Get Ready For a Great Run in Replacements
For Service World Expo 2024, I was asked to present an outlook for the HVAC industry over the coming months and years. To understand the future, you must understand the past, because in the HVAC replacement market, the past is prologue.
In 2017, I sold to private equity. In 2020, after the country shut down due to Covid, I was searching for data that justified an optimistic outlook for the industry. Personally, I believed I could lead my team and the contractors we supported to a positive year, but things were not so positive for my parent company. Layoffs were promised, and I sought to avoid them.
Positive service call data from Service Titan and Scorpion supported a growth forecast, but I needed more definitive data. I found it at the AHRI website. AHRI, which is the manufacturers’ trade association, publishes statistical releases on industry shipments with historical data going back 20 years.
When I looked at the AHRI data, I saw that 2005 was the record year in the history of the industry for residential air conditioner and heat pump shipments. Given a 15-year average life expectancy, 2020 was looking strong. When the late summer in 2019 was factored in, I estimated a potential for 9.1 million replacements, a 26% jump. While Covid would defer replacements forward into 2021 and 2022, I felt strongly that 2020 would still be a record year and went public with it. No one in the industry shared my optimism. I was in a very lonely place.
Due to my certainty and data driven approach, the parent company didn’t impose a layoff, though we were held to our original profit plan. We smashed it, as the industry recorded 9.3 million shipments in 2020, with 8 million coming from the replacement market, a record year despite Covid and capacity driven deferrals.
Having emerged from 2020 on a high note, I returned to the AHRI data and noted that shipments contracted 40% from 2005 to 2009. I called this the shipment cliff and wrote about it (see bit.ly/hvacshipmentcliff). Once again, I was nearly alone when I projected a decline in replacements. It seemed obvious to me. You cannot replace what wasn’t installed.
Deferred replacements from 2020 delayed the onset of the shipment cliff. When it did begin to appear, price increases from supply chain issues, SEER2, and general inflation overwhelmed the reduction in jobs. Moreover, increasing total revenue across fewer total replacements and the corresponding reduction in labor, meant record profits.
Private equity noticed the industry growth through Covid followed by the profits and went after residential service and replacement contractors aggressively. When the shipment cliff began to appear in earnest during the latter half of 2022 and across 2023, this caught many private equity firms by surprise. Combined with the rising interest rates, some began to get shaky financially.
Through August of 2024, shipments of residential air conditioners and heat pumps were up around 4%. While this could be pipeline fill, it seems that we might have bottomed out on the shipment cliff. Once we fully turn the corner, the outlook is rosy for the next decade with historical shipments growing each year.
In addition, the South Pacific undersea Tonga volcano that erupted in 2022 increased atmospheric water vapor by 10%. Since water vapor is the most significant greenhouse gas, we can expect higher temperatures until the water vapor works free, which will take the rest of the decade according to recent studies.
Industry prices can be expected to continue to rise thanks to the government’s A2L refrigerant mandates. Contractors appear aware of the need to pass along the price increases. A recent survey of contractors showed that from 2019 through next year, replacement prices are expected to rise 75% for consumers.
Private equity is still active and this remains a good time for contractors seeking an exit. For those electing to continue building their companies, keep adjusting prices to maintain margins. Market aggressively, no matter what the economy does. Work on increasing call conversion. Take a marketing approach to recruiting. Know your numbers and watch your cash. Keep a close eye on how AI might change the industry. Most of all, enjoy the next decade, which will be the best in history for the replacement market.
Matt Michel is a member of the Contracting Business Hall of Fame and author of “Contractor Stories,” an inspirational book of business lessons for contractors. Buy your copy at Amazon.