U.S. timberland investment prospects have taken a positive turn

The capital appreciation component of the NCREIF Timberland Property Index moved strongly into positive territory, rising by a 1.6% year-over-year rate as of third quarter 2021. This was the first quarterly annualized increase in NCREIF timberland capital appreciation after 10 consecutive quarters of near-zero or negative annual performance. This turnaround in capital appreciation for U.S. timberland reflects improved valuations based on recent appraisals for properties in the NCREIF Timberland Property Index, and this upward movement in timberland property values has been supported by strong pricing in large publicly reported timberland transactions.

U.S. timberland posted capital appreciation gains in the third quarter

U.S. NCREIF Timberland Property Index annualized quarterly total return

Timberland transactions have been active in 2021, providing an inventory of comparable sales to benchmark against appraisals. TimberMart-South reported 1.3 million acres of large timberland transactions in the United States year to date through the third quarter of 2021. This activity compares favorably with 650,000 acres transacted through the third quarter of 2020, and 897,000 acres transacted through the third quarter of 2019.

A TimberMart-South survey also reports retail-sized timberland tracts offered for sale and average prices per acre: In the third quarter of 2021, 672,000 acres of retail-sized timberland tracts were offered for sale nationwide, at an average timberland value per acre that reached a new high in the survey’s history, which began in 2011.

The improved perception of the timberland asset class is being driven by several factors, including:

• Strong performance experienced in residential construction activity over the past year in the United States and other developed economies
• Increased market recognition of the carbon sequestration capabilities of timberland
• Positive correlations between timberland returns and rising inflation

The outlook for U.S. residential construction is expected to extend at least into the middle of the current decade.

The outlook for U.S. residential construction is expected to extend at least into the middle of the current decade boosted by several pandemic-related trends, such as a shift to working remotely and greater focus on home and family. Home construction will also find continuing demographic support in the 2020s from the millennial generation’s entry into homeownership. The robust housing markets have resulted in strong demand for wood building products such as lumber and wood panels as well as wood furniture, flooring, and cabinetry. The expanded production of these wood products has increased sawtimber demand and has translated into stronger income for timberland investors in 2021. In the third quarter of 2021, timberland income as reported by NCREIF—measured as earnings before interest, taxes, depreciation, depletion, and amortization, or EBITDDA—increased to 3.3%, on an annual basis, an improvement over the five-year annualized average EBITDDA of 2.8%.

Production of U.S. softwood lumber expands

Billion board feet quarterly softwood lumber production

An increase in ESG investment awareness

Growing interest in greenhouse gas (GHG) mitigating investments is also putting timberland into companies' toolbox of solutions to help reach net-zero GHG emissions. This expanded interest in the ability of timberland to sequester carbon dioxide (CO₂) is adding new tiers of capital to the market for timberland investments.

AlphaSense and SAP’s report on ESG and sustainability trends in 2021 measured mentions of sustainability-related terms in transcripts and quarterly earnings calls, revealing environmental, social, and governance (ESG) as a top trending topic.[1] Specifically, citations in earnings transcripts of “carbon” as a topic of interest are up 133% year over year. As of October 2021, Preqin estimates there were $3.10 trillion of private capital assets managed by firms that are committed to ESG investing, more than a third of the estimated $8.52 trillion in aggregate private capital assets under management globally.

Forestry projects have become the largest category within the voluntary carbon market

Volume of carbon transacted by project type, mtCO_2e   

Timberland has historically demonstrated a high beta to inflation

Timberland’s historical record of performing well in periods of moderate to high inflation creates a trifecta of positive factors framing the prospects for timberland investment. In recent months, U.S. inflation has reached multidecade highs, with consumer prices increasing an annualized 6.9% and producer prices increasing an annualized 9.7% in November. Last month, the University of Michigan survey showed consumers expecting prices will rise at an annual rate of 4.9% over the next year, the highest level since 2008.

Timberland’s historical record of performing well in periods of moderate to high inflation creates a trifecta of positive factors framing the prospects for timberland investment. 

