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Lumber Prices Threaten Viability of Sustainable Timber Towers

The price of lumber has nearly doubled over the past 12 months. This has threatened the viability of one of the most promising new construction techniques: high-rise timber. Wood is being touted for its environmental sustainability when compared to steel and concrete. Wood is a renewable resource while steel and concrete are finite. Wood is also much lighter than steel or concrete. This means it is cheaper to transport and wood buildings require less foundation underneath them. 

There are a number of reasons for the spike in price. Covid restrictions hamstrung lumber processing facilities, which have already seen increased demand from the residential sector. Speculators also helped bring prices higher, both by buying lumber futures and by stockpiling inventory. All of this means that the commercial industry could soon be feeling the effects of a nationwide lumber shortage and these spiking lumber prices threaten to derail commercial real estate’s push into mass timber construction.

Global developer Hines has been a recent leader in timber construction, developing projects in seven-story timber towers in Minneapolis and Atlanta, two 10-story towers in Toronto, with plans for more timber towers in Vancouver, Denver, Chicago, and Australia. Dubbing the projects ‘T3’ for timber, transit, technology, Hines is hoping to attract tenants that will pay a premium for health, wellness, and sustainability. Hines is far from the only developer pursuing the construction technique. Last year Milwaukee approved the construction of Ascent, a 25-story timber tower, the tallest of its kind in the world. 

“T3 uses the only structural material that comes from a renewable resource. With timber beams, it has the desirable aesthetic of an old warehouse but solves all the problems of energy efficiency, acoustics, and light,”  Bob Pfefferle, project development director of Hines T3 Minneapolis said.

It isn’t just developers that are excited about this construction technique. Walmart made headlines when it announced it would be using 1.1 million cubic feet of mass timber to construct its new campus in Bentonville, Arkansas. Since 2013 more than 700 multifamily, commercial, or institutional projects have used mass timber construction techniques, according to WoodWorks, a nationwide wood products council. The market for cross-laminated timber (CLT) is expected to reach $1.6 billion by 2024, according to Zion Market Research. 

But mass timber construction has a viability sweet spot based on material prices. Cross-laminated timber wasn’t cheap before spices skyrocketed, making it more expensive per unit than steel or concrete. Savings come from reduced labor costs. Between six and twelve stories, timber-based construction is price competitive against steel and concrete because crews can be nimble. Anything higher than that, timber has a hard time competing on price.  Mass timber-based construction is quicker, approximately 25 percent faster than steel or concrete, resulting in 90 percent less construction traffic and 75 percent fewer workers on the active deck, according to the American Wood Council. 

The best case for mass timber construction is its inherently renewable nature. Not only does wood require less carbon to produce, but the wood itself stores carbon. Within a certain height, mass timber construction gives builders an easy and financially viable way to differentiate their projects aesthetically while promoting environmental, social, and governance (ESG) goals for prospective tenants. In many areas, state and local building codes limit the use and height of mass timber construction. As new construction and design techniques for mass timber are developed and put into practice, those regulations could soon be reviewed. 

So far the lumber shortage has been mostly felt by the single-family and multifamily sectors, each relies on lumber for the majority of construction projects. But as the commercial sector starts utilizing more timber construction it means that they too could start to feel the pain. Lumber is only part of the problem, material prices are spiking in every sector. Prices on steel, brass, copper, plywood, and fuel are all going through the roof as builders scramble to cash in on the intense demand for new housing. Labor has also become an issue as wages climb to lure a shrinking pool of workers.

Prices are already delaying projects. Nationwide, 52 percent of respondents in a recent survey of the Association of General Contractors said they are currently experiencing project delays based on a shortage of construction materials. The survey found 77 percent of respondents had an owner postpone or cancel a project that was scheduled to start in 2020 or 2021. 

Developers pursuing timber-based commercial construction have some leeway. When lumber purchase orders are placed by the massive projects is unclear, but the size of each project will give commercial developers a leg-up in supply sourcing over smaller operations in the residential industry. Commercial projects can also delay construction until supply and demand stabilize. Hines’ T3 project in Chicago has yet to begin construction, still in the pre-leasing phase. The best option may be to simply wait for prices to stabalize. 

Experts expect supply and demand to balance, but it’s a matter of when. Some relief on price can be expected before the end of the year as mills ramp up production and new producers take action to cash in the high prices. Record prices have everyone in the lumber and timber industry rushing for a payday, meaning supply will rapidly grow over the next few months. Demand from at-home DIYers may subside as the pandemic fades, but demand from other sectors, particularly in commercial development, is picking up. 

“The pipeline for lumber and other wood products demand remains quite deep in 2021…builders have plenty of ongoing projects to keep working through, which is keeping lumber and panel demand high, and making it very difficult for mills to ramp production up fast enough to rebalance the market,”  Dustin Jalbert, senior economist at Fastmarkets RISI where he specializes in wood prices, told Fortune.

The reality of a market dealing with the impact of COVID-19 has hindered one of commercial real estate’s hottest new building and design trends. The advantages of mass timber construction are a long-term solution to some sustainability issues endemic to the industry but short-term market fundamentals are delaying those efforts. With prices as they are currently, money really does grow on trees.

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