Building Products & Materials Newsletter
Having been inundated with several years of negative press on the state of the housing market, it’s no surprise that many industry participants remain pessimistic on the out- look for the building products and materials industry. The most followed housing in- dicators (or at least the ones that garner the most national attention), such as housing starts, prices, and sales, continue to paint a picture of severe oversupply, market stress, and stagnation. The issue with many national indicators is that they can be skewed by a relatively small number of large, underperforming markets. Housing markets, how- ever, are predominantly reflective of local economies – not national trends – so the performance of regional and local building products and materials companies often varies widely depending upon the specific markets served. While many markets his- torically known for strong housing production will continue to struggle for the foresee- able future, there are a number of housing markets that have begun to demonstrate signs of recovery.
Not surprisingly, the poster children of the housing bubble – Arizona, California, Flor- ida, and Nevada – remain in the worst shape of all U.S. states, with high home vacancy rates and steadily falling home prices. For example, a staggering one-in-five homes in destination cities in Florida such as West Palm Beach, Boca Raton, Miami, and Naples remain vacant. Due to the relative attractiveness of the aforementioned states as well as other highly sought-after markets (e.g., Atlanta, Washington D.C., numerous coastal cities), these areas experienced rapid population growth in the 1990s and early 2000s, and were subsequently overbuilt. Fast forward to the early years of the housing down- turn, and the severe oversupply of vacant homes available for sale in these markets put significant downward pressure on home values, which contributed in large part to in- creased foreclosures. Completing the cycle, millions of foreclosed homes have since made their way back onto the market over the past three years, further exacerbating the supply-demand imbalance.
More Regional Pain to Come
A handful of states in particular – California, Florida, Georgia, Michigan, and Nevada – will likely continue to weigh down national housing statistics by offsetting gains in other regions for years to come. As illustrated on the following page, more pain is likely to come to these core home-producing states, as approximately 30% to 60% of the residential properties with mortgages in these states maintain negative equity value and are thus at high risk of foreclosure. More distressed homes flowing into the “visible” inventory of homes listed for sale will contribute to the ongoing supply- demand imbalance that has plagued these states in recent years, as well as result in further price declines in 2012.
Compounding the aforementioned oversupply issue will be continued weak demand in these states, each of which currently ranks in the bottom 10 of all U.S. states for em- ployment. Ironically, high unemployment in states such as California, Florida, and Nevada is a direct consequence of the multi-year collapse in construction and real es- tate activity, which had been a large component of the economies in these states prior to the downturn commencing in 2007. The employment and economic challenges fac- ing these states will continue to hinder the annual rate of household formation (number of occupied housing units, including rentals and owner-occupied), as an in- creasing number of people will be forced to combine households or remain “doubled- up” in existing households. Long-term, the housing markets in these states (excluding Michigan) should be robust, as historical migration and immigration patterns will re- turn to form and should drive an increase in demand for new housing stock.
Pockets of Recovery
Recent data suggests some good news in the single family construction market, how- ever. While large metropolitan markets garner most of the attention, there are a grow- ing number of secondary markets that have begun to recover. To highlight the impor- tance of local market recoveries, the National Association of Homebuilders recently developed the NAHB / First American Improving Markets Index (“IMI”), which counts the number of metropolitan areas that are deemed to be “improving”. Three primary indicators of economic health (single-family housing permits, employment, and house prices) form the foundation of the IMI, and these indicators must demonstrate im- provement for six consecutive months for a metro area to be included in the IMI. As illustrated below, the number of improving metropolitan housing markets has in- creased steadily throughout the second half of 2011, totaling 41 markets in December.
