Monomoy bullish on construction, despite rising mortgage rates and high home prices

Monomoy Capital Partners forecasts a bright future for construction in the single-family housing market over the next decade, despite short-term clouds on the horizon, like rising mortgage rates and high home prices.

The New York firm has been active in the building products sector. Recent acquisitions include buying Artesian Spas and Marquis Hot Tubs, for undisclosed terms, and merging them to form a pool and spa wellness platform in January 2022; and buying Cast-Crete Holdings, a Seffner, Florida-based manufacturer and distributor of precast products and other masonry supplies, for undisclosed terms in November 2021. Recent exits include selling Atlanta-based Construction Resources, a provider of building products, to Mill Point Capital-backed International Designs Group, for undisclosed terms in July 2022; and selling Friedrich Air Conditioning to Rheem in August 2021.

For insights on the sector, PE Hub turned to Jaime Forsyth, who was named partner, head of the firm’s investment team in December 2021. Below is our Q&A with Forsyth.

Despite talk of a nationwide housing correction, why does Monomoy continue to be attracted to the housing sector?

We remain encouraged by the long-term tailwinds and continued migration to Florida and the Sun Belt. The underbuilding of the past decade has resulted in a shortage of homes that will require more construction in the coming years, despite any temporary pullback due to rising mortgage rates.

We are long-term believers in single-family housing growth in the US over the next decade, and Florida and the Sun Belt stand out due to favorable tax policies and attractive weather year-round, which lend themselves well to people who are working remotely, seeking to retire or aiming to operate a business locally.

New housing construction is often perceived as highly cyclical, and building decreased considerably during the last financial crisis. What do you perceive to be different about the market today?

The single-family residential market is fundamentally different today compared to the lead-up to the Great Recession – lending standards to obtain a mortgage are significantly more stringent, and there is far less speculation driving unstable levels of construction.

Today, fewer homeowners are underwater, and recent buyers have considerable equity value in their homes. Additionally, home inventory levels are not inflated. On average, homeowners have mortgage rates meaningfully lower than the prevailing market – which increases the cost of moving and should moderate the number of homes available for purchase. We believe these factors create a floor significantly higher than that of the Great Recession. We also expect any decline in single-family construction to be temporary as the housing supply has been underbuilt over the past decade, and there is structural demand for new homes.

How is Monomoy partnering with companies to navigate the impact of supply chain challenges and rising labor costs in the market?

Monomoy has one of the largest operating teams in the middle market. We take a hands-on approach when partnering with each of our portfolio companies’ management teams, supporting them to both accelerate growth and manage through challenges.

Supply chain challenges and rising labor costs have plagued companies across our portfolio for the last two years. Examples of initiatives where we have helped our companies mitigate such challenges include: improving workplace environments and workers’ benefits to attract and retain talent; working directly with customers to meet their orders using alternative component parts; bringing some manufacturing capabilities domestically and diversifying vendors to protect supply of certain parts.

Thankfully, in recent months we have started to see signs of both the supply chain and labor markets stabilizing.

Is Monomoy prioritizing any strategic initiatives to drive M&A growth in this sector?

Earlier this year, we announced the acquisition of Cast-Crete, the nation’s largest manufacturer and distributor of precast and prestressed concrete lintels and sills. Cast-Crete is a premier platform that we expect to build, in part, through acquisitions. The building products market is quite fragmented. We are evaluating a wide range of opportunities that fit strategically with Cast-Crete in terms of its ability to serve contractors and builders in its core markets while also adding product and service capabilities.

Tell us about Monomoy’s expectations for deals that close in 2022.

Choppy financing markets and general macroeconomic uncertainty are driving a flight to quality and influencing many buyers to sit on the sidelines for the remainder of the year. I’ve noticed sellers are only exiting if they have to or are much less affected by broad market sentiments. So, for the deals that do get done, it is because buyers feel confident that they can appropriately price risk and manage through any future volatility.