Lumber Price Escalation & Potential Hedges
Long time listener, first time caller...
With the recent, rapid increase in lumber pricing, I was wondering if anyone had any thoughts on some sort of "hedge" against future price escalation. For background, I work for a southeast focused multifamily developer. Like many of you here, we're seeing a pretty steep escalation in the cost of lumber. While pricing declined pretty significantly in October and November of 2020, as I'm sure most of you know, it's recently risen well above the prior 2020 peak.
Although future markets are anticipating lumber will come down, I'm concerned about the timing of this "correction". My worry is this bull market will continue to run, making many (if not all) of our developments financially unfeasible. While we budget for a healthy amount of contingency in our underwriting, I don't think any of us expected it to rise so quickly and so significantly. (IdaPac's Southeast Market Report snippet below for those interested).
Does anyone have any experience with hedging lumber? I'm thinking there must be some type of option or instrument we could use to bet on lumber increasing in price. I.e. Lumber keeps increasing in price, we sell our contracts and use profit to help offset the increase over our underwritten cost. I should add, if we sign these deals up with our GC today, they've promised to fix pricing at today's rates. On the other hand, pricing goes down, our contracts are worthless, but cost is now in-line with (or closer to) underwriting... we buy... deals move on as planned. Everyone's happy.
Is this a crazy / stupid idea? If anyone has any insight it would be greatly appreciated. As much as I'd love to "bump" our rents and make the problem go away, I'd much rather find some other solution... Thanks for listening.
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