“We’ve had great strength in the commercial portfolio,” said Matt Schlegel, a commercial product manager at Johnson Controls. The company’s RTU plant in Norman, Oklahoma, “is producing more equipment than we ever have before, continuing to set our own internal records in terms of how much we’re able to produce. And all of that is being produced to meet our customer demand,” he said.

PROFESSIONAL STYLE: The Johnson Controls Pro rooftop unit is available in capacities ranging from 6.5 tons to 12.5 tons. (Courtesy of Johnson Controls Inc.)

August 2023 saw “significant growth” in production at the Norman plant compared to August 2022, and recent incoming orders signal even more production increases ahead, Schlegel added.

According to the Dodge Construction Network, which analyzes data in the construction industry, construction starts for commercial and multifamily residential buildings in the U.S. increased by 25% in 2022 over 2021. That followed a 16% increase in 2021 over 2020.

“There was tremendous growth in the construction industry over the last two, three years,” said Farooq Mohammad, vice president of commercial business at Rheem. “We saw an unprecedented amount of activity in HVAC commercial demand.”

The demand, in part, stemmed from the spending of federal pandemic relief money given to schools and small businesses, Mohammad said. Some relief money recipients, particularly school districts, made investments in new HVAC systems.

At Rheem, roughly 45% of RTUs sold are for emergency replacements, about 25% for planned replacements, and approximately 30% for new construction, Mohammad said.

“It’s been fairly consistent across the board,” he said.

New Mandates? No Problem

The rooftop market this year saw the imposition of new DOE efficiency minimums for commercial products, standards that had last been raised in 2018. Manufacturers, though, had several years of lead time to develop RTUs that met the 2023 minimums.

“It wasn’t a short turnaround by any means,” said Mohammad.

“All the Daikin products are already compliant. So we didn’t see this surge to get new orders, because we didn’t have a dilemma created,” said Will Ward, a product manager at Daikin Applied who oversees commercial package systems.

UP ON THE ROOFTOP: Daikin Rebel commercial rooftop units are available in capacities that range from 3-28 tons. (Courtesy of Daikin Applied)

“What happened with a majority of manufacturers is, what was standard efficiency in 2022 was removed from the product offering going into 2023,” Schlegel said. “And a previously higher efficiency became standard efficiency and became the entry-level product.”

Schlegel, however, added that, at Johnson Controls, there was a spike in demand for 2022 RTU models before the new standards kicked in.

“Certain customers did kind of take that view and decide, ‘We want to, at the end of 2022, stock up on as many of the old units as we could,’” Schlegel said.

Occasionally, he said, customers will ask whether a discontinued, non-2023-compliant model will be brought back.

“But for the most part, I would say we’ve done a really good job of communicating to our customers what was coming in terms of efficiency increases and the changes they would see,” Schlegel said.

An Evolving Market

The industry has also recently seen the enhancement of existing tax incentives, such as the 179D tax deductions for greater energy efficiency in commercial buildings and the 45L tax credits for qualified multifamily buildings. Manufacturers, though, say it’s too early to say whether those particular increased incentives have pushed builders toward more efficient RTUs. Some states offer financial incentives for decarbonization and energy efficiency as well.

Demand in the RTU market is changing, though, with an increasing number of buyers ordering rooftops with heat pumps for heating and cooling, rather than models with air conditioner-gas furnace combinations.

That trend, said Ward, is driven by the push for electrification and decarbonization; by state laws or local building codes in some areas that are designed to discourage the use of fossil fuels, like natural gas, in buildings; and by the ESG — environmental, social, and governance — goals of major corporations.

“There are more customers with net-zero initiatives that are pushing towards greener buildings. Many big clients, the Amazons, Apples, Walmarts of the world, are all publicly moving in the direction of net-zero initiatives,” Ward said.

“There’s demand for electrified solutions with heat pumps, heat pumps that perform with higher capacities at lower ambient conditions, and that really support the movement away from the use of natural gas in buildings,” he added.

“Heat pump demand (in RTUs) has been steadily growing,” said Mohammad. Regulations are “a big driver,” he said, but improving technology — improved performance in lower outdoor temperatures — is a factor, too.

“We’re really starting to see the percentage of heat pumps (in RTUs) that we sell increase,” Schlegel said. “That is linked to incentives, but a lot of that as well is linked to legislation in certain markets that is starting to either outright ban or heavily incentivize the shift away from gas heating.”

Johnson Controls expects that shift to continue — and increase.

“We do anticipate that that will grow over the coming years,” Schlegel said. “There are more and more states, month by month, that are passing bans or incentives to try to move the industry to heat pumps.”

Still, at all three companies, a/c-gas furnace combinations still make up a majority of the units sold.

Schlegel said Johnson Controls is seeing a demand for RTUs with higher-capacity heat pumps, up to 25 tons.

“To be able to push the envelope and offer higher tonnage in heat pumps for us is really exciting,” he said.

Manufacturers say more recent macroeconomic forces, such as rising interest rates, inflation, and the cutoff of pandemic-related financial support, haven’t affected the RTU market much.

“It hasn’t caught up to us yet, because there’s still so much pent-up demand,” Mohammad said.

“It’s starting to take shape, but it hasn’t been overly impactful at this point,” said Ward.