Construction materials

Cost of building materials and impact on development

Nate nickerson

Lumber :
A little over three months ago, May 7e, 2021, the price of timber has reached a record high. I remember speaking with developers and asking them how they were going to handle the seemingly endless price increases. May 7e, the price of lumber per 1,000 board feet * reached $ 1,670.50. A year ago, before the COVID-19 pandemic affected supply chains and market demand for lumber, the price of lumber on May 7e, 2020 was $ 342.60 per 1,000 board feet. The following year, the price of lumber rose 388%, leading some developers to delay, restructure or abandon their current projects. I was working with a large national multi-family developer at the time and was told their strategy was to wait as long as possible and hope that time would help fix supply chains and bring prices down. which are skyrocketing, or… bear the full cost if they could not delay the project further; something small developers couldn’t do.

Fortunately, for developers, the price of lumber has fallen 73% over the past three months and, as of this writing, sits at $ 458 per 1,000 board feet, which is pretty much where it was before the pandemic. The reason lumber prices soared was due to a “perfect storm” of events in the wake of the COVID-19 pandemic. Sawmills cut production and sold inventories in anticipation of a housing crash. This crash did not happen and instead there was a development / construction boom, which had an even bigger impact on the supply and demand curve. Over time, production resumed, bringing prices back to “normal”. This price drop initially impacts wholesalers; there is still a lot of high priced inventory in the supply chain that may take some time to reverse into retail prices. (Pollack, GlobeSt.com) However, the drop in prices is good news for developers as it will certainly support the current development boom.
* A foot of wood plank is a piece of wood one foot long, one foot wide and one inch thick (1’x1’x1 “)

Steel:
Throughout 2020 and 2021, the price of steel appeared to follow the same upward trajectory as wood, but not as extreme. However, currently the price seems to be holding at very high levels. Steel (rebar) hit a record high of CNY 5,975 / T (yuan per ton) on May 11, 2021. A year earlier, on May 11, 2020, the price of steel was CNY 3,460 / T. Throughout next year, the price of steel would increase by 73%. As of this writing, the price of steel is 5,224 CNY / T, 13% lower than the all-time high in May. Many wonder: why isn’t steel experiencing a similar price correction to wood? There seem to be conflicting opinions on the matter. Evraz, one of the world’s largest steel mining companies, said in early August that the continued increase in stimulus packages for the global economy in 2021 had helped continue the recovery from the pandemic. Steel mills continued to increase production to meet demand, but demand exceeded supply. As supply continues to reach pre-pandemic levels, a gradual drop in prices is possible in the coming months (Taboada, MarketWatch.com). The opinion is that steel appears to be lagging behind in terms of production and price due to a strengthened supply chain.

The other view is that steel prices will continue to climb in 2022 due to two major acquisitions last year by steel titan Cleveland-Cliffs – AK Steel for $ 1.1 billion and US steel companies. ArcelorMittal for $ 1.4 billion – essentially made the steel industry a duopoly. . This firm hold of Cleveland-Cliffs and United States Steel Corp. on the market hardly encourages them to increase their production. After all, creating more supply would only lower their prices (Lambert, Fortune).

Hopefully for developers and the real estate market as a whole, we see the steel supply chain improve and return to pre-pandemic prices, further boosting the development boom we’ve seen.

Nate Nickerson is Vice President at O’Brien Commercial Properties, Concord, Mass.


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