U.S. inflation figures have hit multidecade highs

U.S. CPI-U, U.S. Producer Price Index, percent change, annual rate

Looking forward

Such positive trends are anticipated to continue in 2022 and beyond, suggesting further gains are in store for timberland returns. NCREIF will be releasing the Q4 2021 Timberland Property Index (TPI) performance in late January 2022, and the capital appreciation component should be reflective of additional upwardly revised appraisals, based on strong comparative sales data and more optimistic views on forward-looking timber fundamentals. The income component of the Q4 NCREIF TPI will also find support in rising sawtimber prices, which were noted in a recent Wall Street Journal article. In the article, Thomas Sarno, Global Head of Manulife Investment Management Timberland, said "the investment in mills should bring southern timber supply and demand into balance this decade." The momentum in sawtimber markets is setting expectations that 2021 timberland total return performance will reach a multi-year peak.  

Q3 2021: timberland market indicators

Lumber prices normalize, housing starts ease

Quarterly U.S. housing starts (’000s units) and U.S. softwood lumber composite price (USD per MBF)

Third-quarter lumber prices retreated from last quarter’s record levels, settling at US$472/MBF (thousand board feet) for the quarter average, a 62% decrease from the previous quarter. Housing starts in the third quarter slipped to a seasonally adjusted annual rate of 1.555 million units, down from 1.588 million units in the second quarter of 2021.

Australian housing starts move off recent highs

Australian softwood lumber AUD price, softwood timber AUD price, and dwelling unit approvals (’000s units)

Strong housing demand in Australia eased in the third quarter ending September, with private sector housing decreasing by 12% from the previous quarter, but still 22% above last year’s third-quarter level. Softwood structural lumber demand and prices responded to the robust residential construction, generating solid demand for Australian pine sawtimber.

The U.S. dollar appreciated relative to its peers

Quarterly exchange rates between the U.S. dollar and commodity currencies

The U.S. dollar (USD) appreciated against most currencies in the third quarter, rising 1% against the New Zealand dollar, 2% against the Canadian dollar, 4% against the Australian dollar, 8% against the Brazilian real, and 10% against the Chilean peso. The USD is expected to remain strong in 2022, as global economic activity revives, effective vaccines are deployed, and interest rates in the U.S. remain accommodative compared to most competing currencies. 

Global softwood sawtimber prices higher than year ago levels

Regional softwood sawtimber stumpage prices (USD per cubic meter)

Third quarter prices for softwood logs in major timber producing regions this year are higher compared to log prices third quarter last year. Douglas fir log prices in the U.S. Pacific Northwest rose 40% year over year, having risen for five consecutive quarters.  Southern pine log prices in the U.S. South rose 16% year over year, the first substantial increase in southern pine log prices in a decade. New Zealand radiata pine log prices are 36% above year-ago levels, yet down 25% from recent high levels. Australia log price data, last reported at year-end 2020, reflected a 10% increase over the prior reporting period in June 2020.  

Third-quarter timberland cash yields rose above their four-year average

U.S. timberland annualized operating cash yields (% per year)

Timberland cash yields were 4% annualized during the third quarter, driven by stronger timber prices in the United States, along with increased demand from regional mills, which allowed timberland managers to pull forward harvest volumes, and where able, to take advantage of the strong demand. 

Publicly traded timberland enterprise values in the U.S. South remain near recent highs

Quarterly U.S. South timberland values (USD per acre)

Southern U.S. timberland values, as calculated as enterprise values from public timber companies rose 14% third quarter this year over third quarter values last year. Although near $100/acre below the recent high values of first quarter 2021, publicly traded company timberland values still reflect historic highs, maintaining a large gap in public versus private timberland.  Timberland values in private markets, as measured by the NCREIF TPI, moved upward slightly third quarter from values reported in the third quarter of 2020. As a large percentage of timberland in the TPI is appraised at year end, fourth-quarter timberland values will be the best reflection of 2021 private timberland values.