Why do housing starts matter to the nursery/greenhouse industry?
Bank of the West’s Nursery/Greenhouse specialty area works with some of the largest corporate greenhouses, nurseries, and garden centers in the country. We’re often asked for our insights about leading indicators in the industry, so I thought we would share several elements that can help businesses in the sector plan for their futures.
One of the key leading indicators we look at is housing starts in the region where the company is doing business. When you consider the process and timeframe involved in a new home purchase, this correlation makes a lot of sense. For a housing start that begins in January, we would expect to see the new homeowner heading to the local garden center or hiring a landscaper approximately nine months later with plants being purchased for the yard. By that point, the owner will generally have had time to move in, install irrigation and any necessary hardscape, and they will be ready to plant trees, flowers, etc. By tracking regional housing starts, we can get a sense of what kind of sales volume growth rates a nursery, greenhouse, or garden center should expect to see.
We see similar correlations with building permits and pending home sales. Given that home values and building permits are on the rise in most markets across the U.S., according to data from the Federal Reserve and National Association of Realtors, this bodes very well for the nursery/greenhouse industry.
Many communities have very low inventories of homes for sale, resulting in a pent-up appetite for people to purchase new homes. What’s more, average home values are improving, unemployment rates are falling (see Scott Anderson’s U.S. Outlook) and discretionary income is increasing, according to recent government figures. All these are direct indicators for landscape product purchases to come. Historically, this combination of indicator trends means that residents are more likely to invest in improving their home in the months/years to come — often by beautifying their landscape.
In combination, the housing-related data — alongside a few other leading indicators that we track — suggest a bullish outlook for the nursery, greenhouse, retail garden center, and landscaping sectors. Current economic projections suggest U.S. demand for landscaping products to approach $9 billion in the next three years, according to an August 2015 Freedonia report.
That’s a healthy outlook for the industry; but, as with all agricultural businesses, things can be impacted by weather, which plays a big role on a month-to-month basis in specific geographies.
This year alone, the Northeast faced an extended winter that was even worse than in 2014. We all read about or saw news covering record snow in Boston and “polar vortex”-related cold temperatures across the region. In Texas, the rains started early and didn’t stop, filling the reservoirs and taking the state from a record six-year drought to the state now being at capacity or flooding. Lastly, even the West saw severe drought with water cutbacks that followed and influenced people’s choices to buy the landscaping products that they usually would during a normal rain year.
The weather will always be a wild card that we can’t predict. Identifying and tracking leading economic indicators, however, can be a powerful tool for making smart decisions about your business outside of what Mother Nature delivers.