Pandemic Leads to Rising Lumber Prices in 2021: What It Means for Homeowners

Residential and Commercial Real Estate See Rising Lumber Prices and Demand

Have you noticed enormous lumber prices in 2021? More people staying home during the pandemic means more time to work on home repairs and projects. Here’s what that means for real estate, homeowners and the lumber industry at large.

Everyone is Looking for Lumber

In March 2020, a number of establishments were forced to shut their doors due to COVID-19. The streets of New York City were essentially abandoned as non-essential workers worked from home and students learned virtually via Zoom. The extension of stay-at-home orders into the early summer made many families with young children rethink city living. Hundreds of families fled cities for the suburbs and traded in their rent payments for mortgages. The housing markets in New York, New Jersey and Connecticut took off during the summer of 2020.

Over the summer, like many others, my family and I moved to the suburbs. Shortly after we moved, we decided to fix a few things around the house. I recall my first visit to the local Home Depot and noticed the parking lot was full of cars. It seemed like everyone had a project they were working on: new decks, playsets, bathroom and kitchen renovations and other home improvement projects.

Unfortunately, given the increase in demand, there were significant delays and limited stock everywhere. Our new fence project turned out to be a disaster as it took more than six months to get the raw materials delivered and another six weeks to get installed. We would trade horror stories with our friends and neighbors who were also dealing with renovation projects. It was the same story: contractors would promise to complete a project within a reasonable time for an agreed price, but there were consistently significant delays and cost overruns.

Costs and Shortages

Then I started to read about the increase in raw material costs and how this was contributing to an increase in housing prices. According to the National Association of Homebuilders (“NAHB”), the price of lumber has tripled relative to where it was in April 2020. This has led to an increase of more than $35,000 in the average price of a new single-family home.

In addition, builders are reporting material shortages across the board. In a May 2021 NAHB survey, more than 90% of builders reported shortages of framing lumber, oriented strand board and plywood. Lumber prices in 2021 have been out of control, to the extent that there has been an increase in the number of construction site thefts.

Amidst Rising Lumber Prices is Increased Demand

Despite all of these challenges, the CBRE is projecting an increase in commercial construction in 2021 and expects residential development spending to make up a significant part of the increase. While building material prices have increased in general, lumber prices have increased at a faster pace. Due to the pandemic, a number of lumber mills were forced to temporarily close last year. As things have started to return to normal, the mills have been unable to keep up with demand. Like myself, many other families are spending more time at home and, as a result, taking on home improvement projects or buying new homes entirely.

Due to the increased demand in home improvement projects, the Lumber and Building Material (“LBM”) industry has been very active. In 2020, there were 69 acquisitions of companies that operated approximately 500 facilities. The two largest LBM companies, U.S. LBM and Builders FirstSource, are fueling the industry’s M&A activity by each completing several acquisitions since August 2020.

Distress in the Lumber Industry

Distressed assets in the LBM industry have seen a similar price mark-up during the past year. Some examples include the successful sales of the Klausner Lumber sawmills. In March 2020, the pandemic forced Klausner Lumber One (“KL1”) and Klausner Lumber Two (“KL2”) to halt all operations at its sawmills in Florida and North Carolina, respectively. By early summer, both Klausner sawmills filed for bankruptcy protection. In the KL1 case, the debtors filed for bankruptcy with a stalking-horse bid of $26 million. Following the bankruptcy auction process, the sawmill was sold for more than $60 million. Similarly, the KL2 bankruptcy auction experienced similar results. It filed for bankruptcy with a stalking-horse bid of $30 million and closed the sale auction with a winning bid valued at approximately $83 million.

Looking to the Future

As we look to the future, and as restrictions have eased across many states, the expectation is that supply issues will be mitigated and the price of lumber will soon stabilize. We are already seeing some downward pressure on lumber prices. According to The Wall Street Journal, as of June 15, 2021, the cash lumber pricing is on a downward trend relative to its May 2021 peak. Only time will tell how long before building raw materials return to more normal levels and how this will impact housing prices going forward.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following webinar: Investing in Residential & Multi-Family Real Estate.]

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