The increase in lumber costs has impacted single-family home construction and now doing the same to apartment-building developers, The Wall Street Journal reports. Multi-family buildings are made with several different materials, but wood remains a major component. This is especially true in low to mid-rise buildings. Lumber is also used for flooring and cabinets.
Multi-family building developers such as Trammell Crow Residential and Greystar Real Estate partners admitted to being surprised at the lumber price tag. A lot of homeowners have noticed the price increase when they purchase wood at their local hardware store—costs are more than three times what they were at this time in 2020, according to industry executives. Meanwhile, the price of softwood lumber, which is used for framing, has increased more than 83% of what it was at this time last year, according to CoStar Advisory Services. Lumber and wood prices in general are up 34% from last year, CoStar said.
These price increases are not limited to lumber, The Wall Street Journal reports. Other material costs for multi-family construction have gone up 25% to 30% over the past year for fuel, copper and steel. CoStar reported the increase was the largest for such materials since 1988.
The cost of lumber price increases
Unfortunately, the rising lumber costs could slow down one of the fast-growing construction sectors since the COVID-19 pandemic began last year. Multi-family construction set records in 2020 as rental property demand grew. Suburban rents increased 4% during the first quarter of 2021, according to CoStar. Now, developers are concerned that if these high prices continue, they could run out of funds mid-project that were set aside to protect against cost overruns. This concern could force developers to pick up their pace.
“There’s actually an incentive for multifamily developers to build quicker than they might because the cost of wood has gone up so much,” Alexander Goldfarb, an analyst with Piper Sandler & Co. told The Wall Street Journal.
New multi-family property development could eventually be halted due to the lumber price increase.
“Unless multifamily pricing also jumps enormously, another 12 months of cost growth would heavily impact construction,” said Andrew Rybczynski, a CoStar analyst.
How lumber price increases impact investors, CRE
Multi-family property investors are keeping a close eye on both labor costs and rents to determine the sector’s health. They’re also watching lumber prices, as well as other materials, The Wall Street Journal reports. CenterSquare Investment Management LLC assistant portfolio manager Alexander Snyder said if rents stay constant, the increased costs will impact apartment development returns.
The rise in lumber costs has not affected high-rise development as much, however. Development for these buildings use less wood and partition walls are now typically framed with steel studs. Meanwhile, the decreased demand for commercial properties like office buildings, malls and downtown apartment buildings has slowed down construction business in the U.S. Subcontractors have responded by lowering their prices to get any CRE projects that are moving forward. Gaining CRE projects has helped offset the high lumber prices.
It was just 12 to 18 months ago that subcontractor margins were approximately 20% for some projects due to the heavy workload, David Askie, director of cost planning at Lendlease told The Wall Street Journal. Currently, margins are closer to 5%.
“They want the work,” Askie said.
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