The global pandemic hit many parts of the economy exceptionally hard, but the housing and remodeling sectors have rebounded after a plunge at the start of the crisis.
By Robert Isler
In what can only be described as a perfect storm, in 2020 the U.S. suffered through the worst racial strife in 50 years, the worst pandemic in 100 years, and arguably the worst internal/political divisions since the Civil War. Closer to home for the kitchen and bath industry, it was a year of frightening disruption and disarray that no one could have anticipated, followed by a recovery that surprised most in its swiftness.
The year began with high hopes as 2019 ended with a strong wind at its back. NKBA’s annual Kitchen & Bath Market Outlook for 2020 called for total industry sales of $158 billion, a 6.9% increase over the previous year. Industry fundamentals were as solid as they’d been in years, and NKBA members could hardly keep up with jobs in the pipeline.
Then came COVID-19.
Sales and Sentiments Plunge
As quarantines and other restrictions led to temporary store and showroom closures, supply chain disruptions and client decisions to postpone or in some cases cancel kitchen and bath projects, the situation looked bleak. Several NKBA studies captured the mood. In the first of two unplanned but necessary updates to the annual K&B Outlook — following an initial release that was quickly rendered obsolete — industry size was projected to decline by almost 12% from 2019, and by more than 17% from initial 2020 projections. In the Q1 KBMI release, members rated future industry projections at a dismal 19.8 of 100. This compared with a 76.6 rating in the fourth-quarter report for 2019. In other words, as bad as things were in the March/April time frame, expectations were for the situation to get a whole lot worse.
Sharing Intelligence
Given the urgency of the situation and the need for members to compare notes on concerns and how they might be addressed, The NKBA Benchmark Sentiment Survey: Special COVID-19 Edition was created. It launched on March 18, just a week after the virus was officially declared a pandemic. Nearly 1,000 members participated. Not surprisingly, it revealed that every sector within the kitchen and bath industry was hit hard, as health risks to clients and workers, along with a wave of economic uncertainty, dominated the conversation.
Members were quick to react to the new reality. Nine in ten said they were postponing or canceling large events as well as cutting back on trade-show attendance. Eight in ten restricted employee travel and were pulling back on face-to-face meetings in favor of phone or Zoom. Many noted they were reaching out to clients on a more regular basis to keep the lines of communication open, while some used the down time to update their websites or learn new technologies to remotely move projects along as quarantines gripped the nation. The seriousness of the situation was not lost on anyone. One client noted, “This is the first time in 71 years of family business that we are NOT ALLOWED to do what it takes to survive an economic downturn.” Another said, “Uncertainty and worry are on the faces of every employee. They do not know how to act, and are not yet able to turn fear into courage.”
Proactive Initiatives Serve NKBA Members
NKBA soon followed with two ongoing initiatives to better understand the extent of business disruptions and to share advice on relevant topics. The first, NKBA Pulse, continues to solicit member feedback and monitor sentiment on the pandemic’s impact on a regular basis. The Pulse, initially a weekly and then a monthly tracker, began in late March and has continued throughout the year. The 16 surveys to date have confirmed an industry that has been steadily digging itself out of a hole. At its worst on April 9, COVID-19’s impact was a concerning 8.2 out of 10. It dropped to 5.3 by November. December showed the first uptick in eight months, to 5.5, as the pandemic again picked up steam.
The second, “Brave New Business,” launched on April 2 and is a half-hour webinar series hosted by NKBA CEO Bill Darcy and featuring experts from different segments of the industry. It began as a weekly forum designed to bring topical news on subjects like how various K&B enterprises were dealing with the shutdowns and subsequent disruptions in business and in the supply chain; what protocols they’d follow when restrictions started to lift; best practices in challenging times; the rapidly changing economic picture and how it was impacting the sector; changes in design, layout, smart-home technology and wellness as a result of the pandemic, and more.
Among the timely topics are “Navigating the Stimulus Package,” when PPP funding opportunities were first announced; “Harnessing the Potential of E-Design”; “Working with Showrooms in a Virtual Environment,” at the height of physical shutdowns and quarantines, and “Measuring the Impact — How Will Home Design Change?” when it became apparent that significant increases in time spent at home were necessitating fresh ideas for kitchen and bath design.
