The Rise Of Lumber Prices In Build-To-Rent - EP17

construction costs construction financing income & expenses lumber new construction Dec 21, 2021

"Chase and I are trying to do a contract on an 80-unit build to rent project in Phoenix. I get our builder that we typically work with on the email thread, "Hey, we're ready to do this. This is what the terms look like, blah, blah, blah." 

And he comes back and blows us away with a price that we were not expecting. We had a certain price in our vertical costs for this thing, and he came back $40,000 a door higher. Which is a deal-breaker. That deal's not happening at that price..." - Steve Olson, B2R Show

Episode Highlights:

Are lumber prices going back up in the build-to-rent industry? In this episode, Steve Olson, Chase Leavitt, and Sherida Zenger talk about what they're seeing in each of their projects when it comes to increases and decreases in construction expenses, labor costs, and more.

Recent articles by The Motley Fool and ING, estimate that rises in lumber costs are here to stay for the near future. So what does this mean for real estate investors? That's the topic for today.


Welcome to The Build-To-Rent Show. Steve Olson here with Chase Leavitt and Sherida Zenger. 

We have a topic that we know is on everybody's mind right now. I want to preface it by introducing the title. This is from the Motley fool, and I think they gave some good data here. Headline: Is Lumber Going Back Up? Here's What We Know.  

This issue first came to my consciousness again yesterday. Chase and I are trying to do a contract on an 80 unit build for rent project in Phoenix. I get our builder that we typically work with on the email thread, "Hey, we're ready to do this. This is what the terms look like, blah, blah, blah." 

And he comes back and blows us away with a price that we were not expecting. We had a certain price in our vertical costs for this thing, and he came back $40,000 a door higher. Which is a deal-breaker. That deal's not happening at that price.  

And so this of course got us thinking, what are you talking about? This is crazy.  

Well, you guys have seen all this, these headlines about inflation, and everybody's complaining about inflation. I don't know why I was so stupid to think that that didn't apply to building materials too, but this sneaky lumber increase is happening again. Back in June, we got up to $1600 ish a foot. And then it fell off a cliff, right? It got down as low as 400. I think that was in September  

Sherida Zenger: $454 in mid-August.  

Steve Olson: So everybody just kind of said, oh, that's over. Lumber is free again. 

It's a problem again.  

It's not a June problem, but it's up. Here's a couple of points from the article.  

"Softwood lumber prices increased 9.1% in October alone. According to the national association of home builders, rising lumber costs are to blame for an approximately $30,000 increase in the cost of new homes." 

That $370,000 house that you're looking at is now 400. Just because of wood.  

That doesn't include all the other stuff by the way. Right? This is a ripple effect. We're just talking about one line item,  

"the NHB there's another point is pushing to reduce tariffs on Canadian lumber, which may provide more supply to a market that desperately needs it." 

This makes me really mad at the government. Why are you putting tariffs on Canadian lumber and talking out about both sides of your mouth? About we need affordable housing and you're putting tariffs on lumber. That's crazy. So that kind of gets me this other headline from the wall street journal. 

I didn't even know this, this article is from November 23rd. There was apparently a big flood in British Columbia. And that has constrained their ability to get more. So there's a flood. The pipeline is all clogged with them having trouble already, and they got to pay this big tariff to get it across the line into the United States. 

Makes a lot more sense why we had to hit a lot of our investors with a price increase a couple of days ago kind of sucks. Alright, so materials are going up, Sherida, you had some info, it's not just lumber. What are you seeing? 

Sherida Zenger: So an ING article that was backed, it was August 23rd, but it says, 

"it will take at least until the summer of 2022 before we expect the price of some building materials, notably concrete, bricks, and cement to drop." 

We're experiencing this across the board in multiple supplies. I know lumber was the big thing. I know we had the concrete, cause it was the fly Ash that they were having a hard time getting. But I mean, bricks, cement, I know that pipe was still a big thing. My husband does excavation and pipe in order to do a sewer pipe. It was it's on the rise and anytime they can buy it, they buy as much as they can.  

