Wages, Labor costs & Job Markets
Why it’s important
When conducting due diligence and creating your project proforma, wages, labor costs and the job market can weigh heavily on your expected returns.
On the revenue side of your income statement, changes in these markets can impact your rent inflator, bad debt rates and vacancy rates. To cite one of the more dramatic recent examples, have a look at the building boom in North Dakota, fueled by high oil prices and the requisite demand for labor. With the decline in oil demand, the result is a glut of homes on the market, shuttering businesses and over-leveraged local governments. Not a recipe for a healthy real estate market.
On the expense side, labor costs commonly make up a disproportionate amount of real estate development costs. Typically 45-50% for of the budget for commercial projects, with unionized labor, costs can be 20 to 25% higher.
Labor and wage indicators are an important component of market research, but should be taken in context. What would it look like if we saw a geographic area with a sudden increase in U6 (underemployment)? Is this a sign of a weakening economy or an aging population working fewer hours?
|Bureau of Labor Statistics||Regional Data. NYC.|
Construction Material Costs
Why it’s important
After acquisition and labor costs, your next largest development project cost is likely to be construction materials. Various factors can influence these costs, luckily, the Bureau of Labor Statistics compiles this information on a regular basis. In a large project, small changes can have a big impact.
To the extent a project relies on a volatile commodity component, the developer can purchase insurance in the form of futures contracts for that good. Additionally, when considering which materials to use, a developer should consider the risk of functional obsolescence. Functional obsolescence accelerates the effective depreciation of your building components as the result of a more desirable substitute good. This can be caused by technological innovation in energy efficiency, fire safety or a number of other building features in high demand. The result could be higher than expected vacancy rates at your project.
The Bureau of Labor Statistics collects and publishes data on the producer price index (PPI). This includes regional PPI data which is further separated into various construction industry components. There is also census related data available at: https://www.census.gov/construction/.