In 2017, the Trump administration placed steep tariffs on the Canadian softwood lumber that is one of the key components of residential construction – both for single-family homes and multifamily developments. Additionally, in early 2018, tariffs were placed on imported aluminum and steel.
These tariffs are in addition to already increasing material costs for construction that threaten builders’ bottom line. But will the additional costs be enough to deter new construction starts and slow apartment development in this unprecedented building cycle?
Construction costs had already been rising due to labor shortages, land costs, regulatory fees, natural and artificial growth in commodity prices and increased competition for these inputs during the economic expansion. Skilled labor shortages have been one of the most impactful elements of rising construction costs, but these tariffs have added even more cost and price uncertainty to developer’s already stretched budgets.
The lumber tariffs were initially set at 27% and later reduced to about 20%. Tariffs of 10% and 25%, respectively, remain on imported aluminum and – more importantly for high-rise developments – steel. According to the Congressional Research Service, Canadian lumber comprised an average of roughly 28% of the U.S. market over the past 10 years, while 60% of the country’s imported steel comes from Canada and Mexico and three other countries: Brazil, South Korea and Russia.
The following chart displays the monthly import price indexes for both softwood lumber and raw steel from December 2005.
While the import price index for steel has been more erratic over the past 22 years, the price index for lumber has risen only moderately through 2016. In addition to the actual tariffs, some of the run-up in the indexes for both commodities since 2016 can be attributed to suppliers bidding up pricing in anticipation of tariffs. Uncertainty in the market often causes increased pricing pressure.
The imported lumber price index began climbing in early 2017 as the first preliminary round of tariffs took effect in April of that year. Add to that Hurricane Harvey, the still-growing U.S. housing market, supply disruptions and the November iteration of tariffs, the result has been double-digit annual percent growth in the import price index each month since April 2017, averaging almost 14%.
Steel prices fluctuated sharply around the Great Recession and have dipped and spiked in reaction to global supply and demand, the increasing role China has played in the market as well as several other influencing factors. The tariffs placed on steel and aluminum imports is more recent and the impact less certain. However, the import price index for steel has also been growing by double-digits since 2017, averaging 17.9% annual growth for the past year and a half.
So far, the impact on housing has been modest. Certainly, increased costs are passed on to the consumer, and the National Association of Home Builders estimates the lumber tariff adds about $6,000 to $9,000 to the cost of new single-family homes. For multifamily construction, they estimate the tariffs would add about $3,000 per unit to the cost for a typical mid-rise apartment development. Mid-rise is currently the most popular development type for multifamily, displacing the low-rise or garden walk-up apartments as the favored type before 2013. Based on typical construction costs nationally, the tariffs are estimated to add about 1.5% to 2.5% to construction costs.
A rising sector in multifamily development has been urban high-rise properties. High-rise apartment developments are primarily built of steel and numerous finished metal components. The steel tariffs apply to raw steel, not fabricated steel products. Estimates from Archinect based on the amount of raw steel utilized in high-rise multifamily construction indicate that the increase in cost for the steel portion is less than 1%, others estimate up to 5% to 6%. That would come out to about $2 million to $15 million on a $250 million project.
Current supply contracts that lock in prices and projects currently under development could mitigate price increases in the short term, but new project development may slow into 2019. One possible bright spot if pricing concerns do slow new development is that the potential slowdown in projects would free up workers and lessen wage pressure and shortages.