Steve Olson: I had been hearing too. We all know oil prices are way up to pipe, shingles. Many other products are petroleum petroleum-based products. So when you see that your car is more expensive to fill. It's also more expensive to put that pipe in your house to put those shingles on your, on your roof. 

Right? Steel is way up to, we should check steel futures on this as well, but think of all the steel that goes into your wiring. Your electrical parts, your appliances, your H vac, especially, right? All of those things are made out of various steel products and, and that's, that's why this sticker shock thing is coming across the, across the board prices are way up, Chase and Sherida. 

However, from our point of view, there's an even larger culprit here than the materials, and that's the labor. What do you think about that?  

Sherida Zenger: It's hard to keep people on the job, you know, everyone's coming to post to other people off of job sites. I know up in Idaho, we'd experienced that with people coming, you know, to take a whole crew, and midway through a whole crew was gone. 

There was someone recently, and I don't know if it was in a conversation that we were all having, but there were two builders that were building side by side of each other here in Utah. And it was funny that one of the projects was cruising along and the other one was kind of going slow. The one that was going slow. 

They walked over, had a few conversations with the guys next door. And next thing you know, other people are watching this next thing. They knew that the whole crew went over to the other house. And now that another house is like light years ahead of, you know, the one, the other one, but it was all because they paid him. 

I'm sure. 50 cents a dollar more an hour. I don't, I don't know what it is. Yeah. But yeah, it's, it's a huge problem. I know my husband's struggles with it. I know our builders struggle with it, you know, trying to keep good employees. It's tough.  

Chase Leavitt: We talked about how popular build-to-rent is right now. 

It's not just built for rent it's new construction people want to get in homes in general. So things are booming right now. And so, yeah, there are definitely labor shortages that are really just causing issues. 

Sherida Zenger: And I think the tough thing is trying to pass that along. 

My husband works for some national builders and he was making a comment to me that, Hey. It's expensive to keep these guys employed, but I can't go to the builder until the builder. I needed an increase. And I said, oh yes, you can. Our builder does it. Right. You have to work in those margins to be able to pay the subs. 

The builder still needs to make money. So I'm looking at it saying my husband still needs to make money. So it's a ripple effect. Prices are going up all over.  

Steve Olson: And builders don't want to sign those fixed big contracts right now. We've had a whole bunch of contracts. We wanted to get out the door and we basically, so yeah, well, we're going to take the rest of the year. 

I mean, it's, it's just too volatile of a climate for any builder to commit to anything that's more than 90 days out.  

Sherida Zenger: Yeah. 

Chase Leavitt: We're gun shy because our builders are gun shy and we don't blame them. I mean, you just read the first part of this here and it says at least to the summer of 2022 before things start to come back down. 

So that's another six, seven months if they do so. Typically in the past with FIG and what we do, and I should say other builders, they can probably predict or put some sort of a contingent con contingency line item, whether it's what, five, 10, 15% to plan for any increases over a period of time. 

Steve Olson: It's blown past contingency.  

Sherida Zenger: One line item is one line item wiping out the whole contingency that you have for the whole job. I mean, so it's like I get why they're gun shy, but I think we are too because we're saying, Hey, w we don't want to go to you as an investor. Hey, here's the price. 

And then have to do the bad news of coming and doing the increase. We've had to do that on three of ours. We don't like to do that. So we've just said, no, we're not. 

Steve Olson: We're not even going to put a number out there. Well, you know, the builder we work with, in Idaho, right. We, we know we did a whole bunch of fixed bid contracts. 

Clients closed half-open construction loans. Construction is in the process a builder. Can't go back and change pricing at that point, even though it's jumped all over the map, they're going to have millions in late fees in, in just Idaho alone. Yeah. I mean, getting this a little bit wrong. Is millions and millions of dollars. 

So yeah, nobody wants to commit to anything that's more than a few months out. And does this labor, especially, it's a little bit more of a micro issue, but right now on my street where I live, there are two houses under construction, just a few doors down from me. And I have a construction project going in my backyard. 

