Behind the Surge in Lumber Prices
A better balance between supply and demand could take 12 to 24 months.
If you follow the commodities markets, you might wonder why bling isn’t made of wood instead of gold these days.
Builders can get lumber if they wait and are willing to pay through the nose. Construction is more expensive, with obvious impacts on strategies at all levels of CRE: owners, developers, investment, and brokering.
The National Association of Home Builders has said that lumber prices are triple what they were in April 2020, increasing average single-family home construction by nearly $36,000.
That’s tough in CRE as single-family rentals and build-to-rent have become such big sectors. “A lot of institutions are involved in this and it’s become a new asset type,” Vivek Sah, director of the Lied Center for Real Estate at the University of Nevada, Las Vegas, tells GlobeSt.com.
The NAHB has pointed to lumber tariff problems as one issue. The US is a larger producer of lumber but still imports.
Canada is this country’s largest trading partner for softwood lumber. But, as the NAHB says, “there is currently no trade agreement in place and, while the United States reduced tariffs on Canadian softwood lumber imports to around 9% in December 2020, tariffs still add to the overall cost for home builders.” Plus, when prices skyrocket, the dollar value of tariffs follows. But, for context, up until late last year, as the NAHB has noted, the tariffs were 20%, so 9% is already a tremendous improvement.
Another factor is falling supply from Canada, as forest industry consulting firm Wood Resources International reports. “Despite record-high lumber prices in the US in 2020, Canadian lumber shipments to its southern neighbor have fallen for the fourth consecutive year,” the organization said recently. “A reduction in the Annual Allowable Cut (AAC) in the province of British Columbia has reduced production volumes in that region by over a third in just five years.”
About 3.3 million cubic meters were estimated to have come from Europe to help make up the difference, but a bigger factor is southern US production.
“Since around 2010 the US South has been the dominant lumber producing region for domestic use and is well positioned to continue in that role,” Scott Reaves, director of forest operations at Domain Timber Advisors, tells GlobeSt.com. “The best way to address US lumber shortages is to ensure a healthy domestic forest products supply chain from forestland owners to mills to end users.”
But lumber production capacity utilization in the US fell in January and February of this year, according to Madison’s Lumber Reporter.
Everyone is trying and, as Reaves says, the surge in housing construction and demand because of the pandemic, which also affected labor availability and supply chains, is the big driver in rising lumber prices. “We expect demand for lumber to continue at elevated levels, driven by housing demand but we also expect the domestic supply chain to rise to meet demand,” he says.
Unfortunately, a better balance between supply and demand could take 12 to 24 months.