Shipments of HVAC equipment increased marginally in 2012, reported the Air-Conditioning, Heating, and Refrigeration Institute (AHRI). Year-to-date combined shipments of central air conditioners and air-source heat pumps increased 1.9 percent, while U.S. shipments of gas warm-air furnaces increased 1.2 percent.

This slight uptick in sales echoed the predictions of many manufacturers who believe that the economy will remain a concern through 2013. As Bryan Rocky, director of residential product management, Johnson Controls Inc., noted, “Economic uncertainty translates to reluctance or an inability on the part of many families to commit significant sums of money to the purchase of HVAC equipment. However, growth segments do exist, and if 2013 is a slightly up year for the industry, I think everyone will be encouraged.”

Home is Where the Heart is

One segment of the market that is expecting surprisingly strong growth this year is residential new construction. As Mark Wagner, vice president of sales, Trane, acknowledged, “For the first time in many years, we’re seeing housing sales going up, especially in previously high-volume areas of the country like the Gulf Coast and Southwest. We’ve also seen an increase in new home builds and multifamily construction. All-in-all, this has given us reason to be optimistic.”

Multifamily housing and rebounding home sales in hard-hit areas like Texas, Arizona, and Nevada will definitely provide opportunities this year, said Rocky. “We’ve also experienced a spike in furnace sales in the Northeast as a direct result of Hurricane Sandy. Those areas still recovering from the storm will likely contribute to increased air conditioner sales as warm weather approaches and homeowners replace damaged cooling systems.”

Joe Linsenmeyer, director of residential marketing, Emerson Climate Technologies, noted that while the overall economy is on a slow growth track, residential new construction starts have been very favorable, and it appears that the housing markets are starting to recover. “This new construction should help the HVAC industry recover at a higher rate than would be expected from looking at the overall GDP [gross domestic product].”

As for existing houses, manufacturers are hoping that homeowners will finally start to feel more comfortable about the economy and upgrade their older HVAC equipment. “During the recession, a large number of homeowners hung on to their aging HVAC systems by repairing them, rather than replacing them,” said Tom Huntington, president and CEO, WaterFurnace Intl. Inc. “We believe that as the economy recovers, there will be great opportunities as those homeowners look to finally upgrade to new higher-efficiency equipment.”

Which is why Huntington believes that interest in geothermal systems will continue to grow. “Rising natural gas prices, along with concerns on the heels of summer drought and abnormal winter weather, have renewed consumer interest in climate change. Also, electric utilities are recognizing the many ways that geothermal heat pumps benefit their business. And, the 30 percent federal tax credit for geothermal systems will remain in effect until 2016, which should continue to help sales.”

As the effects of the economic downturn fade, David Swift, president and CEO, Goodman Global Group Inc., believes that homeowners will invest in home comfort and energy-efficient HVAC systems again. “Whether a homeowner repairs or replaces an HVAC system depends on economic conditions. Homeowners who are economically confident are more likely to invest in home-comfort systems rather than simply fix their current system as inexpensively as possible. Currently, homeowners do not enter the HVAC marketplace solely to improve the efficiency level of their existing system; they enter due to a problem with the system.”

Some are hoping that this year’s high-efficiency tax credits, although smaller than those offered in 2010, will help boost sales. They may not help much, though, as consumers remain in a low-cost frame of mind and are looking for the most cost-effective solutions to their HVAC needs, said Linsenmeyer. For this reason, “R-22 dry-charge units are still a viable option in spite of recent increases in the price of R-22.”

Demand for Ductless

While sales of conventional HVAC equipment remained largely unchanged last year, ductless mini-split systems experienced double-digit growth each of the last three or four years, said Rocky. “Although the units represent a relatively small percentage of overall air conditioning or heat pump sales, they have become a more acceptable cooling solution, not just for replacement or add-on applications, but also for new construction. That is a real trend that’s going to impact everyone in the industry.”

Mark Kuntz, vice president of product development and engineering, Mitsubishi Electric U.S. Cooling and Heating Division, agreed, noting that ductless and variable-refrigerant flow (VRF) technologies are one of the fastest growing segments of the HVAC market today. “We were fortunate to experience dramatic growth each quarter throughout the recession, across all geographical areas in the U.S. We anticipate continuing growth throughout 2013 and have set ambitious sales goals for ourselves that we expect to achieve.”

Trane has also responded to the increasing demand for mini-splits by unveiling a new line of ductless products late last year, which Wagner noted are achieving high-volume sales in some areas of the country.

Ductless technology is widely used around the world and is well on its way to becoming a mainstream product in the U.S. Growth will continue, said Kuntz, as more end users and contractors become familiar with the products and realize that ductless technology is easy to operate, install, and maintain.

“Although the technology is advanced, all the sophistication is inside the equipment itself and does not impact the installation and operation,” said Kuntz. “Additionally, new ductless capabilities enable the use of ductless heat pumps in very cold climates, expanding the opportunities for contractors and end users to benefit from this technology.”

