The shortage of skilled workers in construction has been a problem for several years and the impact on construction costs has reached the point where commercial real estate development is being slowed, according to NAIOP. There is a CoStar post about the issue that is very interesting in that it puts contractor groups on opposing sides of what you would think would be a unifying issue.
At issue is the Department of Labor rule, which resulted from an executive order in 2017 that expands apprenticeship programs to allow trade groups and employers to establish separate training from industry certifiers. The revised National Apprenticeship Act exempts construction from its rules for now, but developers are pressing for the rules to be expanded to include construction, and the nation’s largest contractors group is supporting them. Associated General Contractors of America (AGC) has been advocating for growing the construction workforce, including pressing for supportive legislation. AGC supports the revised rules, even though the rules allow apprentices to be paid minimum wage.
The last point is what has developers hoping that the rule change is extended to construction. It’s also what has union-affiliated contractor groups in opposition to the expansion of the rules. Union apprentices are typically paid two or three times minimum wage while working their way to journey-level. Opponents of extending the rules to construction also worry that independent apprenticeship programs won’t adhere to industry standards for certifications and will lead to poor work or unsafe conditions. The arguments are summarized in this excerpt:
Proponents of expanding construction apprenticeships argue the initiative will address the dearth of these kinds of workers and help close the job gap, adding to the workforce pool for contractors and reducing their costs as well as those of developers. The lack of construction workers such as pipe layers, sheet metal workers, carpenters, concrete workers and pipe fitters/welders, as well as logistics employees, has hurt the commercial real estate business.
That’s driving up development costs and hampering the expansion and profitability of warehouse and distribution centers, according to NAIOP, the national trade organization for the industry, which issued a report on the issue earlier this year.
But there is a debate on apprenticeship expansion, with opponents charging it would create a separate, and inadequate, certification system from existing programs, with poorly trained workers who could endanger themselves, others and do substandard work.
As the labor department proposal is written now, it excludes construction, an industry that has for decades had apprenticeship programs in place for trades such as plumbers and electricians. Those programs are registered with the labor department and are funded by unions and employers, as part of collective bargaining agreements.
History has shown that government making rules to solve temporary market conditions rarely solves the problem, and usually creates unintended negative consequences. If you are developing a commercial project right now, the costs of construction – and the schedule – are becoming unfavorable. The pro forma rents aren’t going up as fast as construction costs. Investors will have to accept less of a return or the project won’t pencil out. That’s not a great thing but that is an inevitable consequence of economic prosperity that lasts as long as the current expansion. In truth, wage gains have been held off for much longer than in any previous business cycle; and the magnitude of wage growth is much lower than the typical 4-5% that accompanies a recovery. During the recovery stage of this business cycle, wages barely grew and only moved above 2% since early 2018. Business cycles run from imbalance to imbalance, from lean conditions to fat. It’s not fun to be the development that builds during fat times but, then again, it’s also not fun to try to lease up during lean times. It’s the nature of business cycles. At some point, things will slow down and costs will fall back. New development will follow.
Note: In the Sept. 26 BreakingNews email blast, PJ Dick was omitted from the list of contractors proposing on the $15 million Flats on Forward in error. The list of contractors should have read PJ Dick, A. Martini & Co, Mosites and Rycon.