Forestry Perspective
Smarter Perspectives: Forestry

Podcast: Forestry Product Demand and Industry Challenges

Guest Jesse Marzouk, Steve Katz (host)

Jesse Marzouk, Senior Vice President and Forestry Product Specialist at Hilco Global, discusses how pandemic driven changes in consumer preferences and behavior are impacting demand across forestry product markets and how an industry challenged by continued resource limitations is now responding.

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Steve Katz:
Hello again, and welcome to the Hilco Global Smarter Perspective Podcast series. I'm your host, Steve Katz. Today, we're speaking with Jesse Marzouk, Senior Vice President and Forestry Product Specialist at Hilco Global about how pandemic driven changes in consumer preferences and behavior are impacting demand across forestry product markets and how an industry challenged by continued resource limitations is now responding. Just as a little quick background, Hilco Valuation Services is the leader in valuation for the forestry and lumber industry, having delivered more than 500 forestry and lumber appraisals with asset values ranging from 500,000 to $1 billion. Access to real-time information, in contrast with the aged data relied upon by others, ensures clients of more reliable valuations, which is crucial when financial and strategic decisions are being made. With that said welcome to the podcast, Jesse.

Jesse Marzouk:
Hi Steve. Thanks for asking me to join you today.

Steve Katz:
Yeah, absolutely. It's great to have you on with us. Listen, I think a logical place to start for this discussion is by talking about construction demand and how it really took off and has continued to escalate throughout COVID. What light can you shed on the root causes of what's been happening there?

Jesse Marzouk:
The demand dynamics that we really saw in the housing market changed significantly once COVID hit. For the first month or month and a half similar to many other industries, the housing market slowed down significantly. While housing was deemed a crucial and critical function and area during COVID and during those first few months of COVID in March and April, we didn't really see the market take off and continue to be strong until probably May of 2020. And that's when you saw a really significant change in the housing market. This drove demand for lumber overnight, increasing roughly 15 to 20%. This came at the same time as many lumber mills were struggling to keep up because of employment issues and because of health issues related to COVID.

Jesse Marzouk:
During the first few months of the pandemic, many homeowners were looking for different places to be. They were looking to have more space and outdoor areas where they could socially distance and even spend time with close relatives, but in a distance way. This led many people to look for places outside of cities, moving to the suburbs and many people changing locations. When looking at year over year housing starts, the first few months of the pandemic were week. April and May of 2020 were difficult months.

Jesse Marzouk:
People were unsure of what was going on. People were unwilling to spend money and then the strong response from our federal government to provide the economy with money and to provide those struggling with money, really helped the housing market take off significantly. Starting in June 2020, the housing market really started to take off and that drove demand for lumber in two ways. One, renovations and repairs increased as people needed more space in their existing home as they needed to reconfigure their house from the new work from home dynamic. And then also as people were looking for larger outdoor spaces, the new housing market and the existing housing market took off.

Steve Katz:
Okay, Jesse. So the proof is in the pudding, right? Building permit. Housing starts, as you said, and completions have now all continued at notably increased levels. So the next logical topic is this something, this housing boom that you and Hilco see continuing on and for how long, and what's going to drive that?

Jesse Marzouk:
Absolutely, Steve. It's something that we see going on for at least a few years. Whereas the housing market for the last year has been strong in almost every location, we continue to see the next phase of the housing boom to be concentrated on the lower cost, lower tax locations in the U.S. and you can already see that in the data. There are certain locations within the U.S. where building permits are increasing at a much faster rate. Those areas are generally located in the U.S. south and more rural and suburban areas in the Pacific Northwest. For example, the Atlanta Metro area on a year over year basis for the first five months of 2021 increased building permits at a rate of 41%. Similarly, the Austin Texas area increased building permits on a year over year basis for the same period at 38%. Dallas also increased at a rate of 39%. Other areas in Florida and Tennessee are seeing rates in the 30 or 40% increases as well.

