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CRE and the U.S. Labor Shortage: Lack of Workers Remains Major Challenge to U.S. Economy

Marcus & Millichap, Federal Reserve, San Francisco, Seattle, Los Angeles
Courtesy of Annie Spratt

By Meghan Hall

While the U.S. economy has seen healthy growth throughout the first half of 2020. Looking ahead, however, one major–and almost unexpected challenge–remains: the U.S. has a labor shortage. According to a recent analysis by Marcus & Mililchap, imbalance in the job market is a huge hurdle to both economic recovery and growth of the commercial real estate sector.

As of June–the most recent data available–there were 10.1 million open jobs, a new record for the U.S. economy. That number previously peaked at 7.6 million jobs when the unemployment rate was 3.8 percent in 2018. Data indicates currently, unemployment is 5.4 percent, equating to about 8.7 percent of people looking for work, and that there are 1.4 million more jobs available than those in the labor pool.

The labor shortage has implications for all sectors of commercial real estate, but impacts some asset classes more than others, stated Marcus & Millichap. 

“One of the most significant challenges faced by the U.S. economy and commercial real estate [industry] right now is that there are too many jobs available,” explained John Chang, senior vice president and national director of research services for Marcus & Millichap. “…That imbalance creates a headwind for two types of commercial real estate, specifically hotels and seniors housing facilities. They just cannot hire enough people to operate at full capacity.”

Labor costs within the restaurant industry are also facing pressure as eateries open up and seek to hire back staff laid off during the pandemic. Other major companies, such as Chipotle, for example, announced they would be increasing worker wages, as well.

Marcus & Millichap notes that historically, however, the unemployment rate is not all that unusual. Over the past 20 years, the average unemployment rate has hovered at around 6.1 percent. Since 1948, the unemployment rate has averaged 5.8 percent.

“An interesting quandary is emerging,” stated Chang. “A strong argument could be made that we’re already effectively back to full employment…This type of labor shortage appears to be a pretty rare event in the history of our country.”

Nonetheless, labor shortages create a drag on the overall economy that more indirectly impacts other property types. Most importantly, labor shortages slow the economy in a way that lessens demand for physical space. Demand for retail, industrial and warehouse operations, office demand and even multifamily have all been impacted as positions remain unfilled. Additionally, it slows development throughout the commercial real estate industry. While good for existing property owners because it limits new supply risks, those with projects in the pipeline stand to lose valuable time and money as they struggle to procure enough workers to complete their projects.

Additionally, as businesses scramble to attract workers, the shortage puts upward pressure on wages, therefore causing inflation. Inflation as of June sat at 5.4 percent, the highest level of inflation since 2008. This is also far above the Fed’s general target inflation rate increase of two percent. In addition to a lack of labor, Marcus & Mililchap cites logistics bottlenecks and a huge surge in consumer consumption as additional factors that have caused prices to rise across the board.

“The Fed is walking a tightrope; they are trying to keep interest rates down and money flowing, despite rising inflation pressures,” said Chang. “[The Fed is] trying to give the economy time to mend…[but] they are running the risk that inflation can get away from them.”

Runaway, long-term inflation can pose a number of risks for the commercial real estate industry. Higher prices and wages are likely to remain because they are–as economists say–”sticky downward.” Once wages rise, for example, employers are locked into contracts and employees are unlikely to be willing to relinquish their 

The Fed has stated, however, that it believes the rapid rise in prices to be largely transitory. Even if inflation remains high, the Fed has a number of mechanisms it can employ to moderate increases in price level. While the agency has not stated explicitly it may take action, it could begin to tighten monetary policy and taper its purchases of securities. This could increase interest rates–and costs–for those within the commercial real estate industry.

For now, however, fundamentals for commercial real estate seem to be faring well. Marcus & Millichap states that for most property types, vacancy is declining and rent growth remains “comparatively” strong. Apartment rents have risen 4.3 percent year-over-year, while industrial and self-storage rents are up 5.7 and 9.7 percent, respectively. Even retail–generally considered one of the hardest-hit asset classes, saw rents increase one percent. Marcus & Millichap, however, did not disclose how office rents were faring.

“Interest rates are still low and lending liquidity remains high, so investors can lock in fantastic financing,” said Chang, who added that there are a lot of buyers out there. “[However], the strong buying window may not be open for long.”