Why is Lumber so Expensive?

[John Lyszczyk]

I noticed some BiggerPockets members asking about the rising cost in lumber and plywood, and given my background, I figured I wood (haha) weigh in on this subject. I currently work for a lumber company and I primarily sell to retail lumber yards, distributors, office wholesalers (jobbers) and General Contractors (GCs). We own several sawmills and treating facilties mainly in the midwest, but our services branch out nation wide. I primarily focus on a specific category called fire-retardant treated wood, which is found in all type 3 and 5 construction. This mostly entails the construction of multifamily housing, hospitals, schools, etc. However, I am exposed to different parts of the lumber business through one way or another.

Over the past few months we have experienced something that I have heard several veteran lumber traders call "unimaginable". Lumber and plywood pricing has sky rocketed to concerning levels.  GCs that were plan on framing this fall are already postponing construction until the market corrects itself. That means large multifamily and residential building is in a nationwide lull, and it's hard to say how long this will last. Below is my best (short) synopsis of how we got here today and how this effects us as Real Estate Investors.

The issues stemmed from the COVID shutdowns back in March when most construction projects were told to halt. The shutdowns did not include sawmills and treaters as we were deemed "essential" however, uncertainty lurked throughout the industry and many companies decided to lay off employees. Sawmills and treaters cut laborers to compensate for the anticipated lack of consumption and uncertainty within the business. 

Meanwhile, over 20 million people in America were gainfully unemployed as our lovely government started quantitative easing. Many of these Americans were making more money sitting at home on unemployment than actually working at their job they were "furloughed" from. This later made it difficult for sawmills and treaters to hire back a labor force. A large population of the country was forced into quarantine with a lot of time on their hands. In addition, they were given some bonus money (stimulus), and many people decided they wanted to build a deck. Seriously...it seemed like everyone in America decided to build a deck all at once.

The consumption started at the big box stores (Lowes, Home Depot, Menards) and Pressure Treated wood became the hottest commodity in the market. East coast building material suppliers and lumber yards were calling west coast treaters for Pressure Treated wood, and suppliers were buying it. Meanwhile, the big box stores started soaking up all the available fiber source in efforts to meet the growing demand. Order files extended  and suddenly the sawmills had to start producing more lumber and plywood. They slowly started their labor force back up and worked to meet demand, but little progress was made to increase supply.

Industry experts now grew concerned about the penned up demand from the construction shutdown. Just as the supply became scarce from the Pressure Treated lumber surge, construction started coming back as COVID restrictions were lifted. General contractors for large projects needed wood to continue and meet deadlines. As you can imagine, this generated more consumption as the growing demand cripple what was left of the existing supply. As a manufacturer, trader, or supplier, if you had wood on the ground you could sell for a PREMIUM. One year ago, the average price for general framing lumber was $2.88 per piece FOB the sawmill (composite average). Today, it is $6.56 per piece FOB the sawmill (composite average). One year ago, a truck of treated plywood cost $20,000, and today it costs $40,000. Prices have double the normal averages in just a matter of months. 

The craziest part is that there is no sign of it correcting itself anytime soon. It may be until the end of the year until we see some sort of market correction. Sawmill order files are extended out to October, but the buying still continues. PTS (Price at time of Shipment) orders are becoming more common. The demand isn't going away and everyone is growing more uncertain amid the record breaking run. 

What does this mean for Real Estate Investors? 

Most likely delayed projects and obviously the cost of building materials are going to rise. If you have a large renovation project you may want to evaluate your cost of materials before getting started. I can only imagine having to do a massive renovation project or addition that requires framing lumber. Yikes! 

The rising costs are mostly hurting new build residential and commercial construction. As for the projects expected to start in the fall, many GCs are shelving them until the start of the new year with hopes for improved purchasing conditions.

I would be curious to hear from other members to see if they have felt the impact of rising building material costs. I know that was long winded, but I hope it was insightful.