COVID-19’s Impact on Revenue
As the year continued, the picture for kitchen and bath grew brighter, although not without setbacks or concerns. The second update of the 2020 Outlook, released in September, projected annual revenues of $139 billion. Although still 6% below the $148 billion generated in 2019, it was a significant improvement over the double-digit loss projected during the first update. While lower-cost DIY projects have been on the upswing and mid-range renovations are feeling the pinch, compared with many other industries, the kitchen and bath remodeling sector has been fortunate. Revenues for Travel & Tourism are expected to be down more than 40% for the full year, with sales for hotels likely to be halved. A midyear forecast set expectations for between 20,000 and 25,000 retail store closures in 2020, with 55% to 60% of them in malls. And, of course, live events — theater, concerts, pro and college sports and trade shows — have been decimated.
Positive Drivers for Housing and Remodeling
How did the K&B sector dodge a bullet that squarely impacted so many others? The short answer is that the same home quarantine requirements that sharply limited revenue opportunities for others were a boon for kitchen and bath. House flaws became more noticeable and new work-from-home patterns demanded changes in home design.
A Nov. 20 report by Deloitte Insights, “Why is the housing sector booming during COVID-19?” offers additional perspective. It identifies three trends: first, higher wage earners — those in the top 50% in salary — have been driving housing demand; second, record low mortgage rates are helping to fuel it, and third, Millennials entering the home-buying marketplace for the first time are raising the competitive stakes.
Many higher wage earners work remotely and therefore weren’t financially harmed by the pandemic to the degree that others were. In fact, as COVID-19 led to lower spending on travel, entertainment and various services, more money became available for upgrades and even for second homes. According to the NKBA Kitchen & Bath Market Outlook September Update, another driver was the 22% of homeowners who said they need to remodel soon due to COVID concerns so they can feel comfortable in their homes. Comments such as “We need more functional space” and “Time at home has made us aware of all the things we don’t like about our house” tell the story. As mortgage rates dipped below 3%, it made homeownership even easier. In fact, according to that September Outlook report, based on those low current rates, an additional 4.5 million households now qualify for a $200,000 mortgage.
Evidence has been mounting that Millennials have started to take a serious plunge into home buying. Basic math dictates that as more people compete for a limited number of homes on the market, house prices will increase. This, in turn, leads to more home equity for current owners, who then are more likely to opt for remodeling. It’s the polar opposite of the vicious cycle.
More Good News
As 2020 progressed, a series of economic releases helped explain our industry’s positive direction. Existing home sales rose 4.3% in October to an annual rate of nearly 7 million units, which is a 15-year high and up over 26% compared to 2019. Houses remained on the market an average of 21 days in October vs. 36 days for the same period last year. Increased demand translated into new housing starts as well, which are projected to be up nearly 7% over 2019. Homeownership rates climbed to 67.4% in Q3, not far below the 68.8% peak of the 2005 housing boom.
On the negative side, lumber prices have increased substantially, as have hourly wages, which are 4.5% ahead of last year. This trend will inevitably price more people out of the market and put the brakes on today’s accelerated growth.
In November, the Q3 KBMI was released. Although supply-chain disruptions continue to be a significant challenge, with delays of 60 to 120 days, most of the feedback suggested a strong finish to the year. After two consecutive quarters of contractions, members gave the K&B industry a rating of 61.9, well within expansion territory. The sales outlook turned positive as well. Although the full year is now projected to show a modest 1.1% gain year-over-year, that is a clear improvement over the 4.4% shortfall expected by members in the previous KBMI survey and a vast improvement over the nearly 14% lower projection provided in Q1. Expected future business conditions, which, as cited earlier, came in at 19.8 in Q1, had ballooned to 66.9 by Q3, almost the same as the future confidence expressed a year earlier. The survey also revealed that half the respondents say demand has returned to normal, retail traffic is up 8% year-over-year after having been down by 75% in Q1, and nearly 6 in 10 designers say their future demand pipeline now exceeds pre-pandemic levels.
Is the industry out of the woods? No. As COVID-19 almost assuredly will get worse before it gets better, near-term restrictions and even shutdowns could be in the cards again. But everything that has already occurred over the course of this year has made the industry stronger and better prepared.