Developers Battle Construction Labor Shortage

LOS ANGELES—The high development volume across property types is leading to a shortage in quality construction labor, according to Lydia Tan, SVP of development at Bentall Kennedy. Tan is speaking at the upcoming RealShare Investment and Finance conference this week in Downtown Los Angeles, where she will speak on the Development Outlook panel. The shortage in labor is now leading to drastically rising construction costs, which is a major issue for developers who are already facing high land costs and competition.

“During the recession, we saw a lot of contractors and subcontractors go out of business, and also a lot of the labor force who went on to do other things, and they just have not come back at the same level,” Tan tells GlobeSt.com. “So, we have not only a lot of work going on, but we have a reduced force of contractors and subcontractors. It is pretty dire in some of these core markets.”

The shortage in labor has also led to rising construction costs, which have become one of the most difficult challenges for developers. “In the Western region, construction costs have gone up substantially, particularly in the bay area. We are having a hard time getting contractors down in pricing, and that is because they are having trouble pinning their subcontractors and materials pricing as well. Construction cost inflation is probably one of the biggest risks right now for development. Depending on what product type you are developing, it is unclear if the revenues will escalate at the same rate.”

To navigate this issue, Tan says that her firm relies on long-term relationships that they have had for decades. Those relationships have really helped to get them through both busy times and dry spells. However, when contractors are having trouble finding labor or keeping materials costs down, long-term relationships aren't always enough. “We are using other strategies, like bringing in contractors early, including them in on the design process and getting pricing done early,” says Tan. “We are starting to look at some group buying opportunities. We are really early on in that process, but we are trying to save on the cost of construction by pulling buying power together across the nation.”

Of course, construction costs aren't the only challenge that developers are facing. Generally, there is an intense amount of competition in the market and an ample capital chasing deals. Tan doesn't expect this competition to dissipate anytime soon. “Real estate seems to be something that is a good alternative to other investment vehicles,” she says. “Then, you have low cap rates, and many people are relying on continued low interest rates, increasing rents and continued demand. So, I think that cap rates are going to stay low for a while.”

Hear more on Tan's development outlook at RealShare Investment & Finance on Thursday June 25 in Downtown Los Angeles.