Here's What Those Labor Shortages Mean For CRE Investors

May job creation numbers were once again below expectations, clocking in at 559,000 positions. And with an estimated 8 million job openings across the US and 9.3 million unemployed workers, “a hiring disconnect continues to plague the employment market,” said John Chang, senior vice president and director of research services at Marcus & Millichap.  

Many business operators are struggling to fill open positions, forcing many to open at reduced capacity—and this, in turn, will slow the broader economic recovery, according to Chang. 

The employment gap can be partially explained by the expanded federal unemployment benefits program, which was recently extended through September 6. That program includes $300 in federal benefits per week on top of any state benefits to which the recipient may be entitled. That may not sound like much, Chang notes, but for many it’s more than sufficient—particularly in cases of families with children, where being at home instead of working means reduced childcare costs. 

Twenty-five states have opted to end participation in the federal unemployment program early, with some ending in June and others ceasing participation in July.

“The challenging hiring climate has direct and indirect implications for commercial real estate,” Chang says. “Difficulty in adding staff and upward pressure on wages is forcing some hotels to operate at partial capacity. Even if they can fill all their rooms, some are limited occupancy at 70% because they don’t have the staff to clean them all. Some restaurants are closing one or two days per week because they can’t hire enough cooks and wait staff. And seniors housing facilities are also feeling the pinch as they raise staff compensation to fill positions then have to raise rents to cover the costs.”

A shortage of truckers is also slowing the delivery of goods to retailers, causing shortages and inflationary pressures. Construction worker shortages are also slowing housing delivery. 

All of this coalesces to push wages upward and drives inflation, Chang says.  Bank of America recently raised its minimum wage companywide to $20 per hour, for example, and Amazon plans to fill 75,000 positions in its warehouses with jobs that start at $17 per hour. Quick service restaurants like McDonald’s and Chipotle are also following suit by raising their entry-level raises.

“Wage inflation tends to be sticky,” Chang says. “Wages tend to go up but compensation tends not to go down. This could in conjunction with other rising costs drive inflation rates high enough to force the Federal Reserve’s hand, forcing them to tap the brakes on dovish policies that are holding interest rates down.”

The Fed will likely taper their $120 billion monthly purchase of Treasury debt and mortgage-backed securities, Chang predicts. If they do, interest rates would likely rise quickly. Ten-year Treasuries have held relatively stable at the 1.6% range since early March, while the overall CRE cap rate has edged to a record low of 6.3%. But yield spreads are wide because interest rates are low.

Even if interest rates rise, cap rates are unlikely to increase, Chang says, thanks to a record level of capital in the market.

“Investors in the process of making an acquisition or considering an acquisition may want to move expeditiously if they plan on getting financing,” Chang says. “I’m not saying interest rates will go up, but it is unlikely that they will go down measurably anytime soon.”