December’s list of recovering metro markets, nearly one-fifth of which comprises cities in Texas, is heavily weighted toward cities with strong ties to jobs in the following sec- tors:
- Energy (e.g., Casper, WY; Monroe, LA; and multiple TX locations)
- Agriculture (e.g., Waterloo, IA; Jackson, MS; and Lincoln, NE)
- Military / Government (e.g., Anchorage, AK; Washington, D.C.; and Fayette- ville, NC)
- Major Universities (e.g., Boulder, CO; Athens, GA; and Ann Arbor, MI)
In particular, the “Oil Belt” region from Texas to Wyoming is well-represented on the
IMI, as well as booming shale gas regions of east Texas / west Louisiana (Haynesville Shale) and Pennsylvania (Marcellus Shale). Cities with the aforementioned character- istics have populations that have been growing and economies that have been adding jobs (albeit slowly), the combined effect of which has been an increase in household formations. It should also be noted that very few of the markets included in the recent IMI participated in the hyper-building and exotic financing practices that inflated the housing bubble in the mid-2000s.
Moving the Needle
While the list of improving metropolitan markets continues to grow, most of the cities included in the recent IMI are small (populations under 100,000), so the improvement in these markets is not making a meaningful impact on national housing results. Very few large cities (population of one million or greater) have shown improvement, with the exception of Pittsburgh and New Orleans. Unfortunately, the states that have his- torically accounted for the majority of housing production in the U.S. are also the states that were hit the hardest during the housing downturn and thus will likely take the longest to recover. Despite the recent improvement in select geographic markets, the reality is that local market performance means very little for large national and re- gional building products and materials companies. However, there are a number of local contractors and building supply houses that have begun to benefit from localized recoveries in the single-family construction market.
SELECT COMPANY NEWS Q4 2011
Builders FirstSource Secures Financing
In early December, Dallas-based Builders FirstSource (NASD:BLDR), one of the largest lumber and building material dealers in the U.S., announced the completion of a $160 million first-lien term loan facility with affiliates of Highbridge Principal Strategies. The company planned to use the proceeds to (i) repay $20 million of outstanding debt under its previous revolving credit facility (due in December 2012), (ii) collateralize $14 million of letters of credit, and (iii) shore up working capital reserves in anticipation of the con- tinued recovery in the housing market. The new loan will mature on September 30, 2015 and accrue interest at 3-month LIBOR plus 9.5%. Additionally, Builders FirstSource is- sued warrants in the transaction exercisable at $2.50 per warrant with an expiration date seven years from the date of issuance.
Marvin’s Secures Revolving Credit Facility
Marvin’s Building Materials and Home Centers, based in Leeds, AL, recently secured a $20 million senior secured revolving credit facility with Wells Fargo Bank. The five-year, asset-based credit facility will be used to fund new store openings in 2012. Family-owned and operated since 1945, Marvin’s currently operates 28 stores in Alabama, Mississippi, and Georgia. The retailer opened three new stores in 2011 and plans at least two addi- tional stores in 2012, including the company’s first location in Tennessee.
ProBuild Announces Further Consolidation
ProBuild Holdings, Inc., the largest lumber and building materials supply chain in the U.S., recently announced plans to close or consolidate 12 locations across the country. The company had planned to exit the following markets by mid-November: (i) Yorkville, IL; (ii) Westmont, IL; (iii) Columbia, SC; and (iv) South Fork, CO. Additionally, ProBuild plans to consolidate operations in Cherry Hill, NJ and five markets in Washington (Granite Falls, Sedro Woolley, Coupeville, Bonney Lake, and Moses Lake). ProBuild also plans service reductions in Greensboro, NC and Fredericksburg, VA where only the com- pany’s gypsum operations will remain open.
Lowe’s Closes 20 Stores
Lowe’s Companies, Inc., the second largest home improvement retailer in the U.S., closed 10 stores in October and announced plans to close an additional 10 by the end of 2011 (listed below). In addition, the company reduced its annual new store projections in North America to 10 to 15 stores per year from 30.
- Los Banos, CA
- Westminster, CA
- Denver, CO
- Aurora, IL
- Oswego, IL
- Chalmette, LA
- Biddeford, ME
- Ellsworth, ME
- Haverhill, ME
- Ionia, MI
- Rogers, MN
- Hooksett, NH
- Manchester, NH
- Old Bridge, NJ
- Batavia, NY
- North Kingstown, RI
- Emporia, VA
- South Tacoma, WA
- Brown Deer, WI