The soaring lumber costs that have slowed construction of single-family homes are starting to pinch apartment-building developers too.
While many multifamily buildings are made of steel, glass and concrete, wood is also a major component, especially in low- and mid-rise buildings. Wood is also used extensively for floors, cabinets and other fixtures.
As a result, multifamily developers like Greystar Real Estate Partners LLC and Trammell Crow Residential indicated they are experiencing the same sticker shock that is hitting home builders. Even many homeowners are feeling it when they visit their local hardware stores to buy lumber. Prices are near record territory and more than three times what they were at this time last year, according to industry executives.
The cost of softwood lumber, which is often used for framing, is now at a record, up over 83% from this time last year, according to CoStar Advisory Services. Overall, lumber and wood prices are also at record levels, up 34% from one year ago, CoStar said.
Material costs included in new multifamily construction are up 25% to 30% over the past year, according to CoStar. That increase—not just in prices for lumber but for other commodities like fuel, copper and steel—was the largest since at least 1988, CoStar said.
These rising costs threaten to cool down one of the hottest construction sectors since the start of the pandemic. Multifamily construction hit a record level in 2020, thanks to strong rent growth, according to CoStar. For example, suburban rents were up 4% in the first quarter of 2021, CoStar said.
Developers in the middle of projects are worried that if the high material costs persist, they could run out of the money they set aside in budgets to protect against cost overruns. Some are accelerating plans.
“There’s actually an incentive for multifamily developers to build quicker than they might because the cost of wood has gone up so much,” said Alexander Goldfarb, an analyst with Piper Sandler & Co.
The rising cost of lumber and other commodities could eventually put a damper on new development. “Unless multifamily pricing also jumps enormously, another 12 months of cost growth would heavily impact construction,” said Andrew Rybczynski, a CoStar analyst.
Labor costs and rents continue to be the most closely watched factors by multifamily investors assessing the health of the sector. But investors are also keeping an eye on the price of lumber and other materials.
If rents stay constant, said Alexander Snyder, an assistant portfolio manager with real estate owner CenterSquare Investment Management LLC, increased costs are going to weigh on apartment-development returns.
The good news for developers and construction companies is that increased lumber costs are having less of an impact on high-rise development, which has shifted in recent years to new techniques that use less wood. Partition walls that were once wood-framed are now framed with steel studs.
Overall, the U.S. construction business has cooled, thanks to a sharp decline in demand for many commercial property types like office buildings, malls and downtown apartment buildings. As a result, subcontractors are cutting their prices to get more business with any commercial projects that are proceeding, which helps offset the higher cost of lumber prices.
Twelve to 18 months ago, subcontractor margins were about 20% on some projects because the workload was so heavy, said David Askie, director of cost planning at Lendlease. Today margins are more in the 5% range, he said.
“They want the work,” Mr. Askie said.
About Real Estate Intelligent Marketing (REIM):
REI Marketing is an innovative Real Estate Marketing Company that offers distinctive real estate services to developers and multifamily investors. We are a vibrant, dedicated team of industry professionals with international experience in marketing and multifamily investment.