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HVAC Report

Rate Hikes Main Threat to HVAC

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MCN Editor Karen Zajac-Frazee Air quality concerns and decarbonization efforts remain strong drivers for heating,  AC and ventilation systems, but will higher interest rates squelch demand?

Heating, ventilation and air conditioning is projected for long-term growth over the next four years,  but interest rate hikes are providing short-term uncertainty.

Demand from two main elements of the HVAC market, residential and nonresidential construction, varies. So does the outlook. 

At Wieland Metals, Regional Sales and Foil Manager Kaitlin Biehl says the company services quite a few different product lines in the marketplace for both residential and commercial applications of HVAC. “With the changes in building and construction and how many houses are being built right now, we have seen some initial impact, but it’s still steady growth year after year.”

Mike Wolf, PE, director of regulatory business development at Schofield, Wis.-based Greenheck, an HVAC supplier, says when COVID hit, people really were anticipating the worst and expected a downturn. However, it’s been just the opposite. 
“We’ve seen tremendous growth over the past two to three years that has come from different segments of the market than maybe we had seen in the past. We’ve seen some good activity with warehouse work, so we saw a huge increase in distribution center work. Then the other thing we’ve seen a tremendous growth in is data center work, so our growth has been in demand for our products and has been steady,” he says. 

Tom Schleisner, area leader/HVAC business development, at Winsupply Inc., says the residential market has really slowed up quite a bit. That’s to be expected, given the numerous interest rate hikes. However, there has been some offsetting positive trends. 

“We have seen a big pickup in multifamily and light commercial. I think there’s a lot of pent-up demand in the light commercial world because of the lack of available product to fill the needs and multifamily apartments are going up all over the place, and I believe that that’s going to continue for a while.” 

Nonetheless, the sense seems to be that HVAC is slowing down. Aaron Baldridge, Wieland VP of business development and aluminum sales says, “The HVAC and B&C market is and will continue to be strategic for us. We have seen some softening in the markets like others, but the future market projections are positive. Our customer base is still planning for growth.”

“I expect that the rapid deceleration of this sector will begin to somewhat influence demand at some point in 2024. I’m not too concerned about it though because there are always new projects springing up, and when one area is slow, it’s always supplemented by another,” says Luis Feijoo, sales manager, Century Metals and Supplies Inc. 

Mike Hubbell, executive vice president, American Piping Products, says the rate hikes had put a bit of a damper on business. “Now we’re seeing a little bit of a different story in the last 60 days that the idea is that we are reaching peak or close to peak of interest rate hikes and now you can plan your business a little bit better. So we’ve seen this across the board, whether it’s agriculture or construction, anything that has anything to do with large equipment, there’s been a little bit more planning taking place and the business is picking up slightly.”

Feijoo also says the inflationary times have disguised the increases associated with these rate hikes and at the end of the day if the consumer is willing to accept and pay for it, the market will continue to stay strong. “The housing affordability problem we face coupled with these costs associated with borrowing money will begin to have a negative effect should rates not improve.

“There’s no question, the higher rates have negatively impacted the HVAC building and construction industry. We shall see what happens going into an election year. That said, we are optimistic for the future; especially with new technologies on the horizon,” Baldridge says.

“I think the interest rates really affected residential new construction. Now, we have seen it start to rebound a little bit, but not nearly to where it was before. If you look at the interest rates, they’re not as bad as what they were in the ’80s and early ’90s, so I do see that that segment will start to come back,” Schleisner adds. 

However, Wolf states they have not seen it impact them too much. The commercial market they serve generally lags the residential market by 12 to 18 months. “When we see rate hikes, it typically impacts residential construction first and then commercial construction later.”

He says one thing that insulates the HVAC market from economic cycles is that when people aren’t constructing new buildings, they’re figuring out how to keep their old ones lasting longer.  When this happens, building owners use their limited funds to replace and update equipment. This keeps demand for HVAC equipment relatively steady.

Additionally, metals pricing has come down in the last year and that has had an effect on the segment. Baldridge says,  “Aluminum prices have dropped significantly since hitting their peak in the first quarter of 2022.  Midwest Ingot monthly average is down 16 percent year to date, 40 percent compared to March 2022.  I do think we are near the bottom of the price cycle for aluminum Ingot.”

On top of that, he says, producers are increasingly bullish in the medium term, forecasting growing demand for aluminum, copper and overall metal due to the expected rise of emerging markets, such as, electric vehicles, data centers and solar panels. 

Accordingly, Feijoo states, “Margins are not what we had become accustomed to, but there’s a silver lining as demand has remained strong, and while revenues are down, we’re still showing growth year over year, so we may not be having the record-breaking dollars’ month over month, but the growth in weight is still there which is the primary concern – that’s how we track our growth.” 

Schleisner doesn’t think the softening of metals pricing has had been negated by the increase in labor costs.  

“What it’s done is stabilized pricing.  In the past few years our cost of steel and other raw materials were increasing at a rate that we struggled to keep pace with. With the pace, we were experiencing price increases from our suppliers, we were forced to have multiple price increases per year or place a surcharge on certain products,” Wolf adds.

“During COVID when we saw these rapid price escalations, either we were taking less of a margin for our product or when we were able to pass on price increases or surcharges, someone else in the supply chain was taking less of a margin or the building owner was just forced to pay more,” he says. “Pricing has stabilized  to where people can actually do reasonable planning again.”

