Poor north-eastern timberland returns have been driven by low demand for high-value black cherry wood products over the past decade, according to NCREIF timberland committee chair Ryan Reddish.
Despite outperforming all other US timber regions between 2002 and 2004, returns from timberland in the north-east have been the lowest of any region in eight of the last eleven years. The region was the first to see negative returns during the US housing crisis that began in 2008, and has under-performed the NCREIF property index for all US timberland in every year since, except 2011.
From 2002 until 2004, total returns for the north-east averaged 10.79 percent, compared with 6.9 percent for the NCREIF timberland index as a whole. From 2005 until 2007, total returns in the averaged 6.6 percent, compared to 17.16 percent for the index. From 2008 until 2015, total returns for the region averaged 1.54 percent compared with 4.89 percent for the index.
“When the housing market was booming [before 2008], a lot of people were making a lot of money building homes and they were putting the finest cherry cabinets and things like that in those homes. Cherry prices ballooned very high and I think they had a long way to fall, which they did,” said Reddish, ultimately linking the boom and bust in housing crisis to that of north-east timberland returns. “That’s one of those luxury items that are the first to go when the economy runs into trouble and we saw that reflected in prices.”
Black cherry has fallen from values of more than $2000 per unit to $1,100 or $1,200 per unit, he added.
“So it’s fallen a lot … Interestingly, red oak and maple have held pretty steady if not increased a little bit over the past four or five years,” he said, noting that black cherry is still the highest valued product, followed by red oak and maple.
Saw timber produced in the south is a core material for construction of new homes as opposed to the high-end cabinetry red oak and maple are used for. So the effects of a resurgent housing market, which have already started to boost appreciation returns for southern timberland, might be slower to reach the north-east.
Market value per acre for timberland in the north-east fell by 54 percent between Q1 2007 and Q1 2009, according to NCREIF data. In the first half of 2016, market value per acre for north eastern timberland was roughly 65 percent lower than it was in Q1 2007. However, Reddish said those market values were not necessarily reflective of real performance, citing some examples where the most traded grades of timberland in the northeast were much lower in quality than the overall average of timberland in the region.
NCREIF measures appreciation returns predominantly from appraisals, since market turnover in the sector is comparatively low.
Appreciation return for north eastern timberland was -3.98 percent in the year ending June 30 and returns from income were 2.77 percent. Appreciation and income returns for the index as a whole were .92 percent and 3.49 percent respectively.
Reddish said values in the north-east are likely to grow again, as the drop reflects a correction after a heated high.
“Is it a true shift in consumer preference or is it a cyclical thing? I do think [values] will come back up, but I don’t think they’ll come back to the peaks that we saw in the early 2000s,” said Reddish.