Building Products Distribution Industry Update Q3 2023

Sector Highlights

• The residential building products distribution industry is segmented into several subsectors. This report will focus on exterior products, interior products, lumber and building materials (“LBM”), and hardscape / landscape suppliers.
• Primarily serving pro dealer contractors in the new construction and remodeling markets, these distributors provide a critical link between suppliers and a highly fragmented customer base.
• Given the regional nature of the markets, the distributor base has historically been fragmented as well.
• The past 2 decades have seen considerable consolidation, leading to well-capitalized super-regional and national players in each subsector.
• These larger firms are a combination of private equity backed consolidators, public companies, and privately held entities, creating an interesting dynamic for independents looking to be acquired and a ready exit strategy for smaller consolidators.
• While the sector experienced unprecedented activity post-COVID, rapid inflation in the U.S. economy drove the Federal Reserve to impose significant interest rate hikes, resulting in the highest rate in more than twenty years.
• Mortgage rates have more than doubled over that time, dramatically increasing the cost of ownership for homebuyers.
• Economic concerns have resulted in fewer housing starts, which, combined with a hesitancy for existing homeowners to swap a low rate for the current higher rates, have reduced housing inventory and resulted in stubbornly high housing prices.
• Despite the current disruption faced by the housing markets, there remains systemic issues with housing shortages in the U.S. Household formations have outpaced housing starts, resulting in all-time lows in rental and homeowner vacancy rates.
• The prevailing sector dynamics suggests longer-term tailwinds for housing construction and remodeling.
• We anticipate continued M&A as larger consolidators and platforms pursue continued growth in core areas of focus and / or seek to enter adjacencies (ex., HVAC, expansion into commercial building).