As the push toward sustainability and decarbonization is ongoing across the globe, it is also playing out in the HVAC space.  Feijoo says sustainability is always a positive for any metals-consuming industry. “At the end of the day, we supply a product that is over 75 percent recycled. As far as how this plays out in the HVAC space, recovery projects from local governments as well as federal oversight keeps this industry improving on a constant basis. Many mills are already working on mitigating this and decarbonization initiatives are already being implemented before it’s turned into law.” 

“For decades we’ve offered water-based coatings, which is the cornerstone to our HVAC foil business. It’s that push now, industry-wide and across the globe, encouraging us to continue doing what we’ve already been doing for years,” Biehl says.

Schleisner thinks there is a lot of opportunity to try to move that segment of the business more toward heat pumps and the electrification side of it. He sees government regulations and rebates and different things have  brought a lot more opportunity, but by the same token, they have also driven the price of a system a lot higher and so the affordability to the consumer has been passed on., So, thatt’s also causing some bit of an issue.

“It starts with the efficiency of our product. The first focus is on reducing the amount of energy consumption that our products use when they’re installed. There are a number of things that we’re reacting to from not only a regulatory perspective, but also changes to building and energy codes.

From a regulatory perspective, the Department of Energy continues to set new and more stringent limits on how much energy our products can consume. If our products consume more than the maximum regulatory limits, we’re not allowed to sell those products into the marketplace anymore,” Wolf says.

Furthermore, the industry is experiencing new regulatory restrictions that are being driven by the climate and the decarbonization constituency. This includes requirements also being asked to provide information on how much carbon is being used to produce the material. “These new requirements are putting additional burden on manufacturers to track and report the carbon footprint of their products as well as related data from their component and raw material suppliers,” Wolf adds.

However, there are new developments in HVAC. Feijoo states, “The adding of new technology and techniques for manufacturing coupled with some of the AI tech that’s in the pipeline are setting up this industry to see some major shake-ups over the next decade. Once some of these learning machines are put into play – that’s when we’ll see a major shift in the way we do business from the manufacturing side.”
“Water to air heat pumps, geothermal. There’s a lot of trying to conform to where the markets are going and the decarbonization, so I think those are going to be the biggest things going forth. I also see indoor air quality coming out of COVID still remains strong, so I think that there’s a lot of opportunities in that space as well,” Schleisner comments.

Baldridge says the market is evolving, constantly seeking improvements and creating new opportunities with enhanced technology. “On the copper side, we continue to see a bright future. Copper is a very sustainable product, and we are leading those efforts in the marketplace. In addition, some customers are looking for lightweight materials and lower cost alternatives to copper, so we see more potential for the aluminum side of our business as well.” 

“We are in a very mature industry so the technologies themselves are not new from a development standpoint, but certainly we’re always evolving our manufacturing processes,” Wolf says. “It’s not new, but a trend that’s causing some change in the HVAC industry is the push towards electrification. With the push towards electrification, we’re being asked to come up with different types of equipment.  For example, we’re seeing a shift away from gas heat to equipment that uses electric heat,” Wolf adds.

In addition, there are shifts in material usage in the products.  Schleisner adds there’s been a definite shift toward heat pumps. “Obviously with the regulations of the regional efficiency standards, higher SEER products are now being developed, and so you’re starting to see more of a migration to higher SEER and heat pumps.” 

However, Baldridge has seen a big shift in material usage because the specification selection and requirements can be quite different. “The efficiency of a stainless steel heat exchanger differs from copper and aluminum, thus the requirements are specific to that project.  Alternatively, cost or features like corrosion resistance can be deciding factors on material selection, too.”

Since COVID-19 led to increased concerns about air quality, it is still driving activity. “The infrastructure improvement bill passed in 2021 has opened the door for enhancements with regards to retrofitting and upgrading, with the endgame being a marked improvement in indoor air quality and filtration,” Feijoo says. 

Biehl adds, “During COVID, we saw an increase in inquiries for a desiccant-coated aluminum foil we supply for commercial energy recovery wheels, where air quality is key. Wieland has been able to support the market’s growing request over the past couple of years and can sustain future growth. The market question now is, will that same demand continue into the residential space for air quality of homes? If so, Wieland is prepared.”

“I’ve seen it decrease a little bit, but it’s still pretty prevalent.  I don’t think it’s as strong as it was in COVID, but it’s still there. I think it really brought more attention to indoor air quality inside, not only the homes but also on the commercial side, and you’re seeing it at airports and in public and commercial spaces,” Schleisner comments.

Wolf says there is more focus on indoor air safety and indoor air health. There are new standards such as the ASHRAE Standard 241 Control of Infectious Aerosols that deal with the handling of aerosol transmissions in the air that we breathe in buildings. 241 is a new standard that was just published a few months ago and sets the requirements for when buildings should go into an emergency mode to mitigate the risk of infectious aerosols.

“Air quality is made-up of a number of different things, but the three that I think are most critical are CO2 levels, relative humidity and PM 2.5. There’s more focus on  these specific elements of indoor air quality and how we maintain healthy and safe levels within the building. The best way to do that is by bringing in fresh, outside air into the space,” Wolf concludes.

An up close look at a heat exchanger. (Photo courtesy Wieland)

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