TRENDS AND OPPORTUNITIES IN THE U.S. BUILDING MATERIALS MARKET 2018 International Builders’ Show

Home Innovation Research Labs ▪ Founded in 1964 as wholly-owned subsidiary of NAHB ▪ Independent, for-profit researchers assisting development and commercialization of new building technologies ▪ Engineering research & development ▪ Market & field research ▪ Laboratory testing

▪ Leader in green home building movement (NGBS) ▪ Key role in building codes and standards development ▪ Partnership with ICC-ES to fast-track issuance of ESRs

Purpose and Outline of Presentation Aimed primarily at manufacturers and suppliers of building materials to the U.S. market 1. Review of building materials trends in new homes and remodeling 2. Explore issues with offering new building products & services

Annual Building Product Tracking, Custom Market Research Studies ▪ Home Innovation has been tracking annual materials purchases since 1995 ▪ Builder Practices Survey of 1,500 U.S. Builders ▪ Consumer Practices Survey of 100,000 U.S. households

▪ Decades of custom market research, sponsored by hundreds of building materials manufacturers ▪ Observational research of materials installation issues

Above-Grade Walls are Largely SiteBuilt with Wood Products Shares of Single Family Detached Homes, 2016 Site built wood frame

80%

Panelized wood frame

7%

Concrete block

6%

Poured concrete

3%

Modular wood frame

1%

Structural insulated panels

1%

Post & beam or Logs

1%

Insulated concrete forms

1%

Precast concrete

0%

Slow, evolutionary change is hallmark of U.S. construction… but not always.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: Annual Builder Practices Reports

Shares of Insulating Foam Wall Sheathing in New US SFD Homes 16% 14% 12% 10% 8% 6% 4% 2% 0% 2011

2012

2013

2014

2015

Second Layer of Foam Sheathing First Layer of Foam Sheathing Source: Annual Builder Practices Reports

2016

As Energy Efficiency Increases, 2 x 6 Walls (vs. 2 x 4) are More Common Shares of 2 x 6 Exterior & Interior Walls 50% 45% 40% 35% 30% 25%

2 x 6 Exterior Walls

20%

2 x 6 Interior Walls

15% 10% 5% 0%

Source: Annual Builder Practices Reports

Industry Favors Evolutionary Change, Drop-In Replacements Basement Wall Materials, New Homes in 2016 Poured concrete

77%

Concrete block

13%

Insulated concrete forms

5%

Precast concrete

3%

Other

1%

Pressure treated wood

1% 0%

Revolutionary change happens builder by builder and market by market

20%

40%

60%

Source: Annual Builder Practices Reports

80% 100%

Ceiling Height of New SFD Homes, First or Main Floor 60%

50% 40%

8-feet and Less

30%

8.5 or 9 Feet 20%

10 Feet and higher

10% 0%

Source: Annual Builder Practices Reports

Ceiling Height of New SFD Homes, Second and Upper Floors 70% 60% 50% 40%

8-feet and Less

30%

8.5 or 9 Feet 10 Feet and higher

20% 10% 0%

Source: Annual Builder Practices Reports

Wood Trusses Trending Upward 70% 60% 50% 40%

Rafters Trusses

30% 20%

10%

Labor-saving engineered solutions, like trusses are expected to continue to grow in popularity

0%

Source: Annual Builder Practices Reports

Trus-Joist Successfully Introduced a Better Structural Floor Shares of Floors in Single Family Homes 45% 40% 35% 30%

Concrete

25%

Lumber joists

20%

Wood I-joists

15%

Open-web joists

10% 5% 0%

Source: Annual Builder Practices Reports

Floors Now Have Less Bounce and Total $ Spend per New Home is Up Floor Joist Depth in New U.S. Homes 60% 50% 40%

8 inches 30%

10 inches 12 inches

20%

14 inches+

10% 0%

Source: Annual Builder Practices Reports

Differentiation in a Commodity Market— Shares of Premium & Commodity OSB Subflooring EdgeGold, 18% Norbord, 4% AdvanTech, 34%

LP TopNotch, 15% All Others, 1%

Commodity , 28% Source: Annual Builder Practices Reports

Insulation Usage in New SFD Homes (Overall sq.ft. Coverage) Excludes Wall Sheathing 80%

70% 60%

Fiberglass batt

50%

Fiberglass blown

40%

Rockwool Cellulose blown

30%

Spray foam

20%

Foam board Other

10% 0%

Source: Annual Builder Practices Reports

Spray Foam Insulation Market Share by Assembly, 2016 US Homes Cathedral Ceilings Interior Wall Sound Insulation Second Story Floor Garage Walls Combined House Insulation Ground Floor Over Basement Exterior Wall Cavity Garage Ceilings Flat Ceilings Total Floor Insulation Crawl Space Wall Ground Floor Over Crawl Space Basement Wall

