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Will 2020 Be the Year of Wood?

[Updated: Aug 26, 2020] Jan 22, 2020 by Matthew DiLallo
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The residential housing market has long been one of the main drivers of demand for wood products. However, that's beginning to change as developers seek out more environmentally friendly alternatives to the concrete and steel typically used in commercial construction. That's increasingly leading them to turn toward wood. Not only is it a renewable resource, but the process of harvesting timber and turning it into a usable wood product is also less carbon-intensive than producing concrete and steel, which are responsible for 18% and 24%, respectively, of all industrial emissions.

On top of the environmental benefits of using wood, several other factors could drive increasing demand for the construction material in the coming years.

Wood is starting to stand taller

Wood fell out of favor with commercial property developers more than a century ago due to concerns about its strength and resistance to fire. Because of those issues, many building codes limited the height of wood-constructed buildings to no more than six stories.

However, today's engineered wood products are much stronger than traditional lumber materials. Because of that, the International Code Council concluded in late 2018 that developers could use wood in buildings as high as 18 stories without compromising safety, more than double the previously permissible height. That factor, when combined with wood's aesthetics and favorable environmental characteristics, is leading more builders to use wood when constructing commercial buildings like office complexes and high-rise residential structures.

One place leading the way in using wood is the state of Oregon, which began accepting permits for taller wood-constructed buildings a couple of years ago to help bolster its timber industry. The state currently boasts the country's tallest wood structure, an eight-story condo complex in Portland, and has several other large commercial wood structures in development.

Meanwhile, Sidewalk Labs, which is a portfolio company of Alphabet (NASDAQ: GOOG), is working on developing smart cities that mix technology with sustainable resources. It recently released a draft plan for a smart neighborhood along the waterfront in Toronto, which it would build primarily out of wood.

How this trend could impact the wood market in 2020

The rise of using wood in commercial buildings could provide a boost to the wood products market, which has been struggling since peaking in mid-2018. Driving the decline has been a combination of softening demand for wood in residential construction and oversupply, which has pushed down the price of wood products.

However, because such a small percentage of current commercial developments plan to use wood, it likely won't have much impact on lumber markets this year. That's also apparent in the sector outlooks by leading research firms that follow the space. Moody's (NYSE: MCO), for example, estimates that operating earnings for companies in the wood products and timberland sector will rise by about 7% this year. Driving that rebound, in Moody's view, will be capacity curtailments by the industry, not increased demand from either residential or commercial building construction.

Meanwhile, analysts at Forest Economic Advisors (FEA) also see muted positives for the global lumber sector this year, with an expectation that consumption will grow by 2% to 2.5%. At the midpoint, that would only be slightly above the long-term average of 2.2% growth.

Wood's commercial takeover is still in the seedling stage

Concrete and steel are currently the dominant materials used in commercial building construction. However, due to environmental factors and changing perceptions, more developers are considering using wood to construct commercial buildings, especially now that they can go up more stories. While this increased usage doesn't appear as if it will move the needle for global wood markets in 2020, it could be a meaningful demand driver in future years. That makes it an exciting trend for commercial real estate developers to watch.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew DiLallo owns shares of Alphabet (C shares) and Moody's. The Motley Fool owns shares of and recommends Alphabet (C shares) and Moody's. The Motley Fool has a disclosure policy.