By Catherine Yoshimoto, director, product management
Among the pandemic’s countless impacts, soaring lumber prices is one where both investors and consumers are still feeling the ripple effects. Supply constraints combined with rising demand have sent lumber prices skyrocketing over the past year, ultimately impacting housing and construction prices.
But while there’s been much press surrounding how these prices have been passed to consumers, little attention has been paid to the very beginning of the supply chain—where the timber is being harvested. Timber REITs own and operate land that’s used for timber production and harvesting, and our analysis shows that they’ve benefited considerably from the lumber price surge.
The onset of the pandemic triggered widespread business closures—and lumber mills were not spared. Even when business resumed, some mills weren’t able to operate at full capacity amid COVID-19 safety concerns. And many didn’t ramp up production as they anticipated the pandemic crisis could weaken demand.
However, what they didn’t expect—and what actually happened—was the opposite outcome: housing demand boomed in the economic recovery. The monetary policy response to the pandemic resulted in low interest rates for home buyers. And as more of the pandemic-weary fled urban environments, housing demand exploded—as did home remodeling projects for the housebound masses.
An already reduced lumber supply fell short of this rising demand, and the imbalance has resulted in a headline-grabbing jump in prices. In the period from March 31, 2020 to April 30, 2021, lumber prices rose by a staggering 394%. These higher costs were passed to home construction, and ultimately to new home prices—where in April 2021 lumber price increases added an estimated $36,000 to the cost of an average new home.
What’s been bad for the consumer has been good for Timber REITs
While the lumber price surge has meant higher costs for the end consumer, it’s been a boon for the other end of the supply chain. A closer look at our FTSE Nareit Timber REIT Index reveals that Timber REITs—which own the land where trees are grown and harvested—have materially outperformed the broader equity REIT market over the past year.
As shown below, since March 2020, the FTSE Nareit Timber REIT Index has outpaced the FTSE Nareit Equity REITs Index—which excludes Timber REITs—by a wide margin.
If housing and construction demand should stay on its trajectory and the lumber industry continues its scramble to address supply shortages, upward pressure on lumber prices could persist.
And like many trends set in motion by the pandemic, there are winners and losers, some of which might be less obvious than others—underscoring the importance of looking across the entirety of the supply chain for investment opportunity.
This post first appeared on June 14 on the FTSE Russell blog.
Photo Credit: in hiatus via Flickr Creative Commons
 Source: NASDAQ as of April 30, 2021
 Source: The National Association of Home Builders, April 2021
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