21.1% 20.5% 14.8% 12.3% 11.7% 11.4%

10.9% 10.8% 10.1% 9.7% 6.9% 6.5% 5.3% 0.0%

5.0%

10.0%

Source: Annual Builder Practices Reports

15.0%

20.0%

25.0%

Whole-House Ventilation Systems in New US SFD Homes 35% 30% 25% 20% 15% 10% 5% 0% 2010

2011

2012

2013

2014

2015

2016

Non-energy-recovery fresh air exchangers Heat or Energy Recovery Ventilators Source: Annual Builder Practices Reports

2017

Roofing Material Installed in Home Replacements 60% 50%

Asphalt--Three Tab

40%

Asphalt--Architectural Wood Shakes/Shingles

30%

Concrete and Clay Tile Metal

20%

Plastic Composite Other

10% 0%

Source: Annual Consumer Practices Reports

Roofing Materials Installed in New SFD Homes 70% 60%

Asphalt--Three Tab

50%

Asphalt--Architectural

40%

Wood Shakes/Shingles Concrete and Clay Tile

30%

Metal 20%

Plastic Composite Other

10% 0%

Source: Annual Builder Practices Reports

Exterior Cladding in New SFD Homes 35% 30%

Engineered Wood

25%

Natural Wood 20%

Brick & Block Stone

15%

Stucco Vinyl & Polymer

10%

Fiber Cement 5%

Other

0%

Source: Annual Builder Practices Reports

Exterior Cladding in Home Remodeling 70% 60%

Engineered Wood

50%

Natural Wood Brick & Block

40%

Stone 30%

Stucco Vinyl & Polymer

20%

Fiber Cement Other

10% 0%

Source: Annual Consumer Practices Reports

Exterior Cladding in Home Remodeling (Lower Tier) 20% 18%

16%

Engineered Wood

14%

Natural Wood

12%

Brick & Block

10%

Stone

8%

Stucco

6%

Vinyl & Polymer

4%

Fiber Cement Other

2% 0%

Source: Annual Consumer Practices Reports

To Own a Market, You Educate a Market Shares of Housewrap, 2016 New SFD Home Market

Green Guard, 2% James Hardie, 2% Owens Corning, 5% REX Wrap, 2% DuPont Tyvek, 56%

TYPAR, 8%

All Others, 11%

Dow, 4%

Barricade, 3% CertainTeed, 6%

Source: Annual Builder Practices Reports

Finish Flooring in New SFD Homes Trend Towards Hard Surfaces Continues 70% 60%

Carpeting

50%

Hardwood--Solid

40%

Ceramic Tile Hardwood--Engineered

30%

Vinyl Sheet or Tile

20%

Laminate Natural Stone and Other

10% 0%

Source: Annual Builder Practices Reports

Finish Flooring in New SFD Homes Engineered Wood with Steep Growth 30% 25%

Carpeting

20%

Hardwood--Solid Ceramic Tile

15%

Hardwood--Engineered Vinyl Sheet or Tile

10%

Laminate 5%

Natural Stone and Other

0%

Source: Annual Builder Practices Reports

Windows In New US SFD Homes 70% 60% 50%

Vinyl

40%

Wood

30%

Composite

20%

Aluminum

10% 0%

Source: Annual Builder Practices Reports

Shares of Raised Porch and Decking Material in New SF Homes 70%

60% 50% 40%

Treated Lumber 30%

Untreated Lumber

Composite & Plastic 20% 10% 0%

Shares of Raised Porch and Decking Material in Residential Remodeling 70%

60%

50%

40%

Treated Lumber Untreated Lumber

30%

Composite and Plastic

20%

10%

0% 2011

2012

2013

2014

2015

2016

Some Pitfalls to New Building Product Introductions ▪ Product benefits someone other than specifier, purchaser or end-user (such as some labor saving innovations) ▪ Product requires systemic change ▪ Drop-in replacements have higher likelihood of success

▪ Wrongly assuming little emotional content in purchase decision ▪ Benefits are difficult or disadvantageous to convey ▪ When more than multiple logical points need to be made, or if benefits rest on a hard-to-understand engineering principle ▪ Involves mentioning disasters, sickness, raises questions

Common Mistakes with New Market Introductions ▪ Entering the most regulated or complex applications first ▪ Wall systems in very cold or high-wind areas, for example

▪ Sellers create value proposition that relies on purist view, requires all-or-nothing decision ▪ Exterior trim & molding is a prime example: a single house may have four or more different exterior trim materials

▪ Failure to realize that home building & remodeling companies are businesses ▪ Sales, design, marketing, regulations, code approvals, coordinating construction, financing, hiring & training & retaining employees ▪ Your product can improve their home—how about their business? ▪ Some offer program assistance—bidding, scheduling, financing, etc.

