Steve Basten joins us from John Burns Real Estate Consulting where he supports the firms building products research, including their in-depth forecasts of building products spending in new construction and remodeling end markets and, additionally, is responsible for demand forecasting and sector coverage of all residential building product categories. Before joining John Burns Real Estate Consulting, Steve worked for Kohler Co. as a product manager, responsible for new product development priorities and scheduling and, prior, in Kohler’s Corporate Development office as an M&A analyst where he was responsible for valuation analysis, deal-flow management, and competitive benchmarking for all of Kohler’s business units. He has an in-depth understanding of the residential construction industry from financial outlook to interior design trends and is very passionate about new product development and innovation.
Episode Highlights
- Has HGTV ruined the building industry forever?
- Is innovation outpacing regulation, and how are consumers responding?
- Have consumers changed their opinions on engineered products?
- Are these materials pricier or about the same as their non-engineered replacements?
- What makes design and finish trendy vs classic?
- Will black colors and paint be in this year and out the next
- What is simplified customization?
Episode Notes
In the last segment they covered demographics and some of the fun trends when it comes to living situations. One of the things Aaron was fascinated by was design. He remembered growing up doing rehabs on his dad’s house. He remembered the carpet being laminate flooring and the paint was white was a medium blue trim. What was good for their house was good for everybody else’s. Now, he sees his brother take the business to an entirely new level. He would match the paint color to the roof.
This led into Aaron’s questions of whether HGTV has ruined expectations when it comes to the consumer. Steve said it has not necessarily ruined it, although he believes it has completely changed how consumers approach remodels. You look at the level of programming now that focuses on remodeling and fixer-uppers. Research shows that a younger buyer is definitely willing to take on more remodels. They see more households remodeling versus moving up. They are staying in their homes longer, and household mobility is roughly half of what it was 25-30 years ago. They are sticking in their homes longer and choosing to take on more remodels. Sometimes they do that themselves, but that definitely varies by demographics.
Younger generations are more inclined to do it themselves. On the other hand, boomers are more inclined to hire a pro. This leads into the driver of the shortage of labor. This is such a fascinating thing with the amount of remodeling activity that is happening. This is really where Steve and his boss focus a lot of their time. Fixer-uppers have changed the culture of what goes on as well as what type of programming is on tv. There is an expectation that you can get everything for a certain cost, and there is skepticism of whether a remodel costs $80,000 or $180,000. Steve and his boss spent a lot of their time looking at the labor cost by region.
A remodel in Wisconsin, for example, will be more than a remodel down South. You need to use material that will stand up to weather and provide strong insulation of the home. There are certainly a lot of factors that determine how much a remodel costs. In general, there may be a little elevation of expectations versus what you can actually get. Overall, HGTV has not ruined things, it has changed them and for the better. People are inspired to take on projects and use YouTube as inspiration to do things themselves. It is no longer about shelter, but also beauty and décor. Aaron is fascinated by the level of design that is expected. Aaron finished a rehab where he ended up spending more than he thought, but he also got back more than what he was expecting. It also appraised, so he was happy he decided to do some extra things.
Aaron asked if there is any data suggesting consumers are really leaning towards going green. When you are in a down market and your comparison is an REO, it is really hard to put in things like energy efficient windows, insulation, and solar. Here in California, new builders have to do that. Steve said when asked about his thoughts on the green market is that it varies greatly by market. Certainly in the Mid-West where he is from there are not a lot of tax credits for windows. There is incentive to replace windows that are energy star and not life-changing tax credits.
In general, there is a shift to being more sustainable, but it differs by demographics. Younger demographics tend to value it more. However, this does not necessarily mean they have the income or real wages or savings rates to invest in solar and high-energy efficient windows. However, they are more inclined and willing to spend on more sustainable features. Steve does not see any of this going away. If you take a step back and look outside of the construction industry, the whole world is trending more towards sustainability. Tesla’s power law is the alternative to gas or diesel. The world is trending toward sustainable solutions, and a lot of this can be seen in residential construction.
This leads into smart homes. Aaron is fascinated by them but scared at the same time. Aaron asked Steven if he gets the sense that innovation is outpacing regulation when it comes to technology in the house. He said innovation always outpaces regulation. If something doesn’t exist, you cannot regulate it. Nobody wants their apps on their phone regulated. This is very prolific, but Steve does not see a lot of these products really requiring a lot of regulation.
An example would be home security systems, which have been around for a long time. They have not been significantly regulated, so he does not know if the new version of that like a smart security system will require regulation. It is a better version of what already existed. Everyone remembers those telecoms in our parents’ houses and those panels. The new versions of those are better versions, just ask Alexa. Steve does not see there being a ton of regulation, but innovation will always outpace regulation.
