Skyrocketing lumber pricing and low supply, in addition to cost increases and delays for other building materials, continue to hamper multifamily and affordable housing development around the nation.
The issues began a year ago when lumber mills shut down due to COVID-19 pandemic lockdowns and then didn’t come back at full capacity once reopened.
“Lumber pricing and availability continues to be problematic for stick-frame construction. Mill capacity has yet to ramp back up to pre-COVID production levels, and demand is increasing with multifamily projects that were stalled during COVID now restarting,” says Jay Hiemenz, president and chief operating officer at Alliance Residential Co., one of the nation’s leading multifamily builders and developers. “Single-family new construction starts have picked up as well. Lumber costs are at or near all-time highs. Construction costs have had to adjust as a result.”
The National Association of Home Builders (NAHB) has been on the forefront of the lumber price escalation for its single-family and multifamily members.
“Prices haven’t gone down and have ticked up recently in the lumber market. Prices in the structural panel area for plywood and OSB are scorching hot right now,” says David Logan, NAHB senior economist and director of tax and trade policy analysis. “I believe OSB prices have quadrupled since last May. And the indication of the futures market is not to expect relief anytime in the next couple of month.”
For multifamily, Logan says the skyrocketing lumber costs can add up to $9,000 to the price of the average unit—almost $1 million for a 100-unit development. These costs increases have been taking a toll on multifamily and affordable housing developers.
“We really saw multifamily projects either be delayed or, in many cases, shelved outright until it financially made sense last summer,” he says. “I talked with a builder a few weeks ago whose prices from lumber had risen since closing by roughly $2 million, and that builder was still going to go ahead with the project but forecasts a breakeven or loss.”
He adds that low-income housing tax credit (LIHTC) developments have been even more impacted because of the inflexibility of the type and timing of the financing. With the purpose of providing affordable housing, these building material cost increases can’t be caught up by boosting market-rate rents. “It’s really taking its toll on the affordable housing stock,” Logan says.
R.J. Pasquesi, founder and president of Indianapolis-based KCG Cos., recently spoke at Affordable Housing Finance’s virtual forum and says he has seen the cost of lumber alone impact its multifamily developments $6,000 to $10,000 per unit. He also is seeing price hikes in drywall, and metal-, petroleum-, and adhesive-related products also are seeing price hikes, going over the $10,000 per unit mark combined with lumber.
“The huge positive for us is we mostly do 4% LIHTC deals—the 4% fix [enacted by Congress at the end of December] allowed these deals to absorb most of the cost. We’re still having to be very resourceful to find other sources to help out.”
Pasquesi adds that KCG Cos. is looking at alternative materials, including steel construction, concrete block, and prefab.
“We are really opening up all options to see what makes sense on a deal-by-deal basis just given the craziness of the market.”
At the same event, Brandon Healy, vice president of construction services at The Michaels Organization, the nation’s leading owner of affordable housing, says lumber has been a challenge for his organization.
“It’s not moving in the direction we want it to go. You have to be prepared for those disruptions,” he says. “Value engineering is a huge part of our day to day. Every project is experiencing project value engineering. We’re also looking for additional funding sources and different ways to make deals happen.”
Dominium, which builds and develops both affordable and market-rate housing, also has been tracking the increases with its general contractors.
“It’s not just the pricing, it’s the availability as well,” says Scott Ewing, vice president of construction and architecture. “For example, we are hearing that some of the availability issues with plywoods and OSB is a problem of the plants not getting the resins and glues needed for the manufacture of the product.”
Ewing says the firm hasn’t put a deal on hold or walked away from one yet. “It’s been a tough pill to swallow because some of this pricing can be six months old. We contract for the lumber at the current price when we sign the contract, then later at closing we have to adjust to the current market pricing for lumber since it is so volatile.”
He adds that the firm will be looking very carefully at its next projects, including possibly going to concrete block and plank construction in the Florida market. “We’re getting close to hitting the cost on that structure and would get payback on hurricane resistance,” he says. “We haven’t pulled the trigger on that yet.”
For Alliance Residential, Hiemenz says his company is adjusting to the higher costs and greater uncertainty by building in contingencies in budgets to recognize that these supply chain issues, as well as limited labor availability in the construction industry, will likely continue for some time.
“Pricing is not expected to return to pre-COVID levels. Underwriting for higher replacement costs has to be adjusted accordingly,” he says. “In certain cases, we can look at alternatives such as metal frame or panelized construction on new projects going forward as an alternative to lumber. Other products are also emerging that we are evaluating. These take some time to pivot to alternatives for an existing designed project, but we can look at for new future projects.”
The NAHB is leading the charge to help resolve the cost issues.
“We’re approaching this from about as many fronts as you could possibly imagine,” Logan says. “We are working with our grassroots groups and campaign organizers to get the builders on the ground in touch with their members of Congress. I know that has been a very successful effort over the past couple of weeks.”
He adds that NAHB’s government affairs staff has spoken with and educated congressional offices on Capitol Hill on the issues. NAHB also has been in contact with the Biden administration, including the Commerce secretary’s office and the Department of Agriculture secretary’s office, as well as outlining the impacts on the housing market as well as affordability challenges in a letter to the White House.