Common Mistakes with New Building Product Introductions ▪ New products address complaints or nuisances, but fail to really solve problems or create opportunities ▪ Contractors will not always pay more for a product that is less heavy, less dusty, or less itchy

▪ Some new product benefits create unintended consequences—examples of issues with early Green homes ▪ Ultra-low-flow fixtures and long wait times for hot water ▪ Very high efficiency AC and high indoor humidity ▪ Very tight homes and poor indoor air quality

▪ True advantages are not typically discovered until after the product has been on the market a while

How Switching to a New Product Can Impact Builders & Contractors ▪ Switching Costs—new place of purchase, training installers & supervisors, new tools and more ▪ “Tool Programs” are one popular way to reduce switching cost ▪ Field techs, design assistance, code help are common services

▪ There is an implied “risk premium” required by contractors for switching—so your product/service advantage need to have substantially greater benefits ▪ Remember that most installers do not read instructions, and they want the contractor to make decisions on how to install

Your New Product Installs So Easy, Anyone Can Do It? ▪ Anticipate resistance from some skilled trades ▪ Learn how product improves installation, then demonstrate to contractors ▪ Consider non-traditional users, like remodeling generalists or handymen who welcome alternative that doesn’t require special tools or training ▪ Consider do-it-yourselfers (prosumers, weekend warriors, etc.)

Strategies That Can Build Upon Construction Labor Shortage ▪ Reduce skills required (unskilled worker to do job of journeyman) ▪ Reduce crew size (run more crews with same workforce) ▪ Eliminate need for a trade—one trade does work of two ▪ Fewer trips to the jobsite ▪ Reduce fatigue & jobsite injuries to keep workers longer ▪ Allow for easier payment of workers by piece rates ▪ Cautions: saving time for one worker does not always translate into overall time savings ▪ Focus on savings in time-consuming activities

Management Labor Deficit ▪ Recent HI study of ASHRAE members revealed that there is a deficit management levels of construction companies— not just skilled tradespeople— ▪ The primary lack was project coordination and management ▪ The skills were particularly lacking a deep knowledge of construction (not engineering) need jobsite experience and maturity to anticipate issues

▪ Technologies/apps/software solutions are available, but only tech saavy younger generation was inclined to use them ▪ Webinars to facilitate face-to-face contact ▪ Tracking software to communicate real-time with building team ▪ Communications apps

Industry Concentration Among New Home Builders Share of 2016 Total Starts

Total 2016 Starts of Smallest in the Group

Nation's Largest Builder

3%

41,652

Top 5 Builders

10%

14,229

Top 10 Builders

13%

6,098

Top 20 Builders

16%

2,790

Top 100 Builders

22%

403

Top 200 Builders

24%

149

All Builders Under 149 Starts

76%

1

Calculations Based on Builder Magazine’s Builder 100 and NAHB-reported housing starts

New U.S. Home Starts by Category, 2016 Multifamily Apartments, 28%

Townhouses, 12%

Single Family Starter, 20%

Single Family Luxury, 13% Single Family Moveup, 27% Source: U.S. Census and Annual Builder Practices Reports

THANK YOU Home Innovation Research Labs 400 Prince George’s Blvd |Upper Marlboro, MD 20774 P: 301.430.6194 | F: 301.430.6180 HomeInnovation.com

Value of New U.S. Homes Built, 2016 Average SF of Finished Floor Area 1,745

$

327,091 $

48

Multifamily Apartments

1,118

$

191,640 $

66

Single Family Starter

1,700

$

183,428 $

46

Single Family Moveup

2,535

$

364,136 $

121

Single Family Luxury

3,931

$

767,320 $

119

Townhouses

Average Selling Price (USD)

Source: Annual Builder Practices Reports

Total Value (Billions USD)

Is the Remodeling Market Opportunity Primarily for Pros or DIYers? DIY Share of Remodeling Materials Purchases

Interior Paint

69%

Appliances

58%

Deck & Porch Rails

58%

Faucets

53%

Fences/Landscape Walls

50%

Exterior Decking

47%

Exterior Doors

45%

Siding

39%

Cabinets

38%

Structural Walls, Floors & Roofs

32%

Roofing

18% 0%

10%

20%

30%

Source: Annual Consumer Practices Reports

40%

50%

60%

70%

80%