Jesse Marzouk:
You can compare this with some other areas, which are historically high cost, high tax areas, such as New York and New Jersey, where you're seeing increases in the single digits or low double digit. This trend is likely to continue as the work from anywhere phenomenon continues. You've already seen with the advent of the Delta variant that reopening for many tech firms and other employers across the country has been pushed back. Many tech firms are now allowing workers to work from anywhere. This means that the migration out of California will likely continue into these lower cost locations in Tennessee, Texas, Florida, and the Carolinas. So, whereas the first year of the housing boom post pandemic was concentrated pretty much everywhere and all the suburban areas, the next wave over the next few years is going to be focused in the areas that we just touched on, those locales, which are cheaper to move to.

Jesse Marzouk:
Not only are people individually moving there, but you've seen companies move there as well. Tesla moved its headquarters to Texas. Their next Gigafactory is going to be located outside of Austin. Companies continue to move to Florida and Texas and that trend is only likely to continue.

Steve Katz:
That'll be interesting to see what happens to housing values in those markets. It's that outflux of people such as California and some of the other states. So I know we're experiencing the same thing here in Illinois as well. All right. So now the big talk for many months was the skyrocketing cost of lumber. And I have a good friend who was building a house and he said that his lumber costs nearly tripled from the bid that he originally received before the start of the pandemic. But now that pricing appears to have come down some, although it's still significantly elevated as compared to the expanded period prior to the pandemic. Where do you and Hilco see prices headed over the next 12 months and is normalization and easier product accessibility for builders in sight, or is that something that remains well down the line and why?

Jesse Marzouk:
Great question, Steve. What we've seen over the last six weeks is a significant decline in the price of lumber. Lumber prices got up from roughly 350 to $400 per thousand board feet before the pandemic to a high of nearly $1,600 per thousand board feet at its height in June 2021. Prices have declined significantly as the supply response continued from a number of lumber mills that were having a hard time previously staffing. As those staffing issues were somewhat alleviated, the supply of lumber brought to the U.S. market increased. Now, what I want to highlight is that although prices have declined significantly, we are still roughly 50 to 75% higher in terms of pricing than we were before the pandemic. We will likely see these sustained higher prices for the next 12 to 24 months, driven by strong demand in the markets that we highlighted.

Jesse Marzouk:
One thing to also think about in terms of demand is that the average single family home utilizes roughly two to two and a half times the amount of lumber as a multifamily home, and as the desire for much larger spaces and more outdoor spaces continues, the single home demand will continue to drive an increase in lumber demand. Although you might not see significant year over year increases in the overall level of housing starts and housing permits going forward, what you will see is that continued strong demand from the single family home sector. And as the single family home sector continues to increase, you'll see the demand for lumber increase as well.

Steve Katz:
Interesting. Perhaps I should know the answer to this question, but why is demand for lumber or the volume of lumber demanded for the construction of single-family homes so much larger than it is for multi-family?

Jesse Marzouk:
Well, for a number of reasons. One, the average size of a single family home is just much physically larger than a multifamily unit. Secondly, not only size internally, but a number of multifamily units share walls, share floors and generally those facilities will utilize less lumber because of those shared walls, shared floors, shared ceiling.

Steve Katz:
Very interesting. I hadn't considered that. And what are you and the Hilco Forestry team seeing in terms of demand, trends and pricing with container board and pulp during the same period, particularly given what's been going on with the elevated level of online shopping and related shipping material that's required for that?

Jesse Marzouk:
Absolutely, great question. So similar to lumber, a number of the open container board mills had trouble staying open during the early days of the pandemic, generally because of the social distancing requirements concerns for COVID. You just didn't see the supply response that you needed and almost overnight, even more so than the housing market, online shopping took off. And what do you need for online shopping? You need boxes for the products to be shipped. 2020 was the year of goods. People purchased goods in record numbers driven by the fact they needed to stay home. Online shopping took off, and whereas online shopping had been increasing at a rate of 15 to 20% annually in recent years, online shopping increased roughly 40 or 45% last year compared to [inaudible 00:09:09]. That caused a strain as demand for container board, which is used to make cardboard boxes, increased significantly overnight.

