Construction Industry Booms, but Labor Shortage Persists

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Good morning. Stock futures are slightly up as investors prepare for another wave of bank earnings reports, plus Prologis (PLD) and Alexandria Real Estate (ARE). In other news, contractors are experiencing high demand for nonresidential construction, leading to a search for skilled labor.

Today’s edition is brought to you by Bullpen, an exclusive talent network that connects companies with the top, pre-vetted CRE experts.

Construction Industry Has Work, Needs More Workers

Despite economic complexities, the construction industry finds itself on solid ground, experiencing a surge in nonresidential projects and a building boom in industrial plants and infrastructure. Even as home construction faces the pressure of higher rates, nonresidential construction offers a beacon of hope.

Navigating labor challenges amid high demand: As nonresidential construction spending continues to rise, the construction industry is still struggling to cope with a labor shortage. Despite the increasing borrowing costs that contractors face, there is a strong demand for industrial plants and infrastructure. The backlog of nonresidential projects under contract is a clear indication of the high demand for construction services and the difficulty in completing projects within a tight labor market.

Bridging the skill gap in a changing workforce: The construction industry is facing a shortage of skilled workers as experienced employees retire or switch to other industries. It’s not an easy task for contractors to replace these skilled and experienced workers with less skilled entry-level laborers. However, if they are unable to do so, project timelines get extended, and costs increase. To address this challenge, contractors are exploring various options such as providing increased pay and in-house training to attract and retain a skilled workforce.

Navigating material requirements and shortages: Contractors also face headwinds in the form of stringent requirements for using American-made materials, leading to higher project costs. In addition, supply chain disruptions have resulted in shortages of electrical equipment and semiconductors, further complicating construction. The industry is actively seeking solutions to ensure material availability and maintain project momentum.

➥ THE TAKEAWAY

Building back better: In the face of complex challenges like labor shortages, skill gaps, material requirements, and supply chain disruptions, the construction industry is standing firm. The demand for nonresidential projects is increasing due to the ongoing building boom in the US, and construction equipment manufacturers are predicting robust machinery sales in the coming year. The industry’s resilience, adaptability, and unwavering determination are critical to sustaining its current upward trajectory.

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Coworking Firms Bolstered NYC’s Pre-Pandemic Office Market

Before COVID-19 disrupted the office market, coworking companies were a key driver in supporting NYC’s office sector, particularly for older Class B and C properties, even as the market faced a flight to quality.

Propping up the market: Before the pandemic, companies in the coworking industry such as WeWork (WE), Spaces, and Knotel were actively renting out space in older office buildings. This helped to maintain low availability rates and strengthen the lower end of the office market. Coworking firms were responsible for a significant portion of new leases, particularly in Class B and C buildings. The peak of leasing activity for coworking companies occurred in 2018.

Tale of two classes: While technology and financial tenants were moving into higher-quality Class A buildings, coworking firms absorbed space in less desirable B and C properties, effectively supporting both ends of the market. This dual activity allowed landlords to delay confronting the flight to quality and kept the office market strong.

Seismic market shift: The coworking boom played a role in stabilizing the pre-pandemic office market in New York City, but the landscape has since changed. Remote work, economic uncertainties, and the impact of the pandemic have led landlords to reevaluate their portfolios and explore new ways to stay competitive in the ever-evolving office market.

➥ THE TAKEAWAY

The coworking catalyst: Without coworking firms’ aggressive leasing strategies, the pre-pandemic office market in NYC might have faced higher availability rates and increased pressure to compete with newer Class A buildings. Coworking companies played a pivotal role in shaping the dynamics of the office market, and their impact continues to influence the industry’s trajectory in the post-pandemic era.

• Musk in the dust: Bernard Arnault, the wealthiest person globally, is extending his lead over Elon Musk as he sells pricier luxury goods while the Tesla CEO reduces prices on electric vehicles.

• Southampton: Long Island’s luxury housing market witnessed a 44% YoY drop in the number of homes sold, with the median sale price falling by 7.6% in Q1 2021, which is the first decline since 2019.

• Cash crunch: Patrick Carroll, CEO of the Carroll Organization, has stated that the company, which holds nearly 100 properties with a total value of around $7.4 billion, could be sold entirely this year.

• Japan’s first casino: An MGM Resorts International-led group has obtained government approval to construct Japan’s inaugural casino, which is expected to be finished by 2029 on an artificial island in Osaka.

• Borrowing and lending: In 2022, commercial real estate mortgage borrowing and lending totaled $816B, an 8% drop from 2021’s record high of $891B, but a 33% increase from 2020’s $614B.

• Only in California: Malibu is home to the most expensive trailer park in the US, which is situated in an iconic cove and is popular among celebrities, wealthy individuals, and long-standing surfers.

• All Rise in a high rise: New York Yankees’ captain Aaron Judge bought a penthouse in Chelsea’s newly constructed Cortland at 555 West 22nd Street after signing a nine-year, $360M contract extension.

• Class A amenity: Dallas Council approved $5.8M incentives for a 50k sq. ft Tom Thumb supermarket at RedBird mall property, including property tax abatements and sales tax grants for at least 90 jobs.

The rise of SOFR from 0.1% to 4.8% this year has impacted the feasibility of income property development, as most developers borrow at a spread over SOFR. Their key money-making assumption – exit cap rates – are also highly dependent on the future of SOFR.