Housing demand has remained high throughout the COVID-19 pandemic, as people across the United States have rethought the concept of home and where and how they want to live. Single-family builders especially have had an increasingly hard time meeting this demand, as material prices — especially lumber — have continued to rise at unprecedented rates. Multifamily demand is growing at a slower rate, but demand is increasingly shifting to more affordable suburbs where low-rise wood-frame construction is also being affected by high lumber prices.
The uncertainty in the market has left multifamily developers and builders less than optimistic, as NAHB’s recent Multifamily Market Survey shows. Although the multifamily sector is expected to rebound later in 2021 and in 2022, the current environment is placing significant pressures on the industry, which is experiencing shortages and delays in obtaining building materials, rising prices and labor shortages.
“The lumber price increases in the past year have caused problems across the board for us,” shared Matt Stephens, a developer in New Jersey. “Projects have been delayed, and loan approvals are more difficult because of the volatility.”
“As multifamily builders and developers, it is difficult to absorb the cost of building materials — and lumber is no exception — and still remain profitable,” explained Charles Aggouras, a builder/developer in Massachusetts. “The construction industry works on very small margins, and with COVID, it is impossible to raise the rental pricing or sales prices to make the financials work. We are therefore faced with delaying our projects and waiting for rental price stability and sales prices to increase.”
“There are opportunities that now don’t make sense to proceed with, even though they would normally be great projects in underserved areas with both market-rate and affordable product,” Stephens added. The financial impact is significant, given the scale of many multifamily projects.
“One 434-unit, 12-building project experienced over $1 million of additional costs for the current six buildings under construction," noted Howard Irwin, a developer who runs/manages a general contractor and property management company that operates in New Jersey, Pennsylvania and New York. "Framing on the remainder of the project was stopped with the anticipated additional costs of $1.5 million based on current lumber prices.”
“We closed and broke ground on a 270-unit Class A project in November 2020,” explained Lance Swank, a developer in Ohio. “Our budget was sent and submitted to our lender in September 2020. We are now dealing with a $2.5M lumber bust. We are prepared to handle this challenge, but we will be building the project at zero profit or a loss.”
Builders Pursuing Strategies to Minimize Impact
Builders and developers are trying to get creative with scheduling and purchasing to keep current projects afloat, but alternatives are limited.
“To try and hedge the impact of the lumber cost escalation, we have modified our delivery schedule, purchased our trusses and purchased lumber for the first 25% of the project,” added Swank. “All this has bought us four months in which we hope lumber will moderate, reducing our exposure for the rest of the lumber buy.”
“We continue to look at alternative building materials, but with the bulk of our building types being Type VA construction, three- to four-story wood, we are limited in what we can substitute," shared Jay Kellogg, a builder in Indiana. "Lumber pricing, timing of buying lumber, and what we see in the hedge market are daily conversations and something that is communicated in our daily senior management huddle and weekly construction call.”
Relief on lumber prices can’t come quickly enough to help get these projects back on track and provide much needed housing in markets across the country.
“We are moving forward in the hopes that we don’t wipe out all contingency funds if the lumber market doesn’t soften,” noted Tom Tomaszewski, a developer based in Illinois.
His company currently has three affordable housing projects in Michigan, Iowa and Kansas that have seen increases in wood framing packages of at least $1.5 million each since initial quotes were given. Another developer of low-income housing tax credit (LIHTC) projects saw an increase of $4 million, or roughly $15,000/per unit, on a 289-unit senior affordable development in Florida.
“These are potential deal killers,” Tomaszewski stated.
“There currently seems to be no end to the increases in sight," Kellogg added. "We will continue to stay focused on building quality affordable, workforce and market-rate products throughout our company footprint.”
Share Your Lumber Story
NAHB would like to hear how rising lumber prices, and the limited availability of lumber, are affecting your business and the impact on housing affordability. For example, missed closing opportunities, increased costs, buyers being priced out of the market, etc. This will help us further illustrate to the Biden administration and Congress why a plan to address the lumber crisis is urgently needed. Share your story here.