Lincoln International reviews the structural factors that will support the building products market in the medium to long-term for investors and strategic parties.

We believe it is only a matter of time until the housing market finds its footing. Because of low inventory levels and high demand dynamics, it is becoming clear that the housing market downturn will most likely be limited in nature and nowhere near what was experienced in the global financial crisis.

Any downturn will also be buttressed by robust demand for repair and remodel (R&R). When building products spend is split between new construction and R&R, there is a roughly 25% / 75% split. This split is important to understand as R&R cash flows are valued higher by potential investors as they are less volatile than new construction. There are structural factors that support R&R to rebound strongly. Namely:

The current dislocations in the residential construction market have impacted the number of M&A opportunities currently available. Owners of building products assets will benefit from remembering the 2020 COVID-19 impact to M&A. When the market re-opened in summer 2020, the dislocations in the market created a powder keg that resulted in more activity and higher multiples than at any other time in the industry’s history. During that timeframe, double-digit EBITDA multiples became normal, creating an attractive time for sellers. By the later half of 2021 the market for sellers had become more crowded, impacting the depth of processes but not the ultimate outcome.

Lincoln expects a similar dynamic to occur when the 2023 rate driven market normalizes, creating an optimal time for M&A processes to commence. We would expect A+ assets that have done well during this time to receive premium valuations from both strategic parties and financial sponsors. We recommend that owners commence preparation activities in the first half of the year to take advantage of a potentially healing market ahead of what could be a crowded market in 2024 and beyond.