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Integrators’ revenue mix has ebbed and flowed over the past several years between commercial and residential business, and the tide appears to be streaming in favor of the resi market. Indeed, according to Data by D-Tools over a recent 12-month period 84% of professionally installed projects were residential, while just 16% were commercial applications.
Moreover, more than half of the integration companies (52%) reported they only performed residential projects over the past year… meaning they did not take on a single commercial application between June 1, 2022 and May 31, 2023. On the flip side, 13% of integrators reported that they performed only commercial projects and did not do a single residential installation.
How Housing Bubble & COVID Swayed the Market Mix
The mix between commercial and residential projects has fluctuated over the years. When the custom electronics industry first coalesced in the late 1980s, integration companies were primarily focused solely on residential applications, seldom dabbling in commercial work. Those were the days when the home theater and home automation were first developing. Integrators primarily stayed true to the residential market with a constant flow of new business coming from homebuilders and new home construction.
But when the housing bubble burst in 2007, many residential integrators were forced to cross over into the commercial market to diversify their income stream. That diversification engaged dealers in providing enterprise-level solutions to vertical markets such as corporate/office, hospitality/hotels, bars/restaurants, houses of worship, retail, education (both K-12 and higher-ed), and even government. Digital signage, videowalls, enterprise-grade networks, line-array speakers, access control, teleconferencing, energy management, sound masking, unified communications/collaboration, and video surveillance solutions became part of integrators’ routine service offerings.
There was even expansion into a gray area commonly dubbed as the “resimercial” market. It includes applications such as home offices with commercial-grade equipment, but also lobbies, gyms, and common areas of multi-dwelling unit (MDU) condo and apartment complexes. With the growth of all these potential commercial opportunities, some residential integrators even migrated their businesses so much that the commercial market now represents the majority of their revenues.
But the commercial market momentum tide swayed downward in 2020 with the onset of the COVID-19 pandemic. Commercial business came to a halt as the economy shutdown and travel restrictions were put in place. Meanwhile, the residential market boomed as consumers were stuck at home seeking better entertainment options and improved home networks for work-from-home scenarios.
Clearly, the high percentage of residential projects from the Data by D-Tools shows that the commercial market opportunities have not yet fully rebounded, mostly likely in the corporate/office environments. Many companies have expanded their work from home options for employees as office buildings sit vacant. According to Commercial Edge’s National Office Report, the U.S. national office vacancy rate was 18.3% as of January 2024, with several metros (Houston, Detroit, Seattle, Austin, Denver) at more than 20% vacancy rates, many others (Atlanta, New Jersey, Twin Cities, Phoenix, Chicago) just under 20% vacancy, and San Francisco sitting with a disturbing 24% commercial vacancy rate.
6 Unique Elements of the Commercial Market
Transitioning between residential and commercial business is not as simple as flipping a switch. There are some major differences in how your business approaches the two markets for which integrators need to be prepared.
1. Sales Process
The sales process itself for the commercial market is usually very different than for it is in residential applications. Namely, in the commercial world competitive bidding is much more common. Many commercial clients will develop a Request For Proposal (RFP) that outlines the project’s scope. The RFP is either created on by the commercial client itself or done using a third-party consultant. That RFP is then either sent out to the open market where any integrator can submit a proposal, or more commonly the spec is sent directly to a handful of selected integration companies. The spec usually proposes an acceptable price range because the commercial client has already budgeted for the installation. Positively, that means there is less haggling over price and features.
2. Project Bonding
For extremely large projects, some specs will require the integration company to purchase a bond on the project. That bond, in essence, is a legal guarantee that the project will be completed as expected. Project bonding protects the project owner and developer because if the bonded contractor fails to perform, the bonding company must pay some level of restitution. The cost of project bonds varies based on the credit rating of the integrator, but according to bizfluent.com, a contractor with a poor credit rating will be required to pay a 3% bond rate on a project. So for a $500,000 project, that is $15,000.
3. Cash Flow
Commercial projects tend to be larger than their residential counterparts. Sure, that means potentially more revenue and more profit for the integrator; however, it also means cash flow can be a potential problem. Project specs will usually lay out the timing for payment. Often, that timing may not coincide with how a residential integrator normally handles payments, such as getting an upfront payment that covers the cost of all the equipment.
4. Product Selection
Residential integrators moving into commercial realm could encounter unfamiliar products required by the specification. This can represent a learning curve and possibly add labor time to the installation. It also can require forming a relationship with a new manufacturer or distributor that you have not worked with in the past and therefore do not have a credit history with. Also, compatibility of those unfamiliar products with the rest of the components can be a challenge. There are some products that are suitable for both markets, so if you are looking to diversify, you might want to gravitate toward those options.
By far the most important element to succeeding in the commercial market is deploying an enterprise-grade network. Similar to residential installations, a hardwired and wireless network infrastructure is the basis of a commercial project, but amplified because the number of users and number of IP devices are much larger. Every component, from digital signage to security cameras and beyond, requires a high-speed network basis.
If you are going to play in the commercial arena, service is crucial. Businesses rely on the technology to function; therefore, there is little to no wiggle room in terms of response time necessary to address a problem. Integrators that do not have dedicated service technicians could have trouble properly servicing multiple commercial clients.
As noted, commercial projects are typically large and often have tight installation windows. For example, if a restaurant, bar or hotel is set to open on a certain date, and the owners have already promoted the “grand opening,” the integrator doesn’t want to be the cause of the holdup. Thus, dealers are often required to have an “all-hands-on-deck” approach for these large jobs. For smaller integration companies, sometimes that is not feasible because it means neglecting your bread-and-butter residential clients.
Oddball working hours can also be a manpower concern. Restaurants and offices do not necessarily want technicians roaming around with ladders, open ceilings and giant spools of wire strewn about while customers or office workers are there. That means commercial projects can require technicians to work weekends or overnight. That not only breeds a disgruntled technician but also jacks up your labor costs.