The MAJOR Way a Shrinking, Aging Skilled Labor Force Will Impact U.S. Real Estate
Did you know if you put a frog in a pot of room temperature water and bring that water to a boil, the frog will not realize the slow change and will boil to death without ever noticing?
If you toss that same frog into a pot of already boiling water, it will hop right out with minor burns.
As humans, we are not all that different. It is our nature to notice change that is drastic, is rapid, and affects our daily lives. We tend to not see the slow, little changes, especially if they do not play a role in our day-to-day routines.
Like a pot of water slowly heating, there is a trend happening in our nation that could forever change everything. It goes relatively unnoticed because it is a very slow shift that has yet to accelerate at the rates it undoubtedly will.
This trend is going to change every niche of real estate forever. As a sophisticated real estate investor, I use all my experience in real estate investing, property management, and construction to see trends as they begin to develop so that I can adjust our business to capitalize on these shifts. In this article, I share how I do this, specifically on a massive trend that is on the horizon and that so many are failing to see because they do not have the lens to look through that I do.
If someone asks me, “What do you do for a living,” I respond, “I am a real estate investor who buys apartments through syndication.” On the other hand, if they ask me, “Who are you,” I respond, “I am a blue collar hard, working family man who loves working with my hands and a simple life.” I realize this is not the typical combination of responses you would expect. I know a lot of syndication sponsors. Most have degrees from prestigious schools and have likely spent years at some big firm where they held some kind of impressive white-collar position. That isn’t me. I started as a base-level handyman working on low income housing for a small local investor. I built on that knowledge to later form a construction company. I then parlayed that into buying distressed real estate to be renovated, rented, and maintained that slowly and organically grew to what it is today.
While I do now hold what would be labeled as a white-collar position, at my core I will forever be the same blue-collar, dirty-jean, work-boot-wearing contractor. And what a gift that has been. It gives me a perspective that so few have. I am immersed in things that few in my position are. It is this perspective that has made me realize the coming trend that is going to change real estate in major ways.
For the past 11 years, I have worked in the trades in some aspect. The undeniable truth is that the large majority of those working in the trades are over the age of 45 and/or an immigrant. When was the last time you heard a high schooler say, “I want to be a carpenter” or “I think I am going to service residential HVAC equipment for a living”? This article was sparked by a conversation with my HVAC subcontractor who said he had just returned from a large HVAC convention for small HVAC business owners. At this convention, they reported the alarming fact that the average age of HVAC technicians in the United States is 57 years old.
Unfortunately, the older age of tradesmen is not limited to my own experiences, my specific markets, or even one specific trade. According to a huge study conducted by EMSI, 53% of all skilled trade workers were over the age of 45 in 2012. Nearly 20% of all trade workers were between the ages of 55-64. Those are just the national averages. In Connecticut, Rhode Island, New Jersey, and New Hampshire, more than 60 percent of the skilled trade labor force is 45 or older. Other Northeastern states such as Delaware, Maine, and New York also have aging skilled trade workforces, as do Illinois, Ohio, and Pennsylvania. What makes these even more troubling is that over the age 65, the percentage of trade workers falls off dramatically, likely due to the heavy physical demand these jobs have. Only 1.9% of the trades are made of up of those who are 65+. Contrast that to the labor market as a whole, which is made up of 4.8% workers 65+ years old. This means that once tradesmen hit 65, they are pretty much all done and do not work past that age like in other industries.
There is a Huge Shift in Labor Costs Coming
Another benefit to not having an MBA behind my name is that I don’t overcomplicate things. So here is the simple truth: The majority of people fixing our properties as those properties inevitably fall apart or building our new properties are going to begin dying or retiring very soon. And there is nowhere near enough individuals ready or willing to replace them. This will undoubtably result in an even greater shift in demand for skilled tradesmen as their supply is squeezed to never-seen lows. Guess what? When demand goes up, so does price.
Another reality of the trades is that immigrants play a vital role in this industry. Immigrants make up a sizable percentage of the labor force. The detailed 2013 American Community Survey (ACS) shows that while foreign-born workers represent a substantial component of the U.S. construction labor force, accounting for almost 23 percent, their share is even higher in construction trades, reaching 28 percent. Concentration of immigrants is particularly high in some of the trades needed to build a home, like carpentry, painting, drywall/ceiling tile installation, brick masonry, and construction labor.
