"What's the Deal with Lumber?"
/By Brett P Holmes, Managing Partner
Ask any homebuilder developer what they think are the 2 biggest risk factors affecting future housing projects and many will include a shortage of land and lumber. Wait, lumber (like, wood)?!? Yes, lumber. Current prices are more than 4 TIMES what they were a year ago at about $1,500 per 1000 feet versus $330 last May. Take a look at live futures prices HERE.
How did this happen? Well, it started in 2017 when the US placed tariffs on Canadian lumber imports. Prices spiked more than 20% overnight and kept climbing through 2018. At the time, the US was importing 15 times more lumber from Canada than any other country. Needless to say, this quickly affected all lumber-reliant industries, especially housing. Most homes are framed out with 2 x 4’s and several materials in homes require lumber too like cabinets, doors, trim, and flooring. Steel framing was never really a viable alternative since tariffs were also placed on steel.
A typical Canadian lumber yard…
A year later in 2019, the lumber industry was seeing lower demand and carrying excess inventory. Severe weather and wildfires ensued which caused a reduction in output across most mills as large producers prepared for what was expected to be a housing recession. Overall, it was a perfect storm in the lumber world as nobody predicted that less than 6 months later we would be in a global pandemic.
When the pandemic hit America in early 2020, mills that had slowed production in prior years were then forced to close. Stay-at-home orders and social distancing measures imposed to curtail the pandemic exacerbated the supply shock. The supply of lumber continued to drop more than 30%. Meanwhile, as if lumber could withstand another headwind, pine beetles plaged the northwest, especially British Columbia, destroying millions of trees.
None of these factors would have affected the housing market as severely if the housing recession were to follow as expected. Instead, nobody could have predicted what would happen next — Despite a global pandemic, an economic standstill in most industries, and fear of a deep recession, the construction industry kept building. Buyers and renters quickly absorbed all available inventory in the suburbs. Prices for single family homes and rents for built-for-rent (BFR) and single-family rentals (SFR) continued to rise as if nothing had changed.
Combine those factors with last year’s DIY boom and you have an unprecedented increase in lumber demand and a significant shock to supply for the foreseeable future. Hence, lumber prices are today at all-time highs. The NAHB thinks that the average single family home increases by up to $35,000 and multifamily apartment by $9,000.
Builders are responding by raising rents, increasing prices, and adding standard lumber escalation clauses into their sales contracts. Some builders are stocking up by pre-ordering timber. Some are waiting it out by delaying projects until prices soften, hopefully in the near future.
So what’s next and how does this affect our projects? Well, fortunately, lumber production is back up to pre-pandemic levels. We’re hoping to see an easing in prices but it will take some time for the buildup in demand to catch up with the supply chain disruption.
Each of the last two presidents and secretaries of commerce have been lobbied heavily by trade groups and housing associations. Take a look at the NAHB letter written to the US Department of Commerce HERE. A government intervention would be great, but not likely in our opinion.
With major lumber producers’ stocks at all time highs (2-4x in the last year for Canfor, West Fraser, Weyerhaeuser), we’re hopeful that investments in the supply chain and a catchup to meet demand will gradually occurr over the remainder of this year. At our built-for-rent development in TN (Canvas at Mount Juliet), we’ve partnered with the nation’s largest homebuilder whose scale and access to supply will benefit us. We’re also waiting to lock in our builder contract with Lennar until late summer or early fall.
While our homes are typically smaller than a modern American starter home, the effects on cost are still potentially very significant. We’ll likely go to market with higher rents to offset the cost increase. Overall, this is our largest risk factor right now. We will be monitoring lumber pricing closely in the coming months and we’ll continue to keep everyone updated!
Brett P Holmes, Steel City Management LLC