As of June, there were around 10 million jobs available. Previously, the number of jobs available peaked at 7.6 million in 2018.

In 2018, the unemployment rate was at 3.8%. Now unemployment is 5.4%. In a recent video, John Chang of Marcus & Millichap said that equates to roughly about 8.7 million people looking for work.

“Basically, there are nearly 1.4 million more jobs available than there are people looking for work,” Chang says.

Chang says this type of labor shortage appears to be a pretty rare event in the history of the US.

“That imbalance creates a headwind for two types of commercial real estate, specifically hotels and seniors housing facilities. They just can’t hire enough people to operate at full capacity.”

As the labor shortage continues to drag on the economy, Chang says other property types are indirectly affected as well. 

“It slows the retail sector, industrial warehouse operations, office space demand and ultimately even apartment housing demand,” he says. “The shortage of labor also weighs on the development of all types of real estate.”

In construction, for instance, builders are competing for a limited pool of talent. That is causing wages to rise. “As of July, average hourly earnings were growing at 4%about one and a half times the normal rate,” Chang says. “That puts upward pressure on inflation and not the transitory type. For July, headline inflation held steady of 5.3% while core inflation, which doesn’t include food or fuel costs, actually eased a bit to 4.2%.”

Chang pointed out the Fed aims to keep core inflation around 2%. “They’ve stated that they’ll let inflation run hot for a while to give the economy some growth runway,” Chang says. “And they’ve also indicated that they think most of the current inflation is temporary in nature. But rising wages will stick with us on a long-term basis.”

The Fed is open to taking action if inflation does not prove to be transitory.

“Considering that the main reason the Fed’s keeping rates down is to get the economy back to full employment, an interesting quandary is emerging,” Chang says. “Even though unemployment is still 5.4%much higher than the mid-3% range where we were before the pandemic—a strong argument could be made that we’re already effectively back to full employment. Looking at the last 20 years, the average unemployment rate is 6%. Looking all the way back to when the Bureau of Labor Statistics started tracking unemployment in 1948, the average is 5.8%.”

If the Fed tightens monetary policy, Chang thinks it will be the most significant risk factor for real estate investors. As school opens and unemployment benefits expire, labor issues could ease.

“The extreme tightening we’re experiencing right now may ease, but investors should continue to watch these trends,” Chang says. “Their potential impact on commercial real estate is significant.”