You may be thinking, “Well, that’s good. If the American youth wont carry the torch of our nation’s skilled trade’s needs, then the immigrants in our nation will step up to the plate.” Not so fast on that thought. Let’s take a look at where those immigrants are likely to come from. In 2013, of all immigrant workers in the construction industry, 84% came from our southern friends in Mexico or the Americas. But here is the thing; immigration numbers from those places has been falling since 2000. Finally—and I am speculating on this last point—with President Trump in office, I have a feeling we will see those numbers continue to fall at a much faster pace.
So if all our tradesman are dying, retiring, or leaving, who will replace them? Truthfully, the answer is no one—at least until the market adjusts and labor costs adjust, drawing in more demand for workers to enter the trades.
I am writing this article for an audience of real estate investors. Because of this, I think we are all already aware that it is difficult to find a professional, skilled contractor. Now think about if we removed half or more of them from the marketplace. The ones left will have more work than they could ever handle. What will happen? They will jack up prices on you so fast, you will not believe you’re having to pay your plumber three times what you pay your attorney or that the electrician is making 10 times what you make an hour.
For many decades, parents and children alike have followed the advised path to go to college, get a degree, and find a corporate, white-collar job. The result is that companies now have a ton of accountants, business managers, engineers, psychologists, and whatever else. It’s simple economics. The income distribution will balance itself to the demand. The cost of construction labor is gong to go up, and it is going to go up a lot in the coming 10-20 years. It will likely come back down as the market adjusts to the initial skyrocketing of costs, but undoubtedly expect a quick climb for several years followed by a new era of how we view white-collar/blue-collar jobs.
The Ripple Effect Will Be Massive
Do you own real estate? Do you rent real estate? Do you ever buy goods and services from someone who does? Then this is going to affect you.
The results of this shift are already very noticeable if you look. One of the many examples of this is the affordable housing shortage across the United States. According to HUD (Housing and Urban Development), there is a shortage of affordable housing in every county in every state of the U.S. Although there are several ways of defining it, the most basic definition of affordable housing isproperty that costs the residents less than a third of the median income. Simply put, if the people in the lower half of the income range for the area can spend less than a third of their money on housing, it is considered affordable housing for that area. Every county of every state is lacking in this type of housing. Why? Because there are smaller margins in building these types of homes and apartments, so they simply don’t get built. Many builders instead focus on luxury apartments or premium homes where the margins are better. With fewer and fewer quality tradesmen and women to hire, builders are forced to pay more for their workers. In turn, they have no option but to seek out higher margin work to cover their costs—and this is fine because overall, there is less competition as the number of skilled tradesmen decreases.
The result of this is twofold:
The housing added to the inventory is too expensive for entry-level buyers to come up with the needed down payments. This keeps them bound to the rental market longer.
Rental property owners have to pay more for the increased prices as well as the increased labor cost of maintenance and upkeep of their properties. They turn around and pass that cost on to the renter through high rents. This further increases the length of time they rent and are in need of more affordable housing, which is not being built. It is a never-ending cycle that drives up rents, demand, and property valuations.
But that’s just inflation—inflation is normal.
If it sounds like what I am describing is typical inflation, here is the difference. Housing is the single largest cost for an American household, and that is the expense that will be greatly affected by this increase in housing costs. According to the Bureau of Labor Statistics, the average American spent 26.4% of their income on housing in 2015. If the prices of housing goes up significantly, it will have a relatively much larger impact on the average American household than any other expense. Take gasoline, for example. The average American spends 4% of their income on gas. If gas prices double, people freak out. But for the average American, if gas doubles, annually they only spend $2,000 dollars. On the other hand, if housing doubles, the average American has to come up with an additional $18,000+. Obviously, this would slingshot us into an economic depression if nothing was done.
So, what do we do as a nation? Well what we should and what we will do are likely two different answers. Let’s focus on what we will likely do because “should” is beyond the scope of this article. When the natural forces of a free market economy raise the price of housing to record highs at record paces due to the increase in labor costs in the trades, the middle and lower class will scramble to keep up with the financial burden this will place on them. Either we go into an economic depression or we increase everyone’s income to keep up with the cost of housing. The government will be forced to step in to raise minimum wage, run more cycles of quantitative easing, and perform other government manipulation of the market to keep the demand for affordable housing under control and homelessness and economic depression from sweeping our nation. The jump in minimum wage and additional currency in the market will send a ripple effect through the more skilled professions, pushing income up to meet the new demand of housing. Companies will likely increase prices of goods and services to keep up with the costs incurred by the companies on increased payroll expense. If you’re thinking this just sounds like hyperinflation, I would say you’re correct.