Jesse Marzouk:
Now there was some demand destruction from a lack of production of other products that are used, that container board is used to produce, but the demand for online shopping really drove that. As a result, what we've seen over the last year is two separate price increases [inaudible 00:09:29] by container board producers. They were able to do this because of the strong demand for cardboard. They were also able to do this because they run a very, very concentrated industry. In the U.S., roughly five firms control 80% of the supply of container board. And that's been the case for roughly the last decade. As a result, they have a fair amount of pricing power when demand increases and they're able to put through price increases.

Jesse Marzouk:
A similar thing happened on the pulp side. Although the level of concentration in the industry is not quite the same, you had demand for pulp increase twofold. One in the early days of the pandemic, as everyone remembers so fondly, a rush to buy toilet paper. A fair amount of pulp is used to produce toilet paper and napkins and tissues, and that demand increased very significantly in the early days of the pandemic. Secondly, a fair amount of pulp is sent overseas to China and other Eastern Asian countries to produce container board. And similarly, those regions of the world also saw a market increase in online shopping and the demand for container board increased in those countries. So pulp prices, follow container board prices, and some spot prices of pulp increased by roughly 50% from before the pandemic.

Steve Katz:
Well, it seems like there's no end in sight for that based on what's going on with popularity of online shopping and people continuing... Even with this period before the Delta variant to buy online versus returning to the stores to some degree. So it seems like a continuation of that trend. Thanks for sharing that perspective. I also want to ask you, I think this is to wrap it up. Are there a couple key takeaways or watch outs, Jesse, that you can leave us with? I think it'd be great to pass those along to the lending community that's listening in on the podcast today in terms of how best to stay on top of their forestry borrowers, businesses and limit risk in the months that are ahead given they're likely to be tumultuous?

Jesse Marzouk:
Absolutely, Steve. So a couple of takeaways is that things are changing rapidly. Prices are moving across the spectrum, just not in the forestry space but in almost every market it seems these days with such rapid changes. It's important that lenders don't think that the dynamic that we saw before COVID is the same dynamic that we're seeing now afterwards. Not just in terms of demand and supply, but in terms of the rapidity with which prices change.

Jesse Marzouk:
We're seeing historic volatility in almost every market, forestry products not excluded. No one in their right mind could have ever thought that lumber prices would have reached $1,600 per thousand board feet. And then almost no one could have possibly foreseen the prices would have dropped by two thirds in roughly a six to eight week period. It's really important, whereas before the pandemic, prices may have changed and may have gone up and down by 15, 20% over the course of a few months. Now we're seeing changes in hundreds of percent on the upside and significant decreases on the downside. So it's really something that lenders and other people in the industry need to monitor on almost a week by week basis to stay on top of the recent trends, current pricing, and where we sit in the industry. The good thing is that Hilco keeps track of these prices on almost a daily basis. We're on top of the market. We know the drivers, we talk to people in the industry and we've got our fingers on the pulse of the market.

Steve Katz:
All right. That is great information on what's going on right now in the industry and also the fact that Hilco keeps such close tabs on that. I know you've been doing quite a bit throughout the pandemic period, working with companies in the forestry industry. So for those of you who are listening in today with forestry portfolio exposure, there's obviously quite a bit to consider, including understanding evolving pricing trends, monitoring inventory turnover, as Jesse said, adhering to a regular valuation schedule that can help you minimize undue risk during the volatile period that lies ahead.

Steve Katz:
So with all of that in mind, I urge those of you listening in to reach out to our guest, Jesse, to see how he and the forestry team at Hilco can assist you in your efforts. Jesse's email is Jmarzouk@hilcoglobal.com. That's J as in Jesse, M-A-R-Z-O-U-K@hilcoglobal.com. Jesse, thanks so much for spending time with us today and sharing your insights. It was great having you on the podcast.

Jesse Marzouk:
Glad to be here, Steve. I hope it was informative for the audience.

Steve Katz:
I'm sure that it was. Thanks again. And listeners, we hope that today's Hilco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or a client to help make them that much more successful moving forward. Until next time, for Hilco Global, I'm Steve Katz.

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