Building Products Market Update – December 2023

Building Products Market Emerges As a Standout Amid Challenging M&A Backdrop

Capstone’s latest Building Products Market Update reports that persistent construction spending and robust project visibility have contributed to healthy demand for Building Products sector participants through year-to-date (YTD) 2023. While an elevated interest rate environment has challenged project financing, high growth end markets have continued to experience significant building activity. Through September, total construction spending increased 8.7% year-over-year (YOY)–marking the largest YOY expansion since September 2022, according to the U.S. Census Bureau. Manufacturing construction spending growth has led the sector, rising 61.9% YOY. This has been bolstered by heavy investment in areas including private plastic/rubber and computer/electronic/electrical projects, which expanded 107.2% and 134.9% YOY, respectively, in September. Favorable sector forecasts are supported by healthy levels of contracted work, although labor challenges have continued to impact project completions.

Sustained nonresidential construction demand has been a hallmark of the space for much of the year, with contractors expecting an expansion in sales, profit margins, and staffing over the next six months, according to Associated Builders and Contractors (ABC). However, residential building activity has lagged in recent months, with housing starts falling 4.2% YOY in October, representing the third consecutive month of YOY declines, according to the U.S. Census Bureau. Elevated mortgage rates have pressured the Housing market throughout the year with many buyers opting to wait for more favorable conditions. With the Federal Reserve likely finished, or near complete, with its monetary tightening campaign, a loosening rate environment may provide tailwinds to the Housing market towards the second half of 2024. Sector players across end markets are expected to continue to see robust demand in the coming months, fueling an active merger and acquisition (M&A) market for strategic and financial acquirers.

M&A activity in the Building Products sector has defied broader transaction market trends, with volume growing 7.9% YOY to 284 transactions announced or completed YTD. The steady demand for construction activity has encouraged sector participants to continue to seek inorganic growth, despite an uncertain economic backdrop. Geographic expansion, addition of complementary product offerings, and attainment of cost synergies have remained key motivations for consolidation. Strategics and financial buyers have demonstrated a willingness to pay premium valuations for high-quality target companies with healthy gross margins, attractive end market exposure, and robust revenue growth. M&A volume is expected to persist at healthy levels through year end and into 2024.

Strategic and sponsor interest in the Building Products market is likely to remain robust. M&A valuations for target companies have remained healthy, averaging 9.9x EV/EBITDA through YTD—presenting valuable liquidity options for leading privately-owned sector players.

Also included in this report:

• Commentary on the performance of sector participants through YTD 2023.
• Insights to private equity investment activity in the Building Products market.
• Highlights of recent notable M&A transactions in the space.

Capstone Partners’ Building Products & Construction Services Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the building products & construction services industries. Our team partners with leading mid-to-large sized building and construction businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.

For more information on the Building Products Market Update featured in this report or to speak with one of our Buildings Products & Construction Services M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.