Bloomberg BNA: Labor Shortage to Keep Driving Building Costs

December 13, 2016 Kelsey Burgess

Commercial construction and development is at near-record levels across the United States, thanks to a strengthened economy. As of the third quarter of 2016, the volume of projects and other key industry indicators are all near cyclical highs. But a labor shortage could be threatening the seemingly-endless stream of commercial construction starts. A dwindling skilled labor pool has driven down unemployment among U.S. construction workers to a 10-year low in July 2016.

 

Bloomberg BNA recently spoke with Mason Mularoni, PDS Research Lead, about this trend in its Daily Labor Report:

The construction industry's skilled labor shortage will continue to drive up building costs in many U.S. markets for the near future, Jones Lang LaSalle Inc., a real estate financial and professional services company, predicted.

Construction labor is now in a “high demand, low supply scenario,” the Chicago-based company said in a third-quarter industry outlook. This scenario takes into account that development volumes in many areas are at or near cyclical highs, the report said.

Labor therefore will “continue to be a pain point that the market will have to adapt and adjust to,” Mason Mularoni, research lead for JLL's Project and Development Services, told Bloomberg BNA Dec. 1.

“There's no easy solution to it, and it's going to continue to be the main driver behind construction costs for at least the next three to four quarters,” he said.

Laborer Pool Hasn't Approached 2007 Peak

The construction laborer pool has leveled out at about 1.5 million for this cycle, compared with the prior cycle's peak of 2 million laborers in 2007, Mularoni said.

“I don't think we're going to get anywhere near that 2 million laborer number,” he said. “It's going to be years, if at all.”

The combination of the smaller labor pool and the construction industry's low 4.5 percent unemployment rate has turned labor into the primary driver for construction costs, Mularoni said. In comparison, the cost of building materials is increasing at a significantly slower rate, he said.

The industry's labor problem could get worse, Anirban Basu, chief economist for Associated Builders & Contractors, told Bloomberg BNA Dec. 1. He pointed to an elevated number of construction workers reluctantly retiring because they can no longer meet their jobs’ physical demands, a shortage of young people entering the industry relative to demand and construction contractors’ reported difficulty identifying “trainable talent.”

“Star construction talent” has leverage over employers in many cases, Basu said. As an example, he said, some construction superintendents in the “red hot” building market of New York are making roughly twice what they were making a few years ago and some are refusing to take on jobs requiring a longer commute to New Jersey.

“It's an increasingly demanding construction workforce from the perspective of both compensation and flexibility, and I think that becomes even more onerous from the perspective of employers over the next year,” Basu said.

Wage pressure will continue to build as contractors provide a steady supply of job openings and compete with each other for the “hot commodity” of labor, Mularoni said. The previous hitJLLnext hit outlook noted that the average hourly wage for construction workers was $29.98 in July, more than 3.5 percent higher than the July 2015 rate and it predicted another 3 percent rate increase by March 2017.

Unclear When Labor, Volume Will Start Equalizing

Pressure caused by labor shortages probably will “ease up as we go into mid-2017, stretching into mid-2018, at which point we're probably going to see the actual volume of construction work go down,” Mularoni said. The demand for construction labor will exceed supply “well into 2018,” but they will come closer to meeting, he said.

Volume figures going forward will be “very regionally based,” Mularoni said.

New York City probably will experience slowed labor cost growth, the previous hitJLLnext hit outlook said. Costs should flatten soon in Boston, Houston and Minneapolis and should maintain current rates in Denver, all of which have decent access to skilled labor, the company said.

But there are likely to be increased labor costs in Chicago, where there was low cost growth this quarter. There will be increased labor costs also in major California markets, which will continue struggling to fill job openings for backlogged projects, the outlook said.

Basu said he doesn't expect to see a substantial slowdown in commercial construction spending by this time next year. He said before the recent presidential and congressional elections, he was more in agreement with JLL's prediction of softening construction volumes, but his opinion changed because of the election results.

With Republicans soon to be in control of the White House, Senate and House, there is a greater likelihood that lawmakers would pass any substantial infrastructure stimulus package of the type President-elect Donald Trump has promoted, Basu said.

Basu also pointed to the possibility that certain tax policy changes under the incoming administration might create “growing appetites” for directing capital to real estate and development.

But though lawmakers’ decisions could have a “dramatic impact” on construction volumes, the uncertainty surrounding those potential choices calls for more of a wait-and-see approach, Mularoni said. He reiterated that volumes are already close to peak strength for this cycle.

“I think we're sitting pretty close to the top in terms of total under-construction square footage,” Mularoni said. “I think it will increase for the next two, three, maybe even four quarters, but at a much slower rate than what we've been used to for the past two years.”

Meanwhile, lenders who took financial hits at the end of the previous construction boom are beginning to tighten their standards, Mularoni said. While developers will continue being able to secure project funding, they will have to “start being creative over the course of the next couple quarters” because of traditional lenders’ increased caution, he said.

Original story found here. To contact the reporter on this story: Elliott T. Dube in Washington at edube@bna.com

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