Building Products Roundtable: Executive Perspectives on Trends Shaping the Sector

The building products sector continues to offer opportunities for growth and M&A. Harris Williams and L.E.K. Consulting recently held a roundtable discussion with leading building products executives whose companies span a mix of product categories across residential and commercial markets. The group cited many reasons for medium- and long-term optimism, referencing strong, persistent tailwinds that are generating value-creation potential across the space.  

In this article, professionals from Harris Williams and L.E.K. Consulting share the group’s perspectives on notable trends shaping the building products sector.

Contact our Industrials Group for additional materials covering the building products market and to further discuss its M&A opportunities: IndustrialsInsights@HarrisWilliams.com 

Residential Market: Optimism Amid Near-Term Uncertainty

Residential market executives acknowledged headwinds over the past 18 months and continued demand softness in the short term, although they remain optimistic for a strong and sustainable rebound. 

Tim Webb, a managing director and head of Industrials at Harris Williams, notes that the lack of existing home sales is heavily weighing on remodeling activity. “Homebuying triggers remodeling projects, and existing home sales have slowed due to low inventory levels and high interest rates,” he says. However, some product categories at the high end of the market—such as fiber cement siding and high-quality pools—and with break-fix dynamics—like roofing and garage doors—have demonstrated better resilience than others. 

While the current interest rate environment and broader economic concerns among homeowners present near-term headwinds, executives are confident in the market’s long-term fundamentals. They are closely monitoring interest rates and consumer confidence as leading indicators of a rebound. “A large number of old houses need to be remodeled. The big question is when people start spending again,” notes one executive. 

In new residential construction, affordability is becoming increasingly important to homebuyers. Because of this, builders are seeking ways to lower their build costs and are closely managing costs more broadly. Lucas Pain, a managing director and co-head of Global Industrials at L.E.K. Consulting, says these trends are not universal, pointing out differences in behavior across buyer segments. “Cash buyers are spending on projects without deferring them or trading down in selected finishes, much like their behavior over the past 18 months. However, the mid-and low-tier segments are seeing deferment of non-need-based activity. For those projects that are moving forward, buyers are more often trading down in finishes or downsizing the number of amenities included to reduce costs,” he explains. Executives serving the new residential construction market cited product portfolio expansion as a way to better serve their customers, such as offering a sliding scale of products to mitigate the price pressure that comes with the builders’ desire to reduce costs. 

Despite short-term uncertainty, the medium- to long-term residential market outlook is positive. Historically low inventory levels, aging housing stock, pent-up homeownership demand from younger generations, and an anticipated decline in interest rates are some of the key factors leading to market optimism. 

When comparing today to the 2008 recession, executives believe the sector is better positioned for a quick recovery, supported by relatively healthy consumer balance sheets and record home equity levels. “What’s different about the current environment versus 2008 is that consumer sentiment is relatively positive, and people still feel confident about where they are financially. Homeowners are sitting on record levels of home equity as home prices and values have remained strong,” adds one roundtable participant. 

Commercial Market: Upgrades and Modernization

Despite mixed headlines and expected medium-term stabilization, total commercial construction spending increased significantly in 2023. While executives agreed that sentiment around the commercial market is challenged, businesses are continuing to invest. In “heavy” non-residential categories—including manufacturing, data centers, and energy—executives have seen strong activity. This is stemming from the early-stage build-out driven by onshoring activity with new facilities being developed and existing spaces being modernized. 

On the other hand, “light” categories—like retail, office, and hospitality—have experienced more pressure. Property owners are rethinking how commercial space is used to combat post-COVID headwinds, while driving increased foot traffic and a return to higher occupancy rates. “As property and asset owners grapple with how to retain the value of their portfolio, they want to achieve fuller occupancy. However, they’ll need to be willing to invest in their properties to do so,” says a roundtable panelist. 

“Property owners are making necessary repairs and spending on upgrades and modernization that can help achieve their goals,” adds Ty Denoncourt, an Industrials Group director. Specific categories and sectors, such as outdoor living spaces in retail and hospitality, or flexible and livable workspaces in offices, are drawing higher levels of investment. 

Mitigating Labor Dependency Through Value Engineering

Executives shared that broad-based labor shortages are producing operational challenges downstream. In turn, this is creating opportunities for products that reduce job site labor requirements and improve efficiency. The residential and commercial markets have increasingly adopted modular and prefabricated solutions, while increasing their focus on value engineering. David Mahin, a managing director focused on Building & Construction at L.E.K. Consulting, notes that as commercial property owners face greater pressure, they and their contractors are substituting materials and streamlining work to decrease costs without sacrificing functionality. “This includes finding ways to reduce the need for labor, given skilled professionals remain difficult to find and retain,” he says. 

Building products executives also cited the tight labor market, particularly in technical trade sectors, as a key driver behind changes they are making within their product sets. Their focus is on making products and materials simpler, faster, and more labor-efficient to install. “Builders and contractors are seeking opportunities to ease the pressure on their labor requirements and help their customers contain costs,” says Webb. “Suppliers that can achieve the relevant specifications or performance requirements, while taking time out of the install or build, will have an advantage to capture market share.”

Customer Experience and Efficiency Drives Tech Spending

Technology continues to be a priority in both residential and commercial building products, becoming an increasing percentage of building product company spending. Companies are focused on creating a modern and intuitive online experience, incorporating automation, and exploring the best use cases for AI. These advancements are more likely to benefit scaled players over small family-owned businesses and lead to more consolidation across sectors.  

“The construction industry has been behind in technology adoption. But this is quickly changing due to the introduction of new productivity tools and the rising importance of an intuitive customer experience,” says one executive. 

“With labor being less reliable and more expensive, there are automation decisions that didn’t make economic sense five years ago. That whole equation has changed,” adds another participant. 

With today’s dynamic pricing environment and less reliable supply chains, it’s vital for building products companies to provide inventory certainty and pricing accuracy. Some companies are doing so through innovative tech. “Significant investment is underway in longstanding technologies, such as barcoding and warehouse management systems, to ensure inventory accuracy, order completeness, and reliability,” says Tim O'Neil, an L.E.K. Consulting managing director. “These capabilities help create a positive buying experience and drive repeat business.” 

Companies are supplementing their efforts to gain operational visibility and accuracy with e-commerce platforms. These systems offer simplified ordering, an enhanced digital experience, and real-time updates on inventory availability and pricing. Because of these benefits, executives noted substantial growth in the adoption of online ordering by consumers, builders, and contractors. 

Enduring Optimism

While building products executives participating in the roundtable acknowledged that there is a degree of uncertainty for near-term growth expectations, they expressed strong conviction in the underlying health of longer-term demand trends and shared cautious optimism for 2024. “While 2024 may not be an accelerated growth year, the sector is nearing the completion of a recalibration to more sustainable activity levels,” summarizes Mahin. 

Webb adds that executives are doubling down on expanding their footprint, investing in technology, and creating better solutions and experiences for their customers. “We feel strongly about the sector’s long-term trajectory and are confident that there is substantial value-creation opportunity throughout the market,” he concludes.  

To discuss M&A opportunities in the building products sector, please contact our senior professionals. 

Featured L.E.K. Consulting Professionals:

• Lucas Pain, Managing Director and Partner and co-head of Global Industrials, L.E.K. Consulting

• David Mahin, Managing Director and Partner, L.E.K. Consulting (Building & Construction practice)

• Tim O'Neil, Managing Director and Partner, L.E.K. Consulting (Building & Construction practice)