If the past few years have taught us anything, it is that we should expect the unexpected and that the most accurate prediction is that something unpredictable will happen. Nevertheless, here are seven things you can expect from the HVAC industry in the new year.
1. There Are No Fixed Standards
Abraham Lincoln once asked a group of people how many legs a cow had.
“Four,” someone shouted.
“What if I call the tail a leg?” asked Lincoln in response.
“Then the cow would have five legs,” someone answered.
“No,” said Abe, “Just because I call the tail a leg, doesn’t make it one.”
Lots of people are calling tails legs these days. For example, when the nation plunged into a recession in 2022, the politicians had a ready answer. They changed the definition of a recession. Boom! What recession? Problem solved.
From economics to HVAC, definitions are changing and standards are variable. At least we get to refer to the new SEER as SEER2.
2. The Economy Will Slow (Maybe)
No matter what the politicians want the public to believe, the economy does seem to be slowing. This is driven in part by the Federal Reserve’s attempt to get inflation under control by raising interest rates and reducing the money supply through quantitative tightening. It’s the right action by the Fed, but the central bank is swimming upstream against the profligate amount of money being sprayed out by Washington.
Money, like everything else, responds to the law of supply and demand. Pump money into the economy without increasing productivity, without producing more, and the money loses value. We see the loss of value as inflation. Lately, not only has Washington spent like crazy, but U.S. worker productivity has been plummeting.
Recessions generally serve to reduce inefficiencies in an economy. In most cases, this results in a strong rebound and good growth. If the bottom is reached in 2023, the balance of the year should be robust.
3. Energy Prices Will Rise
Energy is also subject to supply and demand. Reduce fossil fuel exploration, production, and make fuel transportation more difficult, and the price of petroleum and natural gas will rise. Without drawdowns of the strategic petroleum reserve, gasoline prices will resume their upward trajectory as soon as economic activity picks up. Exporting liquified natural gas to a thirsty Europe that is deprived of Russian gas will raise the price of natural gas here.
Furthermore, as we shift the oil supply chain’s source to less reliable and unsavory nations that despise us, the potential for disruptions jumps. Any supply disruption is almost guaranteed to result in an “energy crisis.”
As politicians try to pump more green energy into the electricity generation mix, electricity prices will rise even faster than fossil fuel prices. Moreover, electric reliability will suffer.
The rise in energy prices is entirely self-inflicted, which means it is solvable should our national leaders find the desire and fortitude to address it. In the meantime, it will give today’s super-high-efficiency HVAC a real return on investment, allowing contractors to make rational as well as emotional appeals on energy savings.
4. The New Construction Market Will Shrink
Residential new construction is responsive to interest rates. Until the Fed breaks inflation or gives up on its target of 2% annual inflation, the new construction market will suffer. First-time homebuyers will have to accept smaller starter homes or rent. Existing homeowners will more likely feel trapped in their current homes due to the lower payments of existing mortgages and, thus, are less likely to move. Rising interest rates after the recent low rates make the entire real estate market more static.
5. Replacement Revenue Will Rise While the Number of Replacements Will Fall
It sounds paradoxical, but we will see fewer replacements and more replacement revenue. The replacement market is still feeling the effects of the shipment cliff, echoing the industry’s contraction from 2005 to 2009. Yet manufacturer price increases across 2022 resulted in price increases greater than the reduction of installations. The result is overall revenue jumped, labor fell (fewer jobs), and profit soared.
The same thing that happened in 2022 will happen in 2023 thanks to price increases from SEER2. Fewer installations for more money will mean record profits.
6. Private Equity Will Continue Its Buying Spree
Private equity companies appear to be expressing the sentiment that they will continue to vacuum up companies in the residential service and replacement space. Those using leverage (i.e., debt) for acquisitions are likely to become more diligent as the cost of money rises. Deals will still get done, but they might be a little more difficult. This will make the role of an M&A advisor like Brandon Jacob, SF&P, and the Business Modification Group even more important for contractors seeking to exit.
For contractors, the important point is that this remains the best time in history to sell a heating and air conditioning company. Contractors should consider grabbing the brass ring while the grabbing is good.
7. The Long-Term Outlook for the Replacement Market Is Excellent
Beyond the new year, the residential service and replacement side of the industry will continue to present a bullish picture. The refrigerant changes may present short-term challenges for contractors, but they will likely result in an acceleration of replacements for the approximately 50 million R-22 systems and some 40 million R-410A systems in place.
Even without the refrigerant impact, the outlook is good. The shipment cliff will expire in 2024. Starting in 2025, the replacement business will begin a 10-year run of ever-increasing demand. The next decade will be good for contractors.
