Apartment Building Replacement Costs Rising: lumber back to housing boom highs, growing labor shortages.

The NAHB has a piece out called Producer Prices in March – Building Materials Prices Approaching Housing Boom Highs talking about how far gypsum (main ingredient in drywall +18%), softwood lumber (2x4s, 2x6s, etc. +30%) and chipboard (oriented strand board and waferboard which have replaced plywood, joists and beams in many applications +68%) prices have risen in the last year, the chart tells the story:

Apartment Building Material Prices 2012 to Mar 2013
Click on chart for full size image.

Bill McBride over at Calculated Risk has a piece showing the longer term price history for Random Length Lumber (2x4s only, both cash and futures) and a link to a pretty depressing Vancouver Sun article on pine beetle devastation in BC (Spoiler alert: the little buggers have destroyed more than 30% of the merchantable lodgepole pine in the Province. About half the lumber produced in North America comes from Canada).

Apartment Building Material Prices Rising
Click on chart for full size image.

Next we have this from the NAHB: “In a recent NAHB survey, over half the builders reported shortages in framing crew subcontractors and over 40 percent reported shortages in their own framing and carpenter crews as well as carpenter subcontractors. As a result, over half the builders are paying more for these crews and raising prices…”

“The survey consisted of special questions periodically included on the NAHB/Wells Fargo Housing Market Index (HMI) survey, asking single-family builders about shortages of labor in 12 categories: carpenters-rough, carpenters-finished, electricians, excavators, framing crews, roofers, plumbers, bricklayers/masons, painters, weatherization workers, HVAC and building maintenance managers.” Note that while this survey asked builders of single family homes, the same trades are needed in the construction of most apartment buildings.

Labor shortages effect on residential replacement costs.
Click on chart for full size image.

The NAHB’s survey also asked builders about the effects labor shortages have had on business.  “More than half of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices.” Once again these are single family builders competing for the same labor and materials needed to build apartment buildings.

labor-shortage-effects on apartment building replacement costs costs
Click on chart for full size image.

What that means for apartment building investors: With two of the five main components rising, the apartment building Line of Doom (replacement cost) is being pushed up. For owners of existing buildings that will slow down the rate of new competition coming online. For investors looking to acquire more properties we believe it will create more competition at today’s prices and push them to move higher. This potentially will extend the length of the expansion phase of the apartment building investment cycle and depress cap rates further.

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