IOT is the internet of things and basically describes a smart home. You have everything from those devices that have only been around over a year. It was only at Christmas 2016 that Amazon released the Dot, and since then they have released several different ones with cameras and the Amazon look. Now we have smart refrigerators, phones, tv sets, and ovens. Aaron asked if consumers are driving this demand. Steven said yes and that consumers definitely drive some of that demand. Almost everybody has a smart phone, so there is definitely desire for products that make your life simpler and give you more time in the day to do things you want to do.
There is a misconception across the industry because a lot of these smart products have actually existed for a very long time. You look at digital shower valves you can program to turn on at a certain temperature at a certain time of day. There are all these tech-oriented features that have been around for ten years. What has been the driver of smart homes is the IOT, which is definitely that engine. All these products can speak to each other as well as to Alexa, the central hub where you can control all of these different smart products through one platform. There have been smart refrigerators and programmable HVAC systems. The engine driving the smart home is this central platform where you can control everything from one area. You do not have to have 10 apps on your phone. You just have to speak to Alexa.
What Alexa has done all well as these other central platforms and tech assistants is they have made the user experience a very seamless one. Smart technology has been around for a long time as well as the internet of things connecting it all together. Aaron was one of the first people to buy the Phillips Hew LED smart light bulbs because he thought it was cool to turn the lights red. He regretted this decision and has not done it since.
Aaron got to interview the team with the National Association of Realtors that deals with the tech, and he said they talked about the zero interface. He had not heard of this prior to interviewing them. He had only heard of it when referring to Alexa. Not only can Alexa talk to you, she can also find you a video on what you need. Aaron next asked Steven if he is seeing any specific smart technology that is a must in new construction that rehabbers should consider. Steven said right now is a little early to tell, especially when it comes to new construction. We are just really figuring out what consumers are willing to pay for and not willing. They do a very large survey of new buyers in the purchase process for a new home who they know are more inclined to spend on tech features. This could include a smart refrigerator that orders groceries from Alexa.
Steven wrote an article that was featured on their website and showed some interesting statistics. Lenders and buyers, specifically the 1980s and 1990s sharers and connectors, are willing to spend an extra $3500 for a smart refrigerator that could order groceries. However, this also comes at a tradeoff. They are also the last ones to spend on name brands. Those from the 1930s and 1940s are way more inclined to spend on name brands than the newer generations. Part of the reason is they value the quality of the name brand as well as the longevity and warranty. There are different value propositions with features versus brands.
Aaron said he would not have thought this was the case, especially when it came to technology. You would think you would want a major brand, if nothing else, for security. If something were to happen, they would have enough money to back you up. Overall, they were not willing to trade up on things like name brand tile or a sink, but they would be more willing to trade up on technology. When you think about our parents’ and grandparents’ generations. They associated high quality products with name brands. A lot of these companies have been around for over 100 years. People are more willing to trust household names that have been around for a long time. They’re not going anywhere, and that’s something our parents’ generation and their parents really valued. There are differences to what new homebuilders should be putting in their homes to attract their target buyer, and they vary by demographic.
Aaron said one of the reasons he specifically reached out to Steve was because of a report he produced about six major design trends in 2018. In this show, they covered the internet of things connectivity. Aaron asked Steve if he thought there was any product that was so cool that it would be huge in the next few years. Steve said there are so many, although he really thinks these smart kitchen appliances are neat. He values the attention to detail and quality control, like a refrigerator you know will keep your fruits and vegetables fresh. There is so much innovation and engineering that has gone into building the perfect refrigerator that is really going to keep your dairy and meats where they are supposed to be. This includes all different temperatures and zoning controls in one refrigerator.
Steve is more inclined to buy something that keeps things fresher longer since he is more inclined to work out and eat healthy. He wants products that can save him time in the day and cut out a monotonous task. These are things in which he is definitely inclined to spend money. There are some companies leaving the space that are providing very holistic solutions and not just giving you a one-off product that is connected to the smart home. They are giving a product where everything works and speaks together.
One major category is labor efficiency, which is something to which real estate investors should really pay attention. Steve said this is a huge trend, although it is not new. Looking back over the last 20-30 years, building product manufacturers have been taking labor out of installation for a very long time. Twenty years ago, a faucet came in 20 pieces, and your plumber had to sit there to assemble everything. Everything was labor intensive, and it was all in parts and pieces. Now, faucets come pre-assembled in the box and you can install them yourself. There is not a lot of labor involved.
