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Labor shortage could impact strong Utah commercial real estate market

By Jasen Lee, KSL | Posted - Jan 25th, 2019 @ 8:20am



SALT LAKE CITY — After a dramatic climb over the past several years, analysts say Utah's strong commercial real estate market could take a hit from a lack of available qualified labor needed to meet the ongoing demand.

Speaking Thursday at the 2019 National Association of Industrial and Office Professionals Commercial Real Estate Symposium in downtown Salt Lake City, the executive director of investment for Newmark Grubbs ACRES said the state has experienced double-digit growth in the amount investors are willing put into local development projects.

"We've set all-time records of sales volumes in the last five years," said Bryce Blanchard. "This year, we were 44 percent higher in the number of transactions and dollars spent on Utah commercial real estate than 2017 — which was already a previous all-time high."

He noted that the trend upward began after the market hit "the bottom" in 2009, in the wake of the Great Recession. Since then, investment has increased annually, he said.

"We've had consistent growth in our market now going on 10 years," he said. "It's been a 10-year run of appreciation, of transaction volume increases, of pricing increases (and) absorption — all across the board in commercial real estate."

He said the upward trend is expected to continue for the foreseeable future based on the state's strong economic fundamentals.

"Utah right now is leading the country in population growth (and) we're also double the national average of job growth," Blanchard said. "Those two drivers create the desire for people to build real estate (and) absorb real estate. Those are significant factors of the growth metrics of our community."

He said most of the commercial investment money is coming from out-of-state investors.

'Headwinds' coming

While a decade of robust growth is something to be optimistic about, there may be some "headwinds" coming, including rising interest rates, global economic unrest and the U.S. trade conflict with China.

"There are some 'bogeys' out there that could take a little bit of the exuberance out of the marketplace, but we live in a world of cycles," he said. "The nice thing about Utah is we are economically resilient because of the diversity of our economy."

He said having various strong industry sectors to rely on for economic growth helps the state from falling too swiftly during a down cycle.

Fortunately, the local market is robust, construction is booming, and growth is fast, said Josh Caldwell, director of Business Development for Big-D Construction.

While growth is good, it is having a major impact on labor, project performance and the cost of construction, he said.

Finding manpower to meet demand

He said due to the negative impact of the economic downturn in 2008, the construction industry is still fighting to find the manpower needed to meet the continuing demand.

"While the industry as a whole has bounced back, the workforce has been notably diminished," he said. According to the U.S. Bureau of Labor Statistics, the construction workforce went from a high of about 11.7 million in 2005 to 10.8 million in 2010, which dwindled to 10.2 million in 2016, he said.

In the meantime, the U.S. population continues to grow — an estimated 9.4 percent increase from 2005 — resulting in greater demands in housing, office space, healthcare facilities, and hospitality.

"Simply put — there are plenty of construction jobs available, but not enough workers to fill those jobs," Caldwell said.

In addition, the cost of construction materials is also increasing, he said. Since late 2017, materials costs have been rising rapidly — at a 6.6 percent rate from October 2017 to October 2018, he said. Meanwhile, labor costs have also picked up, rising 3.8 percent in the past year.

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"For labor and material costs to decrease, it will be crucial for industry professionals to focus on investments in career and technical education, swift resolution of (international) trade disputes and immigration reform that would enable construction employers to bring in foreign workers when there are not enough locally available construction workers," Caldwell said. "The labor restraints, tariffs and the robust market will cause construction expenses to increase during the next year or two."

One of the sectors being affected the most is multifamily, which includes residential rental units like apartments or town houses. The rising costs have driven the cost of construction higher, and by extension the cost of renting those units. Housing affordability has become a concern for civic leaders, along with individuals and families looking for places to live.

Larry Curtis, senior associate with FFKR Architects, said developers are working on creative solutions to meet the growing demand for rental units at prices that are reasonable to most people.

"They see the need for lower-income housing and they are trying to provide that," he said. "We are continually trying to find different ways of getting materials and using labor."

He said some developers are considering modular solutions that could be built off-site at a lower cost and shipped to the desired location, which could save money on overall construction costs. Additionally, the amount of square footage is decreasing, which is also a way to reduce building costs and lower rents for prospective tenants, he noted.

"We're looking at creative opportunities to try to save money," Curtis said.

He also noted that some companies may choose to move away from multifamily developments if the projects lose their profitability. But innovation could soon find a way to stabilize development expenses, he added.

"Technology can help us to reduce costs in these apartments," he said.

The half-day conference included an audience of 700 commercial real estate professionals from all over Utah — covering specific segments of the industry, including investment, retail, office, multifamily and industrial, explained Angela Eldredge, president of the National Association of Industrial and Office Professionals Utah.

She said despite some of the challenges present in the local real estate market, Utah is still among the strongest in the region.

"We have a really bright future and we're headed in the right direction," she said.

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