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