Two little. Yeah. It's like a pool shed. One holds pool equipment. One holds a bath. And we had on our plans to brick these exteriors. And the problem is, as you guys know if you have us if you're a homeowner and you have a small job right now, good luck. See you later. No one's showing up, to do your small job. 

So you get an alert. Or you get a, write a check. So my wife has kind of running the project and she basically gave him the, what is your show up today? Price to the brick contractor. And they, they throw out a number. She said I'll see you soon. And they showed up and we had their attention and we paid for it. 

And so one of my neighbors is generally in his own house and he and this other house have had like 10 pallets of brick sitting out on their front yard for months. And he comes up to me. How you got brick guys at your house? Like, I know that I'm using the same sub as the house, up the street from me and they're not even, they don't even have scaffolding set up. 

I know I'm months more out because they haven't even started. And I'm at least second year. Right. And I was like, you got to pay, right? What is the show-up today? Price. And what does this do? It makes these guys have added, my wife did the same thing, needed some framing corrected. And she posted a framer. She said I might be this crazy housewife showing up at job sites, waving money around to get framers, to show up. 

And that's just a microcosm of it because builders are doing it on a much larger scale. They, we see this in Idaho. They go to a job site. They're framers. They're. Hey, how much are you guys getting paid? And builders have to put up with people walking off the job. Cause these got there's such a labor shortage, right? 

I, I said, I told him, my wife said I got young boys. If my boys say, you know, dad, I want to go into HVA cm, like giddy. Right. What do you want that degree for? It seems like what I'm seeing. Everybody wants an HVAC guy or a framing company or an electrician or a plumber. Yeah, no kidding. No kidding. So that was my tangent. 

I think the moral of the story is it's really hard to commit, you know, we see a big appetite by institutions in the built for rent space right now. They want to buy projects at C of O that they say, we want you to take all this risk and get these units all the way to certificate of occupancy, get them done and ready for lease-up. 

And we will pay you out the nose. If you do that, because to them, they can cap their risk. They sign a contract that X price they're not going to have to ride this wild tidal wave of material. And, and, and. That is so volatile, but guess what risk they're willing to take. Lisa, they're willing to take that because in this environment with costs going up, what's this doing to these poor tenants. 

Sherida Zenger: Pricing them right out of homeownership.  

Steve Olson: Leases or rents are going up. I mean, I think we've seen rents rise like 20% in, in many markets over the last 18 months or so. So I think that this volatility. Is probably all, ultimately it's the end-user, the tenant or the home buyer that is going to say uncle and they haven't said it yet. 

Chase Leavitt: How many builders are going for the contract where they're writing it up at certificate of occupancy and I'm sure they're probably putting some sort of a deadline in there, right? Yeah. So is it appealing to them or they're just getting quite a bit more where the cap rate X amount.  

Steve Olson: I dunno. I had an institution ask me for a price that I said, no, you name it. 

Yeah. This is one that I've got under construction, small build for rent deal. I said, well, we don't know. I said I don't know. Make it, so I don't have to think. Yeah. That's, that's where you are. So everybody wants to take the lease-up risk rents are going up. They're like, I can do that. There's a huge housing shortage finding bodies. 

Isn't the problem. Yeah. Finding bodies that have hammers and nails is the problem. Yeah. Yeah. I would actually venture to say that that's a bigger problem than the materials because you know, you can have your materials sitting there, but if nobody can do the work, what does it matter? Right. And so, yeah, I guess materials do walk off the site sometimes too. 

Sherida Zenger: Maybe with the subs that are walking off to.  

Steve Olson: There is organized material theft, like mafia level construction theft in Houston. Right? You gotta like a prison, prison guard, your job site with a razor wire and cameras and a security guard. 

We had 16 AC units get clipped and walk off. The guy came in on a flatbed. It was on camera. Came in. It was like, this is an organized effort. I can't help, but be a little bit impressed. That was crazy...

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