Volatile lumber market still provides developers options to hold line on project spending

The volatile price of lumber over the past year is causing developers of multifamily buildings to consider a variety of alternatives to control the price of projects. How lumber prices have affected real estate projects was the subject of two recent BuzzHouse podcasts.

Lumber prices peaked at an all-time high price of about $1,700 per 1,000 board feet on May 10, 2021, and then dropped 40% by the second week of June to $1,059.20 per 1,000 board feet. At the start of the COVID-19 pandemic, lumber was priced at about $300 per 1,000 board feet, within the range of $200 to $600 seen since 1992. The average cost of single-family home construction increased almost $36,000 from May 2020 to May 2021, largely due to rising lumber and other construction costs.

The rising cost of lumber and other building materials as well as supply chain shortages resulted in builder confidence dipping to its lowest level since August 2020, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).  

How developers are responding

Spencer Skinner, senior manager on Baker Tilly’s real estate advisory team, said during a BuzzHouse podcast episode on lumber price hikes, “Prior to the pandemic, developers might not have focused on price until the end of design development. Now, developers are having construction pricing discussions with their architecture and construction partners at the concept stage, when they can have the greatest impact.” This may lead to decisions to juggle the timing of contracts for projects, perhaps scheduling carpenters later in the process when lumber prices may have decreased and developers can take advantage of the savings.

The volatility in the price of lumber also may affect how developers approach the bidding process for new projects. Skinner noted that during the earlier schematic phase, developers might hold off on getting a definitive price because of possible increases in hard costs as the project gets underway. Another alternative is to agree on price based on present-day numbers, but then negotiate an agreement on how an increase in hard costs will be dealt with in the future. Other cost savings developers are considering include:

• delaying some bids for several months based on conditions in the local marketplace
• reducing the term of construction to possibly recoup some savings related to soft costs, like construction interest
• considering prefabricated or panelized construction, or even changing construction materials
• discussing with the general contractor how they will price future projects or if there is a better time of year to bid on a project
• buying futures on certain construction commodities like lumber to keep original pricing in place for clients but using the profit on the futures to offset rising commodity costs

Don Bernards, principal in Baker Tilly’s real estate group and BuzzHouse podcast host, had advice for developers working on low-income housing tax credit projects. “With these fluctuating costs,” he said, “it is a good idea to stay in close contact with your state housing finance agency to see if they have plans to address potential cost overruns, be it with National Housing Trust Funds dollars, which are seeing a substantial increase this year, additional credits or any other resources they may have.” 

Flexibility is key

Even if a developer hasn’t completely anticipated rising commodity costs, it still has options, based on the flexibility built into its contracts. Perhaps the project owner will allow the developer to juggle the number or size of units up or down to make the project more financially viable. A multiphase project could possibly be modified, for example, from three phases to four phases to extend costs over a longer period of time.

Depending on the value options available from the general contractor, the developer may be able to offset uncontrollable commodity costs by reducing the amount of certain materials used, like bricks. The developer also may consider changing window styles or reducing the number of windows, changing exterior or interior finishes to less expensive options, or finding material efficiencies in the design (carpentry, mechanical, HVAC, precast, plumbing, and electrical). Sometimes, just reconciling differences between an architect’s rendering and a general contractor’s actual materials  may yield savings; for example, if an architect’s rendering shows 100% aluminum siding for a project, but the general contractor is showing a large expense for brickwork, taking the time to reconcile the disconnect may uncover savings for a project.

Lumber alternatives

Skinner said developers are asking more questions about using steel construction as an alternative to wood, as a result of the volatile price of lumber. Jason Korb, principal at Korb + Associates Architects and a recent guest on the BuzzHouse podcast who shared the shift in design trends due to rising lumber costs, agrees, noting that because of much higher lumber costs he has seen a shift from wood framing to cold-formed steel framing for multifamily buildings. Korb expects the current price spike to be temporary, with the price of lumber decreasing by the third quarter of 2021.

“The biggest single change we're seeing,” Korb said, “especially in multifamily for larger projects, is a move away from traditional lumber to a mass timber assembly.” A mass timber project is one where the primary load-bearing structure is made of either panelized or engineered wood. Korb added, “The beauty of mass timber is it is very sustainable. If it comes from a sustainable forest, it is a carbon sink. We have a mass-timber-building project in Milwaukee that will sequester the carbon dioxide equivalent of taking 2,400 cars off the road for a year. And as long as that building is standing, that carbon is sequestered.” He also is seeing an increase in the use of carbon neutral concrete.

Sustainable design

Korb said one of the biggest growth areas in sustainable design across all building types is in solar because the technology is improving at an almost exponential rate, encouraged by a number of solar tax credits. For one project, a rooftop solar array will be used not for power generation but to heat water for the building, cutting down on the load of the boilers. He’s also seeing a trend toward complete electrification of buildings, removing any gas or petrochemicals that come into the building because electric heating and cooling technology is improving so fast.

In the wake of the COVID-19 pandemic and an increase in people working from home, Korb said he has seen an increase in “one-bedroom plus den” units in multifamily building projects. There has also been a slight increase in micro-units – living spaces of 400 square feet or less. In addition, he is seeing a greater emphasis in buildings on touch-free features like for front doors or elevators.  

Supply chain issues

The pandemic has led to “strange supply chain issues,” Korb noted, that are slowing down projects. For example, he said doors are being rationed. “We’ve had projects where our contractors had to redesign or retrofit doors at the 11th hour because they couldn't get 7-foot-tall doors and they needed to redo the walls around them to accommodate a 6-foot-eight-inch) door. That was important because this was a low-income housing tax credit project with very strict compliance dates that we needed to hit.”

Skinner noted that lumber prices are likely to be volatile and supplies tight through the end of 2021. Even if prices drop, he said, it takes time for that adjustment to work its way through the market. Still, with some developers pausing or delaying bidding on projects, a more stable lumber market could come sooner rather than later. 

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.