6 Strategies to Mitigate the Impacts of Lumber Price Escalations and Supply Constraints on your Commercial Residential Development
Lumber prices continue to soar throughout the U.S., now almost 200% what they were this time last year. As developers look to break ground on new projects and maintain budgets on projects already in the process of construction, many are looking for new ways to cope with the drastic price escalation by exploring new strategies to mitigate the financial risks associated with this emerging crisis. Adding to the challenges that exist, lumber supply constraints threaten to delay project delivery schedules.
So, how can you mitigate the impacts of lumber pricing escalation and availability?
The answer lies in creating a procurement approach that takes all risk factors into account: price, supply, and lead times. Though there is no silver bullet, we have found that employing a combination of the strategies below will improve your ability to manage this unprecedented risk:
#1 Keep a pulse on the market. From lumber brokers and suppliers to industry organizations and national publications, arming yourself with information is key to making informed decisions. Identify trusted resources and reference them weekly helps stakeholders stay ahead of the conversation, thus putting them in a better position to respond to evolving market dynamics. In this case, it is crucial to understand what to expect today and months down the road.
#2 Structure contracts to account for changing market dynamics. Be aware of the impacts the current market dynamics may have on your contractor agreements. Consider the possibility of allowances related to lumber if prices are forecasted to trend down as a means to reduce future lumber purchase costs.
#3 Adjust your loan documents. Knowing that lumber supplies are tight it is critical to be in a position to make bulk purchases and store the material as it become available. Talk to your lender to ensure your loan documents properly account for multiple storage locations, insurance requirements, and increased dollar value of allowed storage materials prior to placing your lumber order.
#4 Explore alternate materials. Current market dynamics are forcing the broader adoption of alternative materials. Partner with your design team, contractors, and suppliers to explore different options that may be viable substitutes and help offset costs and minimize schedule delays.
#5 Ensure flexibility in design. Your design must remain fluid to keep the project budget in line. Teaming with architects and structural engineers in tune with the market who are willing to validate the viability of alternatives puts you in a good position to respond to changing dynamics while improving your chances of successful outcomes.
#6 Hire a GC with buying power. Contractors with a national presence or those who do a large volume of multifamily work in your local market likely have relationships and buying power with suppliers, revealing better pricing and quicker access to materials. Confirming your GC is in good standing with lumber brokers and suppliers influences your buying power.
Conclusion. As we have helped our clients navigate the volatility in the lumber market, we have learned that no two procurement strategies are alike. Consistent collaboration with informed project partners will help you respond appropriately to the ever-changing dynamics while mitigating impacts to your project’s budget, financial, and schedule performance.
Reach out to Tim Laumakis for more information on how we can assist you with your lumber strategy.
About the author: Tim Laumakis is a Darden Senior Vice President well-versed in the multi-family and related commercial, residential markets. His engineering, real estate and banking experience provides a solid foundation to analyze complex real estate matters and determine what makes a deal work. Over the last six months, he has helped multiple clients navigate the challenges presented by the lumber market and has created comprehensive strategies that have helped reduce risks, keep projects on track, and mitigate the budget impacts associated with the recent escalation in lumber prices and associated supply constraints. His expertise can guide you through this crisis no matter the stage of your project. Feel free to contact Tim for more information on ways to mitigate your project’s risk. c: 404-583-0198; e: firstname.lastname@example.org