Incredible growth has been the norm for residential design and construction firms on the whole for the past few years. Now the winds are shifting again, according to survey data that Houzz recently collected from more than 2,000 firms. Here we reveal what industry pros are citing as challenges, how those challenges will affect the cost of doing business in 2023, and areas where optimism is the prevailing sentiment.
“The home renovation and design industry experienced remarkable growth in recent years. However, that growth rate is unlikely to continue in the current economy,” says Marine Sargsyan, Houzz staff economist. “The findings from the 2023 Houzz State of the Industry reflect tempered optimism among professionals, who expect their businesses to experience slowed revenue growth and face headwinds from increased costs of doing business.”
The seven business groups covered in the State of the Industry study are architects, interior designers, general contractors/remodelers/builders, design-build firms, and three types of specialty firms: building and renovation, landscaping and outdoor, and decorating.
Cost of Doing Business Likely to Rise
More businesses are expecting the cost of doing business to increase rather than decrease in 2023. The factor pros cite most frequently as a contributor to the rising cost of doing business overall is product and material costs. However, compared with the previous year, the share of businesses across all the surveyed industry groups reporting this as the No. 1 cost driver has declined by 15 to 29 percentage points.
The second most frequently cited factor is subcontractor costs. In fact, about 3 in 5 GCs (60%) and design-build firms (58%) report that these eroded profits in 2022. However, these percentages are lower than in 2021 (71% each).
The third most frequently cited cost driver is employee wages.
Price Volatility and Availability Concerns Ease
The price volatility of products and materials still poses a challenge for six of the industry groups. However, the sentiment is less widespread compared with 2021, with decreases of 20 percentage points (GCs), 13 points (building and renovation specialists), 9 points (design-build firms) and 9 points (landscaping and outdoor pros).
In addition, the availability of products and materials was less of a concern overall in 2022 compared with 2021. Whereas in 2021, five of the seven industry groups cited it as the No. 1 or No. 2 challenge, for 2022 it did not make the top two for any group. Interior designers, building and renovation specialists, and decorators do say this was the No. 3 challenge they faced in 2022, but the percentages are lower (down by 9, 12 and 16 percentage points, respectively).
Among architects, the majority point to the weak/uncertain national economy as being their greatest business challenge in 2022, with the percentage up by 20 points year over year.
Lower Revenue Growth Predicted…
As mentioned earlier, the winds of growth appear to be shifting after the boom of the past few years. Businesses across all the industry sectors we surveyed are anticipating much lower revenue growth in 2023 (growth rates of 0.3% to 6.1%) than they expected for 2022. Decorating specialists are the most bullish, with their expected growth rates for 2023 averaging 6.1%. Construction businesses (general contractors, design-build companies, and building and renovation specialists) fall in the middle, anticipating growth of less than 3% for 2023 (2.9%, 2.3% and 1.3%, respectively).
Architects are typically the most conservative when it comes to predicting growth, so it’s no surprise that they have the lowest anticipated rate (0.3%). It’s also worth noting that on average, actual revenue growth in 2022 did not meet expectations for businesses across all sectors, following unusually high performance in 2021.
…But Overall Outlook Is Positive
Despite the lower expected revenue growth, the projected increase in the cost of doing business and other challenges, at least half of the surveyed residential construction and design companies (50% to 56%) predict that 2023 will be a good or very good year. Interior designers are the most optimistic, with 56% anticipating a good or very good year, followed by design-build firms and general contractors (54% each).
Demand Expected to Increase
Perhaps contributing to the generally positive outlook is the fact that more businesses in six of the seven industry groups believe that demand for their services will increase (21% to 32%) rather than decrease (12% to 24%). Specialty decorators are the most confident about the increased demand (32%), followed by interior designers and landscaping and outdoor professionals (24% each).
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