Build Up: High Cost of Wood Brings New Opportunity for Developers

The swelling construction pipeline has been a long time coming.

The lack of new supply during the recession, coupled with a tremendous amount of pent-up demand, has led to an environment where developers are trying to play catch-up, to make up for lost time.

But this glut of activity brings other pressing issues, and at the beginning of the year, some industry stakeholders could see problems forming on the horizon.

“It wasn’t just finance,” says Mark Humphreys, CEO of Dallas-based Humphreys & Partners Architects. “With the ramp-up we’re seeing in our design side, we could tell there was going to be a doubling of a number of units coming out that was going to cause a problem with construction costs.”

Humphreys’ firm had about eight contracts out last year. By the first quarter of this year, that number had more than quadrupled, to 33 projects nationwide. That’s when Humphreys realized that construction costs—particularly the price of wood inching up to that of concrete and steel—were likely to become the No. 1 problem for future developments.

There’s been a 30 percent rise in the cost of lumber over the past 12 months, largely due to most U.S. building materials plants operating at merely a third of capacity right now, Humphreys says. Three to four years ago, the apartment market delivered only about 60,000 units, which led, in part, to some plants shutting down.

But now, there are more than 200,000 starts, and, on top of that, the single-family market is picking up. The high demand for wood caused an increase in wood prices, and the cost of labor subsequently went up as well.

“A lot of companies during the downturn cut costs to the buyer to try and get the work,” Humphreys says. “They were basically doing it at their cost or very low margins. Since it’s getting busy [now], they’re trying to make up for those low margins.”

This bizarre reality—where wood costs almost as much as steel in some areas—has caused developers to think about taking a new approach. Instead of the suburban garden apartment community, developers are thinking it may make just as much financial sense to build up.

“You can justify a podium in wood frame at today’s new construction costs,” Humphreys says. But developers need to take a look at all factors involved in the deal. “In some cases,” Humphreys notes, “it’s more expensive than a high-rise.”

It generally costs less to build a wood-frame structure than a high-rise based on construction costs. But the costs have gotten so close that there could be only a 5 percent to 10 percent difference in pricing now.

Adding in extra factors like land costs could tip the scales, not to mention the higher income garnered from building a high-rise.

Wood-frame developments can only be built to five stories. If you’re going to do more than that, it’d likely be less expensive using steel and concrete, according to Bernie Cornelius, vice president of Jacksonville, Fla.–based Summit Contractors.

“Five years ago, it used to be a rule of thumb that you could build a four-story project using what they call ‘total form construction,’ for $15 a square foot more than wood construction,” Cornelius says.

The prices are fluctuating, as Summit sees a $15 to $20 premium on concrete and steel. And even as the trend of building high-density wood-frame projects on large tracts of land slows down, it’s harder to find that type of space at the right costs these days.

It’s easier to find land at one acre or a half acre, and that opens the door completely to new sites.

“You also don’t have that big bite of paying [higher] prices for the land,” Humphreys says.

And land costs are definitely going up.

Let’s say you have a property on an urban infill site that costs $100 per square foot of land. Wood may cost 10 percent less than its counterpart materials, but by doing a high-rise on the site, you get double the density and the land cost is cut in half.

An acre of land with a 140-unit podium structure (with land priced at $125 per square foot) would yield a land cost of about $40,000 per unit. If you took that same land and put a 300-unit high-rise on top of it, the price would be just over $18,000 per unit.

It’s simply the Manhattanization of the United States, as Humphreys describes it. With a new high-rise in Denver, for instance, the firm calculates that, coupled with land cost, it’d cost $20 a foot less to complete a high-rise, helping to save about $100 per square foot overall.

Still, not everyone is convinced enough to go all “Manhattan” in the concrete-versus-wood debate.

“If you want five stories in wood versus concrete, it’s probably close, but I still see an advantage in doing wood,” Cornelius says.

Labor-wise, more contractors are used to doing wood, so it offers more competitive pricing. Additionally, while building higher pays off, the complications with adding more studs and following more codes may scare away potential developers.

“It’s more complicated than a wood-frame building,” Humphreys says. “But if you have the right contractor, the right architect, the right engineers on it, then it’s just like everything else. It takes care of itself.”

And despite potential fears, Humphreys believes in an ongoing trend in high-rises.

“With the successes that everyone is seeing in these urban areas, the rent growth that’s just taking off, the demand that’s outstripping what everyone thought would happen in these urban cores across the U.S., it’s just going to snowball on itself,” Humphreys says. “The only way to go now is up.”