Soft Residential Demand Carries Into the New Year

That sobering performance set the stage for candid reflection from manufacturers. Speaking to investors at the Baird Global Industrial Conference in November, Carrier and Trane acknowledged the sluggish residential market and tempered expectations for a quick rebound in 2026.

As Carrier CEO Dave Gitlin, noted, “It goes without saying that in the second half of [2025], the [residential] business experienced significant weakness. And a key question is, what will this business do next year?”

He said that the residential U.S. market consists of about 130 million installed HVAC systems, with a typical annual replacement rate of around 6%, or roughly 8 million units. Add another 1 to1.5 million for new construction, and the annual average jumps to a little more than 9 million units.

“As we exit 2025, we expect the market will be well-below this rate at about 7.5 million units,” said Gitlin. “Though a return to the norm in 2026 would be tremendous…we do not believe that we will get back to those levels in just one year.”

Carrier attributed much of the 2025 downturn to excess channel inventory left over from the pre-buy of equipment due to the refrigerant transition, which was more than anticipated. Beyond inventory, weak new home construction and historically low existing home sales sharply reduced replacement demand, said Gitlin, since many homeowners delay upgrades until selling. High interest rates, consumer stress, and a growing preference for repairs over replacements also dampened sales.

“Our number one priority right now is to ensure destocking headwinds don’t persist into 2026, by ending 2025 with field inventories down 30%, a field inventory unit level not seen since 2018-2019,” said Gitlin. “As of today, we are in good position to achieve that…We will discuss more on our outlook, including the North American residential market when we report [fourth quarter] earnings. But for now, we are assuming a flat volume market for 2026.”

Trane shared a similar perspective. Donald Simmons, group president of Americas at Trane, characterized the residential slowdown as “cyclical rather than structural,” while predicting that the first half of 2026 will likely remain difficult for residential sales. He pointed to three main drivers behind the decline in residential sales. First was the refrigerant transition, which triggered an initial prebuy, followed by another significant prebuy ahead of tariff increases. The second factor was the shortage of A2L refrigerant cylinders.

“None of us predicted that with the refrigerant change, there would have been a canister shortage,” he said. “Contractors couldn’t get refrigerant to do the installations, which was a problem. The third factor is that the cooling season was shorter than what we had expected. Of those three drivers, two won’t repeat in 2026.”

Meanwhile, lower volumes aren’t translating into lower equipment prices. Carrier reported double-digit price increases in 2025, largely due to higher production costs for A2L equipment compared to R-410A units — and more increases are expected.

“Our intention is still to announce a price increase in residential in the Americas for 2026, likely in the mid-single-digit range,” said Patrick Goris, chief financial officer and senior vice president at Carrier. He added that the reason for that includes ongoing material cost inflation, particularly copper and aluminum.

The bright spot continues to be commercial HVAC, which is experiencing robust growth — particularly in the data center market. Carrier said its data center revenue doubled to $1 billion in 2025 and that their backlog stretches into 2028. Trane reported similarly strong momentum, ending the third quarter last year with $6 billion in data center bookings and an overall backlog of $7.2 billion — more than 90% of which is commercial HVAC.

And it’s not just a data center story. Carrier said its non–data center commercial business is growing in the high single digits, while Trane pointed to strong demand across healthcare, higher education, government buildings, and Class A office renovations.

This points to a year of unevenly distributed opportunities. For contractors not working in commercial HVAC, prepare for relatively flat residential sales in 2026. That means tightening up inventory strategies, concentrating on replacement-oriented customers, and leaning into system upgrades, indoor air quality, and deferred maintenance opportunities. Weather will remain a wild card, and the industry can only hope Mother Nature delivers a colder-than-average winter followed by a hot and humid summer.