of these heat pump systems is further enhanced by the remarkably precise zoning capabilities they offer end users, who literally can control temperature room-by-room. Demand for these transformative alternatives, all of which are charged with R-410A, has been growing by double-digit percentages in each of the past three years as well as in 2008.”
Publication date: 05/26/2008