Building Products: Is the Sector Ready to Capitalize on the Winds of Change

Building products is a vast market ecosystem with six micro-verticals within each of its two segments, building interior and building exterior. The industry is also fragmented, primarily because of a plethora of privately owned companies (Exhibit 1).

Exhibit 1

During the past few years, building products as an industry has seen its performance momentum slowing in terms of shareholder returns, revenue growth, and margin expansion. Nevertheless, the best-performing building products companies have outpaced the sector overall. Furthermore, an improving macroeconomic outlook, pent-up demand in the residential market, and stimulus spending in recent federal legislation all point to brighter days ahead. Companies looking to take advantage of these conditions can learn how by studying the examples of the top performers.

A Vast and Fragmented Industry

The building products industry includes finished materials for residential, industrial, and commercial buildings. The industry is a vast space: six micro-verticals including more than 20 product categories within each of its two segments: building exterior and building interior.

The building exterior segment includes companies that produce roofing, siding, windows and doors, outdoor decking and landscaping insulation and weatherproofing, and other exterior products, such as downspouts and chimney systems. The largest and fastest-growing micro-vertical is windows and doors, with a market size of $65 billion as of 2022. This micro-vertical is also expected to be the fastest-growing in 2022–26. Within each micro-vertical are many product categories. For example, windows and doors include not only exterior doors but also patio doors and skylights, and roofing products include a wide variety of materials, such as asphalt shingles, clay tiles, slate, fiber cement, metal, and more.

The building interior segment includes companies that provide ceilings, flooring, walls, kitchen cabinets and countertops, bathroom fixtures and fittings, and furnishings and decorations. The largest market by far is for kitchen cabinets and countertops, at $52 billion. The fastest 2022–26 growth is forecast to come from the smallest micro-verticals: ceiling materials and systems ($2 billion) and furnishings and décor (less than $1 billion). As in the exterior segment, micro-verticals include many product categories. For example, insulation may be fiberglass, foam, cellulose, mineral wool, or reflective, and weatherproofing products include sealants and caulk, house wrap, vapor barriers, flashing and tape, and gaskets and grommets.

The industry is fragmented due to the large number of privately owned companies—more than 3,000, versus about 50 publicly listed companies. For example, within the building exterior segment, more than 500 companies provide roofing, siding, and windows and doors, but just 11 are listed entities. Similarly, in the building interior segment, the bathroom fixtures and fittings micro-vertical includes more than 500 unlisted entities, versus only one listed company. 

Momentum Has Slowed

The sector’s performance momentum slowed in 2021–23, with total shareholder returns (TSR) at 3.7% (Exhibit 2). In addition, revenue growth and margin expansion lagged overall industrials. In line with this performance, investor confidence weakened: EV-to-sales remained flat at 1.8 times. Forces contributing to the slowdown include high interest rates, which pushed mortgage rates above 7%; a cooling of remodeling activity; an 80% drop in new commercial square footage; and inflation rates of 40% or more in construction materials like iron, steel, and lumber.

Exhibit 2

The TSR for building products also has been slipping relative to other industrial segments. For 2021–23, building products’ TSR of 3.7% put it in ninth place out of 13 industrial segments, ahead of just industrial services, industrial diversified, electrical components and equipment, and packaging solutions. Although this was a difficult period for industrials, automotive and ancillaries managed a TSR of 40.2%.

Behind the lower TSR was a set of fundamental financial challenges. For 2021–23, revenue growth of building products was just 1.1%, versus 7.6% for industrials overall. And EBITDA margins shrank, declining by 67%.

In line with this performance, investor confidence weakened: EV-to-sales remained flat at 1.8 times from 2021 to 2023, while it inched up from 1.5 in 2018 to 1.8 in 2021. 

Reasons for the performance problems and investor caution included high interest rates, which slowed housing starts; a slowdown in remodeling activity; a weakened commercial sector; and rising input costs. Thirty-year mortgage rates, which had been extremely low during the pandemic, rapidly moved up past 7% in 2023, and although they have moderated, they are expected to remain well above the 3% homebuyers had grown used to. Even as builders pulled back in the face of high rates, homeowners slowed their spending on remodeling with a decline that started in the second half of 2023 and is expected to continue to the end of 2024. Meanwhile, the supply of new commercial real estate fell by 67% between the first quarter of 2022 and the first quarter of 2023. The companies in the sector also faced inflationary pressures with input price increases of 40% or more especially for materials like iron, steel, and lumber.

Pockets of Success

At the level of individual companies, not all were weakened. Amid the sector’s struggles, the top performers outpaced peers, with two-year returns almost 27 percentage points higher than the industry average (Exhibit 3). More significantly, these pockets of success were not a function of company size or micro-vertical. In our analysis of 38 building products companies 45% of those in the top quartile for total shareholder returns, and they operate in seven different micro-verticals. This diverse group of companies achieved 125-point margin growth and boosted cash conversion rates by 450 or more basis points. As they did so, they consistently met earnings targets and saw increases in analyst coverage.

Exhibit 3

Our analysis found that the top performers focused on five performance areas: product portfolio innovation, digital innovation, customer centricity, programmatic M&A, and investor engagement. For companies seeking role models to study, these top performers offer a variety of relevant examples, several of which are described in our full report.

Brighter Prospects Ahead

Brighter prospects lie ahead, thanks to an improving macroeconomic outlook, pent-up residential demand, and recent legislation allocating funds to construction projects.  Positive indicators for the macroeconomic outlook include easing inflation (notably, the 12-month CPI falling to 3% in August), projected rate cuts (from 4.5% in 2025 to 3–3.5% in 2026); pent-up residential demand, given low home inventory (less than $1 million) and household growth outpacing single-family construction; and spending boosts from the IRA and CHIPS Acts, which together double manufacturing.

Under these conditions, residential construction is expected to increase in response to inventory shortages caused by the underbuilding of homes (underbuilt by 1.7 million to 3.5 million since 2010), robust growth in the number of US households (higher than the 20-year average since 2017), and aging housing stock (which now has a median age eight years higher than during the Great Recession). In addition, government initiatives associated with the Inflation Reduction Act and CHIPS Act are fueling a boom in manufacturing construction. The industry also is experiencing tailwinds from the global push for sustainability, which is estimated to contribute to 10% compound annual growth in the market for green building materials.

Five Priorities for Success

Companies can position themselves for success by addressing five priorities associated with success in the industrial sector (Exhibit 4): 

Exhibit 4

1. Product portfolio innovation in areas that enable companies to lead, given industry trends. Pursuit of product quality should be balanced with sustainability goals.
2. Digital innovation with a B2C mindset to transform e-commerce platforms. Companies need to prioritize changes that contribute to a seamless online buying experience and supply chain transparency while offering a comprehensive product assortment.
3. Customer centricity through speed, scale, and range. This entails superior product availability and delivery speed. It will require building a network of retailer and/or dealer partners, as well as integrating service with product delivery to meet customer needs. 
4. Programmatic M&A with accretive acquisitions for geographic and portfolio expansion. The leadership challenge here is to maintain the company’s focus on its core business while executing multiple acquisitions.  
5. Investor engagement and consistent results to attract and retain investor interest. Successful companies plan opportunities for engagement and communicate the company’s story openly and effectively.  

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The building products industry need not be defined by its overall financial performance during the past two years. Many signs point to significant growth potential: a backlog of unmet housing demand, a rise in household formation, aging of the US housing stock, increased spending on manufacturing construction stimulated by government initiatives, and a growing demand for green building materials. A bright future awaits the companies that exceed the industry’s past performance by embracing the priorities for success.