Huber Engineered Woods is a great company that is developing systems that have panels with pre-installed insulation at different thicknesses. Their zip system is a great way to save a lot of money for house racks, and there is a lot of renovation surrounding engineered products and labor efficiency. Tile is pretty labor intensive, but over the last ten years innovations have been made where you only have five sheets of tile to put down versus individual pieces and its done. Everybody is coming up with better and more efficient versions of what they already have, and they are trying to solve the labor crisis. A lot of building product manufacturers are doing this now, especially with three hurricanes and the big fires. We were already having shortages on specific trades before, but now real estate investors are paying attention even more. You may not need skilled labor because of the way some of these things are engineered, and this leads perfectly into Steve’s section on engineered products.
Aaron just did a rehab where he put in a PVC floor that was more durable than a hardwood floor. Aaron asked if the average consumer is open now and understands the benefits of this compared to a raw wood floor. Steve said this is another area that depends on demographics and on what they are placing value. In general, a trend has been towards expectations. For example, consumers want to see what they get. If they see something online or in a catalogue, they want to make sure that is what they are getting. The question is what the natural categories are that have been able to engineer products to meet those expectations. The answer: counter tops. This includes counter tops, engineered courts, engineered stone. This is a product set that is really a proliferated and penetrated channel.
In the past, you would have to go to a stone yard and pick out a slab of marble or granite. You might have to go to three slab yards to find the exact one you want, and even then it is hard to visualize what it will look like when it is installed because of all the cut-in and fabrication. Now, you see all these designs online that are factory-made products. You know that what is printed is exactly what you are going to see. It is really fascinating how building and product manufacturers have been able to design high-quality products that are very comparable to their natural counter parts. At very similar price points, they are competitive. These products usually require less maintenance, and you do not have to seal or maintain them as often as their natural counterparts. There is a lot of value proposition for the consumer when you look at engineered products. A lot of times they can be less expensive or on par, which is nice.
Another thing Steven talks about is black finishes, so black is back. There have been a lot of companies that have been rolling out more black finishes in recent years, but this year it was apparent that black is here to stay. There was not a manufacture out there who did not have hardware, plumbing, or appliances fully displayed in black. His personal opinion was that the matte black finish is something that is really going to become the new brush nickel, brush stainless trend. Someone commented to him the other day how they had just replaced their black appliances, and now they were back. Steven looked at them and said they were different products since a glossy black is much different than a black stainless.
Black stainless is a little more tempered down, more moodier, and goes with more color and finishes. Black is here to stay, although it is hard to say for how long it will last. The typical life cycle of a trend is at least seven years, but we will see. Clearly the consumer loves it though. If you look at HGTV, dream home, you see how they are all displaying this black finish. Aaron painted his doors from white to black, so he is very on trend right now. Steve’s parents also replaced all of the windows in their house with black windows.
Aaron and Steve ended the segment with simplified customization, which a lot of rehab shows do. Steven described it as getting that custom look and feel in a very simplified manner. The process to get a real custom look was, historically, very labor intensive. You had to often hire an interior designer who would inspect different finishes and vendors. It was labor intensive, expensive, and not easy. Consumers didn’t know all the channels half the time that had to do with getting a custom panel made for their refrigerator. Now manufacturers are offering these standard upgrade options. It is very consumer-friendly. You can pick your door hardware, the color, and it is a very user-friendly experience. It does not necessarily take an interior designer out of the equation, but it does empower a very discerning consumer to do it themselves. It is really simplifying the whole process.
When Steven went to the show, he saw some really cool products. One had launched a mix and match handle, a very modern faucet line. You could pick your handle or spout with five different finishes. This allows the consumer to personalize their space. They don’t have to go out and figure out their custom look that nobody has one the market. Instead, this gives the customer a very user-friendly and simple equation. Aaron sees a lot of real estate investors along the coast in higher end markets really get into some stunning design. It is not necessarily things that cost a lot of money, it is just those extra special touches that would shock you.
It is like art. It doesn’t have to cost a lot of money. You can go to your local thrift store and repurpose something with a classic design. There are so many opportunities to do these light touches that add to the value since it is more beautiful. People are looking for personalization. Steven said the last company he was with did a lot of consumer research, and there is certainly a desire for repurposing. People want the space to be truly theirs and truly personal, whether this includes picking things out from your parent’s house or other things to make the space theirs.
For more information and want to download his report, you can go to www.realestateconsulting.com. John Burns gives really great coverage of the housing industry, new construction, repair, and remodel. They have a product design line that focuses specifically on design trends in construction. You can find a lot of great resources here.
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