As the price of materials such as lumber and concrete continue to fall, many developers are employing an "as-needed" approach to purchasing at the end of the second quarter.
Construction costs are down about 20 percent from 2007, the peak of the last development cycle. And the ability to capture the falling prices of materials on the fly is one advantage to building in the downturn. In May 2006, framing lumber was priced at $377 per 1,000 board feet, but by January 2009, the price was down to $190. There was an enormous overlap of supply on the market when the music stopped, and it took a couple of years to burn through the overhang.
The drop-off in demand was so steep that many mills throughout the country shut down. But now, as demand for lumber and drywall picks up, prices are fluctuating wildly. So far this year, lumber prices peaked in April at $367 per 1,000 board feet—they hadn’t been that high since May 2006. But by last week, the price was down again to $257.
"We’ve just gone through a period where we’ve seen an extraordinary spike in lumber due to capacity issues and inventory becoming restricted," says Jay Graham, vice president of Encore Construction, the in-house construction group for Dallas-based Encore Enterprises. “As a little bit of capacity now begins to bleed back into the market, we’re seeing the price come down just about as fast as it went up."
When to Buy
Given the fluctuating prices, knowing when to buy is a tricky business. When prices are depressed, many developers will strike when the iron is hot, buying up big volumes and warehousing the materials. But in an environment like today, many wait until the last minute.
In 2008, AvalonBay Communities was building a 311-unit community in Norwalk, Conn., as lumber prices fell rapidly. The company started the project in January but did not need the wood framing until June. "Usually in a lousy market, we buy things as quickly as we can, but at Norwalk we waited until the last minute in May because we could see that the market was continuing to fall," says Rick Morris, senior vice president of construction for Alexandria, Va.-based AvalonBay. "Today, we try to do more 'just in time' buying, especially in this marketplace, where we don’t think we found a bottom.”
With lumber prices coming back down to earth, The NRP Group is also employing an "as-needed" approach at the end of the second quarter. "We won’t even buy a whole package right now because it’s so over inflated," says John Leonard, a vice president at Cleveland-based NRP Contractors, the construction arm of The NRP Group. "And that’s proven to be true the last two weeks, with prices going down, so that’s worked to our advantage."
The price of concrete slabs has also fallen sharply. At the height of the market a few years ago, concrete slabs were pricing at $100 per yard, but that cost has fallen to about $65. Oriented strand board went up to about $17 a sheet in 2007, was as cheap as $5 in the fall of 2009, and in June was up to around $9.
During the fourth quarter of 2009 and the first quarter of 2010, Encore was able to capture these falling prices from suppliers. "We had guys saying, 'we just got a significant reduction on our concrete price, and we’re going to quote your contractor a new price,'" Graham says. "These weren’t people we were calling, they were calling us."
Even if you think prices have hit bottom and will start to trend up, warehousing materials is not a good strategy if you’re building to the Federal Housing Administration’s (FHA’s) 221(d)(4) program. Multifamily general contractor LandSouth Construction used to warehouse materials, but it stopped when the FHA became the only game in town.
"HUD is very strict on it, they don’t really allow off-site storage," says James Pyle, president and CEO of Jacksonville Beach, Fla.-based LandSouth. “I’ve never done an off-site material draw for HUD—we do everything possible not to do it.”
Regional Buying Groups
Keeping construction costs down as far as you can, even in today’s low-cost environment, can be difficult for smaller developers. The industry’s biggest builders have opportunities to get great discounts on materials due to high-volume purchasing, but the smaller shops can’t capture that same discount.
One way to increase your buying power is to band together with other regional developers to hit the critical mass for price breaks. "It would make sense if smaller developers could partner in regional buying groups," Leonard says. "That would go a long way to hold their costs. Then again, a lot of times, competitors don’t even talk to each other. But it would help everybody."