I believe it to be very possible that the lack of skilled workers in the trades will force housing cost to record highs, which may very well be the domino that tips the chain reaction to hyperinflation. Because housing accounts for such a large percent of an American expenses, it could very well be a big enough domino to set off a chain reaction, giving government a reason to push hyperinflation into effect to keep our country’s economy from crashing.
Why would our government let us go into a period of hyperinflation?
The U.S. Treasury is taking on trillions and trillions of debt—roughly $20 trillion upon the writing of this article—but you can see the real time debt figure here. They have done this by borrowing dollars into creation from the Fed. If you want to learn more about how this works check out my article titled “Want to Make Money? Then Understand How Money Works! Here’s Your Complete Guide.”
Why would the treasury want hyperinflation? It makes their massive debt figure hurt less and easier to pay. Let me explain. For a simple example, let’s say the treasury borrowed $2 trillion. Let’s say that $2 trillion has a purchasing power able to buy 100 aircraft carriers for our military.
But 4 years later, since the magically created $2 trillion has worked its way through our banking system and has become $20 trillion in private debt, the currency supply has magnified through the fractional banking system we operate under, and because of that, the prices on everything have gone up to reflect the excess supply of currency. This increase in prices includes prices on aircraft carriers. So, the government used to be able to buy 100 aircraft carries for $2 trillion, but now maybe $2 trillion will only buy 90 aircraft carriers because their prices went up with everything else. This means their 100 aircraft carriers may now be worth $2.2 trillion, but they still only owe the fixed $2 trillion they borrowed. So, we want to know why the government would choose hyperinflation over a depression. It is as simple as because inflation makes the dollar worth less. When the dollar is worth less, it makes paying off existing debt easier. And no one holds more debt than the United States Government.
The government understands this. Their debt is easier to pay as the dollar’s purchasing power becomes diluted through inflation. On top of this, the increased inflation helps slide income levels up, pushing individuals into higher tax brackets, which makes it easier to collect more taxes to pay for all that interest on the debt.
If you don’t believe me, take it straight from the Federal Reserve’s mouth: “The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money” (St. Louis Federal Reserve Bank, Review, Nov. 1975, P.22).
So What Do We Do About It?
I pile a lot of stats and information into these articles, and I really do put a lot of thought into them, but the truth is the economy is too complex for any one man or woman to predict. Nonetheless, even without a crystal ball, it’s easy see an undeniable trend for a major shift on the horizon in labor costs, specifically related to housing. That workforce is made up of people who are not replaced as they exit the workforce. This demand will continue to push cost up. I strongly believe government will choose hyperinflation over an economic depression for many reasons, the big one being that it is a great way to dilute the massive burden of the nation’s $20 trillion debt. This is kicking the can down the road, but I do believe the can has a few more kicks left in it.
Knowing all this can help us immensely in deciding how and what we purchase. My experience in construction and property management allows our company to do everything we can to shield our investments from the inevitable increase in labor costs as well as exposure to the good demand and price increase it creates. To do this, we purchase more newly constructed apartment buildings that are well built with durable construction and finishes to ensure minima, and predictable labor costs in the future, while still falling well within the affordable housing classification. Too many investors look only at the spreadsheet and past performance of the investment to determine if it’s a good purchase. Those same investors will feel the squeeze of the coming trends in labor costs.
Secondly, we align our position with the government and use debt just as they do. We align our interest with the interest of those in charge. We use safely structured debt to receive the benefits of leverage and the potential for huge gains when inflation does what it does best by eroding the purchasing power of the dollar. Because of our debt, we will be left with an asset worth more dollars but still have the same amount of debt. This if the main benefit of using leverage to buy tangible assets.
In addition to how we buy property, we take the coming trends into consideration on when we operate. Vertically integrating for in-house management and construction will allow more control over those labor costs. Within our property management company, we are constantly doing everything we can to ensure our maintenance tech’s time is being used to maximum efficiency, using technology to cut down on miscommunication, scheduling, and ordering.
At my core, I am a dirty-jean, work-boot-wearing contractor. But that very perspective not only allows us to see this trend coming but it will also allow us to prosper from it for years to come.
The current workforce of tradesmen and women are getting old, dying off, or not entering the country. There is no one to replace this workforce and yet there is more need for them than ever. This coming squeeze on the construction labor market will affect every niche and strategy of the real estate market. So far, this has been a slow change that does not affect most on a daily basis, so it has easily gone unnoticed. Don’t be the frog sitting in the warming water. Pay attention to your surroundings and learn to capitalize on them.