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The cost of some wood products has more than tripled, bringing the building budgets of affordable developers to their knees.
The economic conditions caused by the pandemic have reduced the demand for some products, such as lowering the price of diesel fuel. However, the crisis has also reduced the supply of other products, including sawn timber. This has led to a significant shortage and has rocked prices.
“We are currently seeing a 30% increase in the cost of wood and steel and vinyl products nationwide,” said Joseph DiSalvo, executive vice president of Camden, Michaels Construction, New Jersey – part of the Michaels Organization, a leading development and property management company.
Towards the end of the year, supply and demand should improve, provided the markets are not hit by new surprises. But even affordable developers were shocked by the delays.
“We are also feeling the effects of longer lead times and product availability not only on wood, steel and vinyl products, but also on equipment and mechanical devices,” says DiSalvo. “These procurement issues have a direct impact on our project plans and home deliveries, resulting in additional costs.”
Lumber prices shock developer
Overall, the cost of building materials to build affordable houses and apartments has been relatively stable. In the past 12 months, prices rose 3.6% for inputs to apartment buildings, according to a US Bureau of Labor Statistics analysis of the August Producer Price Index (PPI).
However, individual materials were much more changeable. “There has been a lot of volatility due to hiccups in supply,” said Ken Simonson, chief economist at AGC.
The cost of lumber was the biggest shock to apartment developers. The cost of sawn timber and plywood products increased 27% year over year in August, according to AGC. “By far the greatest growth was recorded in wood products,” says Simonson. “Wood, plywood and oriented strand board (OSB) have reached record heights.”
In the first few months of the COVID-19 crisis, most of the wood factories were closed, cutting off the supply of new wood. However, the demand for wood never decreased, even when non-essential businesses of all kinds were closed, including many residential construction sites. Many people who sought shelter on site started their own home improvement projects.
“Home Depot and Lowes saw their shelves empty while homeowners were doing minor and major renovations to their homes,” said Marc Padgett, president of the Jacksonville, Florida-based Summit Contracting Group.
“Demand grew first from home improvement and then from restaurants that build outdoor seating,” says Simonson.
Frame timber and building boards such as OSB have increased the most. “Lumber has increased over 150% since mid-April and OSB prices have more than tripled in the last year,” said David Logan, senior economist and director of tax and trade analysis for the National Association of Home Builders.
However, these prices are unlikely to stay sky high forever.
“The mills are reopening and we are seeing the prices of lumber falling,” says Padgett. “We hope things get back to normal between the end of the year and June 2021.”
Other materials hard to find on schedule
The prices for other materials were more stable. “We haven’t seen anything extraordinary outside of lumber, and we don’t expect it to,” says Padgett.
However, the delivery of some building materials has been delayed. Other materials just weren’t in stock.
“Our bigger challenge was not so much in pricing as in easy availability. Things like cabinets and appliances were a big problem, ”said Nancy Hughes Moyer, president and CEO of Volunteers of America Illinois, an affordable property developer based in Chicago. “Our understanding is [the problems were caused by] Rolling downtime in production facilities, mainly due to COVID-19. “
The contractors did their best to plan ahead. “A lot of factories lagged behind as they got used to doing business,” says Padgett. “It is important to plan as far in advance as possible and order materials much earlier than would have been the case last year.”
The prices of some materials used in construction were lower in August than last year, including diesel fuels (minus 7.3%), aluminum mill molds (minus 9.8%) and steel mill products (minus 11%), according to the AGC’s analysis of the PPI.
However, even these materials could become unexpectedly expensive as supplies for certain products are running low. “There was a big leap in the steel PPI for certain products,” Simonson gives an example.
“In our experience, when steel was so hard to come by, the price of timber construction rose because of demand,” says Hughes Moyer. “But ultimately, resourceful and competent general contractors were able to find ways to get what was needed.”
This article is sponsored by PNC Real Estate. Read PNC’s general disclosure.