A pair of recent investor presentations provided a positive outlook for the HVAC business this year and into the near future. Trends in everything from sustainability to home ownership are moving in a positive direction for the industry.
The residential market has been the strongest performer since the pandemic started, and executives at Lowe’s Companies Inc. foresee that continuing. CEO Marvin Ellison new-home stock will take several years to grow to meet demand and more than half of the homes in the U.S. are more than 40 years old. That creates a strong market for repair and replacement of HVAC systems and other components.
What’s more, houses today function as more than a place to live. Consumers have undergone a mindset shift, Ellison said. They view their homes as a sanctuary that may have to serve multiple purposes.
Demographics are also fueling growth in the residential market, Elllison said. Household ownership among millennials is accelerating. Meanwhile, baby boomers are choosing to “age in place.” Moving patterns also look like they will help the industry. More people are moving to warm weather states, with Florida the leading destination. This means more demand for air conditioning.
“All these factors are expected to fuel a long-term shift to the home,” Ellison said.
A number of factors could slow residential sales this years. Dave Denton, Lowe’s chief financial officer, said another round of government stimulus checks remains unlikely. Also, the Federal Reserve is expected to stop quantitative easing and eventually start raising interest rates, which should make credit more expensive.
Commercial Market Shows Signs of Recovery
The good news is the commercial market is showing signs of recovery. According to the American Institute of Architects, the majority of architecture firms saw billings growth through the fall. This is considered a strong indicator of future demand for contractors.
The movement to homes that has benefitted residential contractors has created uncertainty for commercial HVAC contractors. There has been less demand for office buildings, for example. Other markets, such as warehouses, have boomed. Elliot Zimmerman, Lennox International’s chief operating officer for its North America commercial heating and cooling business, said the current situation reminds him of the market 10 years ago.
“Our expectation is that like after the Great Recession, pent-up demand will be released,” Zimmerman said.
There are already signs of that happening. According to real estate services provider Savills, commercial vacancy is down 180 basis points in Chicago. Office leasing activity in New York surged to its highest level since the start of the pandemic. Quarterly leasing in Atlanta remains above the five-year moving quarterly average.
New facilities are also going up that need HVAC. The Associated General Contractors of America report that non-residential private construction spending was up 6.7% month-over-month in November. Commercial construction, which includes warehouses and retail, saw a 15.1% year-over-year increase in spending.
Supply Chain Issues Remain
Supply chain issues will remain for at least the near-term. Still, the situation has improved since the summer, said Lennox CEO Todd Bluedorn. The company’s executives are taking some long-term steps to limit future disruptions, including moving more production to Mexico.
“Things are getting better, but we’ll still have some impact in the first half of the year,” Bluedorn said.
Both Lowe’s and Lennox expect to provide more supplies to contractors, regardless of challenges. Lennox plans on adding 30 new stores in 2022. Lowe’s plans on continuing to invest in its program for home improvement professionals, including redesigning its stores.
It’s uncertain how long the pandemic pressures will continue, but Bluedorn is very optimistic about the HVAC business. He said he expects it to remain strong not only next year, but for the next five years.