New Data Supports Industry Concerns Over Rapidly Rising Materials Costs

By Caitlin Walter, PHD

Caitlin Walter is vice president of research at the National Multifamily Housing Council (NMHC) in Washington, D.C. She can be reached at cwalter@nmhc.org.

Over the course of the pandemic, the COVID-focused NMHC Construction Survey has tracked the pandemic’s effect on multifamily construction operations and consistently highlighted concern over materials availability. But with every round of the survey, results have shown an even further exacerbation of material supply. (See Figure 1.)

The fifth and sixth rounds of the survey, conducted in Fall 2020 and Spring 2021, saw a notable uptick in both a lack of availability as well as price increases. In the most recent round of the construction survey, 40 percent of respondents cited price increases of greater than 20 percent for their most impacted materials. Most notably, rapidly rising lumber prices, well documented in the media of late, are creating a serious impediment for apartment developers and construction firms.

Material shortages and cost increases will lead to development cost increases and potential project delays. Builders and contractors can attempt to offset these issues by either substituting materials (if possible) or assuming higher costs for the materials in their budgets. However, longer term, these disruptions could challenge the already supply-constrained market and threaten to derail housing affordability efforts. New units need to be built at a variety of price points, and cost increases only make building those units more difficult.

NMHC will soon launch its seventh iteration of the construction survey to provide updated data on this growing challenges, particularly around skyrocketing lumber costs. In the meantime, here’s a snapshot of the materials cost landscape today.

Overall Multifamily Costs Are Rising

New data released this week from the U.S. Bureau of Labor Statistics (BLS) provide more concrete information on the true magnitude of material cost increases while improving clarity on which specific materials are experiencing more rapid increases.

The BLS provides data on the cost of goods and services for companies through its Producer Price Index (PPI). One PPI series provides a look at the overall change in the cost of goods for residential builders (excluding food and energy).

By this measure, the cost of goods for multifamily residential construction grew at a faster pace than single-family construction for several years after the start of the series (in December 2014). But, in 2020, increases in single-family costs began to slightly outpace multifamily. Regardless of these shifts, the inputs to multifamily residential construction (goods less food and energy) PPI was up 11.9 percent year over year as of April. More concerning has been its 7.9 percent climb since December.

Lumber Prices Are Skyrocketing, Outpacing Other Materials Increases

Multifamily builders have routinely cited lumber as one of the leaders in price increases and, indeed, the price of lumber continues to increase drastically throughout the pandemic.

The overall lumber PPI remained below the 2018 high water mark for all of 2019 and the beginning of 2020. Prices then began increasing dramatically mid-year and surpassed the 2018 record by August. Overall lumber increased 89.7 percent year over year in April 2021 and has risen 34.3 percent since December.

Softwood lumber, which is used for a significant amount of multifamily construction, has risen even more sharply, increasing 121.1 percent year over year, and 39.8 percent since December. Plywood has increased as well, with a 70.4 percent increase year over year. The increase in plywood pricing had not been as drastic as softwood lumber, although both March and April saw 10.0 percent or greater increases in pricing.

Other Building Materials Are Becoming More Expensive

Price increases are not limited to lumber, however; the following figure shows PPI levels for other building materials that are commonly used in multifamily construction. Increases vary by material, but pricing for steel as well as copper and brass mill shapes also began increasing rapidly in late 2020, rising 67.0 percent and 49.0 percent year over year, respectively.

Gypsum (drywall) and ready-mixed concrete, which have been cited as difficult to obtain from NMHC Construction Survey respondents, have seen more moderate growth. The price for gypsum rose 12.1 percent year over year, while ready-mix concrete pricing rose 2.0 percent during the same period.

Next Round of NMHC’s Construction Survey Will Provide More Insight

Even before these price spikes, the rising cost of construction was on the industry’s radar for the last several years. However, as detailed in this writeup, recent disruption may be a horse of a different color. Pricing has increased since the pandemic began in March 2020, and the increases became more acute after the initial shutdown. These increases can be traced to increases in demand for the products as well as supply chain issues. But it’s important to note that these numbers do not mean that inflation is here for good. Rather, the current issues may only persist in the short term. Until supply chain and demand pressures ease, prices will likely remain elevated.

The PPI data reveal the magnitude of the increases but do not explain how these increases translate into changes in operations for multifamily builders and developers. The next round of the NMHC Construction Survey is currently underway and will quantify the effect that these cost increases are having on the ability of NMHC members to build new units right now. NMHC members are asked to forward the survey link to staff responsible for construction and development. These responses will help direct NMHC research, advocacy, and communications efforts on the construction cost increases.

Caitlin Sugrue Walter cwalter@nmhc.org

Paula Cino pcino@nmhc.org