Four Top Economists Give Their Take On The $15/Hour Minimum Wage's Impact On Real Estate
The $15/hour minimum wage is sweeping the country, adopted so far in New York, S.F and Seattle—with even Airbnb tempted to get in on the "Fight for $15." Here's what four elite economists have to say about the $15/hour minimum's impact on commercial real estate.
Jack G. Kern, Director—Research and Publications, Yardi
"The rise in minimum wage is likely to have effect on commercial real estate properties but the ultimate impact will be pretty slight. Most positions in commercial real estate are at levels typically close to or above the proposed minimum wage point. A certain number of part-time positions may end up being changed or eliminated to compensate for increased costs. Since many employees are working for contractors, the increased wage rates will mean higher contract agreements and lower yields on marginal properties."
"I do expect that retailers will get a lot sharper about managing personnel and hours will be cut for most non-essential positions, especially during slack, non-holiday hours. Other positions based on after-hours services will see some staff reductions as well. We’re not talking about a huge number of workers, but it will mean some hardships for the underemployed. One benefit may be that certain higher skilled and better educated employees will find the wage increase compelling enough to look into better situations, offering employers a different kind of workforce."
George Ratiu, Director of Commercial Research, National Association of Realtors
"An increase in the minimum wage will lead to higher labor costs for employers. The employers are likely to pass some or all of the increase onto customers. At the same time, since labor costs are the largest component of expenses for many companies, they may also consider cutting back on employees, slowing hiring and, in tandem, also looking at their real estate expenses. In the short run, we may see a slowdown in demand for commercial space. However, since the minimum wage increase will be phased in over a period of time, companies may be able to plan and adjust accordingly, leading to a smoother transition."
Jeff Havsy, Chief Economist, Americas, CBRE
“Industrial is the property type most impacted. For a typical 500 employee operation, a $1 increase in the average hourly wage raises its annual labor cost by over $1M. This is equivalent to a $2.08/SF increase in rent for a 500k SF building. That would mean a 37% mark-up to the average US industrial rent of $5.65/SF. Many warehouses have even greater employment density, so the impact could be even larger. However, industrial/warehouse wages are above the proposed minimum wage (on average) in a number of large industrial markets, including LA, so the minimum wage will not have an immediate dollar-for-dollar impact. This will also lead to greater automation as firms look for labor cost savings. Retail and hotels will also be impacted due to the high percentage of employees at the lower end of the pay scale.”
Rajeev Dhawan, Director, Economic Forecasting Center, Georgia State University
“The cost of running warehouses, retail operations, hotels and restaurants is going to go up, and typically these businesses do not have the market power to pass on the cost to the customer in the short run, so the profits take a hit—which means the cash flow from those real estate transactions for the near term will look lower. So the CMBS for this market will suffer. In the long run they can adjust by passing some cost to the consumer and also by doing some mechanization—but not too much, because these businesses are very labor-intensive, and there’s no easy substitutes. Now, if the economy is growing gangbusters it becomes easier to pass on the costs. When it’s growing so-so there’s a clear profitability problem.”