CRE Waits for Labor Shortage to Ease

In each of the Federal Reserve’s recent press conferences, Chairman Powell cited wage growth as one of the key inflationary pressures causing the Fed to raise rates.

Rising wages are inflationary by nature because they increase business operating costs, which are ultimately passed along to consumers.

This can affect commercial real estate directly and indirectly, according to John Chang, Senior VP, National Director Marcus & Millichap Research Services.

In reality, what the Fed is trying to do is slow business growth, which in turn slows hiring, ultimately softening the labor market and then reducing wage pressure, according to Chang.

The unemployment rate is 3.4% — a low number that was last seen in 1969, 54 years ago.

“And that ultra-low unemployment rate has been accompanied by a severe labor shortage,” Chang said. “And a labor shortage has ultimately been a contributing factor to higher interest rates.”

Some of the more direct effects include higher office vacancy as employers have shifted to a hybrid work model to retain employees, Chang said.

“Additionally, many real estate-oriented businesses are having a hard time filling key positions like property managers, maintenance people, security personnel, hotel staff, or medical service providers at seniors housing facilities.

“That in turn is driving up operating costs,” Chang said.

Another direct effect is the shortage of construction workers, which is slowing the completion of new buildings. Chang also noted that construction labor costs are up 15.3% from pre-pandemic.

“That’s hitting the developers financially as they have to extend their construction timelines and their loans,” he said, “And ultimately, slowing the construction pipeline reduces commercial real estate supply-side pressures, supporting the performance of existing assets, a favorable trend for investors.”

The commercial real estate sector still faces a variety of headwinds, but if the labor market cools a bit that could be a good thing.

“Things could change quickly,” he said.

There are three things driving the labor shortage, he said.

First, a record number of Americans are working. There are 3.3 million more jobs in the US than there were prior to the pandemic.

Second, the significant drop in labor force participation was people over the age of 55, the Baby Boomers. At the onset of the pandemic, many of the Boomers that had been putting off retirement decided it was time to step out of the labor force.

The participation rate of this segment is 38.4%, down from the 40% range it was before the health crisis.

The third factor is the impact of reduced legal immigration to the United States. From 2003 to 2016, the US added about 900,000 net new residents each year through immigration. That number began to fall in 2017, and in 2019 only 570,000 people immigrated to the US.

That number fell even more during the pandemic, reaching just 376,000 new immigrants in 2021.

“Those four or five years of reduced immigration reduced the inflow of new labor to the workforce,” he said. “But the good news, at least for employers, is that we’ve seen a bit of a rebound in the immigration numbers.