While many in the industry are excited about the growth of ductless sales, they are also interested in seeing how Daikin’s acquisition of Goodman Global Group Inc. will affect the market. Daikin, which has long been known for its ductless systems, is now the world’s largest HVAC manufacturing company, and Swift noted that the entire company is working to deliver new products along with several product enhancements to its current lines for the North American marketplace. “Further, we anticipate the expansion to our U.S.-based manufacturing operations to include HVAC products that were not part of the Goodman family prior to the acquisition.”

Commercially Speaking

On the commercial side, initial industry forecasts indicate that construction spending will be slightly more positive in 2013, with growth in the mid-single digit range, said Cindy Sparrow, vice president of marketing and product management, Lennox Commercial. “The commercial unitary market has seen positive increases over the last several years. This year, segments such as retail and hotels are expected to see even greater increases, while new construction tied to public funding such as education is predicted to continue to decrease.”

The commercial replacement market remains positive, although Sparrow noted that the current economy has resulted in more of a repair-rather-than-replace mentality. She hopes that pent-up demand will cause more customers to buy new equipment this year, particularly when it can cost almost as much to repair an older unit as it does to purchase a new one.

However, she added that continued economic uncertainty has resulted in particularly strong growth in the company’s Rapid Replacement™ program, which delivers emergency replacement equipment the same day for customers within 100 miles of a stocking location when the order is placed before 11 a.m. Delivery is available within 48 hours for customers located more than 100 miles away.

Manufacturers will continue to face a tough economy, said Sparrow, noting, “Customer service continues to be key during this environment. How can we continue to improve service for our customers is a continual question we ask ourselves.”

Looking Ahead

There is no question that general concerns about the economy and confusion about new and pending regulations will likely continue to affect the industry this year. This may lead consumers to continue to purchase HVAC solutions with the lowest initial cost, even though research indicates that they may prefer to purchase a high-efficiency system, said Linsenmeyer. He added that the high price of R-22 may drive some consumers to purchase full R-410A equipment replacements, “However, it may also drive the very low-cost buyers to other options like window a/c units.”

Another trend this year may include the demise of oil furnaces, said Rocky. “The cost of fuel oil continues to be very high, and as a result, I think we are headed toward the visible end of oil furnaces in the next five years, unless the price of fuel oil drops dramatically.” He predicts that the geothermal market will continue to grow, as will the use of heat pumps in the central U.S., due to the high cost of electricity and propane, especially in rural areas.

As for other opportunities, smart-home systems seem to be gaining traction amongst sophisticated consumers who are tech-savvy and constantly connected, said Wagner. “That’s why we’re positioning our business to meet the increasing demand for smart-home systems that allow homeowners to not only remotely monitor their home comfort and security, but control their thermostat and manage their energy usage from anywhere in the world.”

Home automation is, indeed, a significant trend, said Kuntz, who noted that zoned temperature control is part of that strategy. “Customers are demanding more control of their systems, and we’re seeing a rise in solutions to increase the ease with which end users can customize and interact with their HVAC systems through smartphone devices or through their computers remotely.”

Advanced technology will continue to make its way into all HVAC products, said Swift, as evidenced by the quick adoption of communicating controls.

“A few years ago they were considered farfetched, bordering on science fiction. Today, communicating control technology allows a high-efficiency system to be installed with the same or greater ease than a standard, minimum-efficiency system. I anticipate that even more energy-saving and energy-efficient enhancements will be available
to dealers over the course of the
next two years.”

Overall, most manufacturers believe it will be a decent, if not a spectacular year. As Rocky noted, “The good news is that there is some demand, and most manufacturers are taking similar steps as they prepare to meet this demand. They’re looking at their distribution channels, their quality, and the performance of their products, making the necessary adjustments to ensure flexibility and their ability to meet changing customer needs.”

SIDEBAR: Regional Standards Breed Uncertainty

Bryan Rocky, Johnson Controls Inc., is happy that the Department of Energy (DOE) is pursuing a lawsuit settlement that would vacate its regional efficiency standards concerning furnaces. If the settlement is accepted, a May 1 implementation deadline will be eliminated. “The associated risk is that DOE will start over in the development of efficiency standards and is not in any way bound to again create regional standards. Instead, the agency could impose a single standard for equipment efficiency.”

Regional efficiency standards for air conditioners, heat pumps, and packaged units are set to take effect on Jan. 1, 2015, but if these, too, are vacated due to industry challenges, DOE is free to set either regional standards or national standards for each of these pieces of equipment, said Rocky. “Uncertainty is the big risk.”

He added that these circumstances made it difficult for manufacturers to plan through the end of January, just a few months before the furnace standards were scheduled to take effect, only to find the standards may not apply come May. “Most manufacturers already put plans in place for inventory control and sales. Meanwhile, many customers have not ordered equipment, because they are not sure what to do. What we may see is a little bit of a bump in furnace sales as contractors realize they can sell 80 percent furnaces again. On the other hand, they have become accustomed to not ordering equipment, so maybe they won’t order anything they don’t think they can sell.”

Overall, Rocky thinks the implementation of regional efficiency standards for furnaces will be delayed, which may help the industry in the short term as contractors can go back to selling 80 percent furnaces. “However, the uncertainty surrounding standards for air conditioners, heat pumps, and packaged units will most likely hurt the industry, especially if we have to go through the process for establishing standards a second time.”

Publication date: 3/18/2013