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The Construction Labor Shortage Needs Major Institutional Fixes

Ask commercial developers in a major market to name their biggest challenges, and the rising cost of construction will be at or near the top of the list. But while the complaints have grown louder in recent years, the underlying problem has been decades in the making, and the current administration's policies only figure to make it worse.

The Construction Labor Shortage Needs Major Institutional Fixes
Construction on Philadelphia's Love Park

A major contributor to the present challenge of obtaining construction labor is the current point of the development cycle. A Fannie Mae study found that 404,000 new units are slated for delivery in 2017, 61,000 more than came online just a year ago.

In the near future, construction labor will likely become easier and cheaper to come by; the same study expects 2017 multifamily starts to decline by at least 25% compared to 2016.

“At some point, we’ll move into somewhat of a recession, and the demand for construction will drop off, though not at a level that happened in 2008,” Michigan State University Human Resources and Labor Relations professor Dale Belman said. “Some developers must say, ‘You know, today’s not the day to start this project.' You have to play the construction cycle if you want the pricing to really work.”

But the construction labor pool has scarcity that goes beyond the cycle, especially for the the mid-Atlantic, Texas and Louisiana, Belman said. The scarcity is felt the most on larger developments, rather than single-family homes, due to their complexity and the skill required to complete them.

“There aren’t enough companies with the workforce required for such complex projects,” Perryman Construction CEO Angelo Perryman said.

As development has ramped up without any meaningful increase in available construction labor, construction prices have followed the laws of supply and demand. Multifamily buildings from eight to 24 stories tall have increased in construction cost by $23.40 per SF from 2013 to 2016, according to a Fannie Mae study, and they are forecast to jump another $15 per SF in 2017.

Even with such rapid increases in price, more than one-third of contractors are forced to turn down jobs, according to a survey by USG Corp. and the U.S. Chamber of Commerce. How there came to be such a gap between the ambitions of developers and the capacity of construction firms is a story in line with the labor history of this country, as unions have weakened and nonunion labor has gained market share.

The Construction Labor Shortage Needs Major Institutional Fixes
Michigan State University Human Resources and Labor Relations professor Dale Belman

“The decline of union representation in the construction industry over the past 40 years coincides with an increase in issues related to worker training and a shortage of skilled craft workers,” Belman wrote in an article for the Economic Policy Institute. “Training highly skilled craft workers requires multi-year programs that combine classroom training and on-the-job experience … With the large-scale shift to nonunion employment, the apprenticeship system has declined.”

Unions have been losing ground in every industry since the 1960s, but while the construction trades have remained among the strongest in the country, they have been feeling the effects of their declining power for decades.

“The lack of large-scale training systems in the nonunion sector was not an issue for many years, because many of its workers had been trained in joint apprenticeship programs,” Belman wrote. “Over the past 20 years, however, the lack of effective training systems in the nonunion sector has increasingly affected the ability to deliver high-quality projects.”

Executives in development and construction are not as convinced that nonunion labor has had such a directly detrimental effect on the number of skilled laborers in the workforce, but everyone agrees that more training and education is needed, and it needs support from all sides.

“The school system needs to be involved, [as well as] regular businesses,” Perryman said. “There needs to be a lot more organization in the industry.”

“You have to start at the high school level,” Brandywine Realty Trust Vice President of Construction and Urban Development Jeff Weinstein said. “For years, there’s been this assumption that everybody should be college-bound, and I think there’s been less of an interest in recent generations for pursuing a career in the trades. You need to communicate and make sure high school students are aware of opportunities in the trades.”

The Construction Labor Shortage Needs Major Institutional Fixes
Perryman Construction President and CEO Angelo Perryman

President Donald Trump’s administration plans to cut $10.6B from the federal education budget to encourage vouchers for private schools, which includes a $168M cut to vocational programs, a 15% decrease from its current funding level. The responsibility for early investment in labor education may fall increasingly on the businesses that need the workers.

“There are certain schools in Philadelphia that are and should be geared more toward trades, and can introduce students to that, but the industry also needs to have an impact,” Weinstein said. “When students see somebody in the field communicating with them, that tends to have the most impact.”

The construction industry has become increasingly reliant on minority and immigrant populations as the nation’s demographics have shifted. A survey by the Pew Hispanic Center found that the country’s construction workforce increased from 11% Hispanic in 2003 to 15% in 2006, and that 75% of Hispanic workers in 2006 were born outside the U.S. The date of that study is significant, however.

“A major change is that you don’t have nearly the immigrant and undocumented immigrant labor force that you had before the Great Recession, which could be permanent,” Belman said.

If the country is to see a recovery in the number of immigrants who could potentially join the construction workforce and receive training, it almost certainly will not happen under the Trump administration. In addition to a sizable increase in deportations by Immigration and Customs Enforcement, Trump is supporting a Republican bill in Congress that would place several new restrictions on legal immigration, mostly on the basis of existing skills.

In the face of the government's impediment of immigration, businesses and unions are increasingly on their own when it comes to boosting the diversity of the workforce, a particular challenge for an industry historically beleaguered by allegations of racism.

“The unions have to diversify. I think that can increase the ranks,” Weinstein said. “I think they’re beginning that process, and there needs to be more of it.”

Unions will be hard-pressed to go on the offensive in any regard if Trump’s nominations to the National Labor Review Board are confirmed and gain influence. If unions are weakened further, skilled labor might only grow more scarce. That leaves private industry with the responsibility of preventing the construction labor situation from becoming even more dire.

“Owners need to take a bigger stake in training, because construction employers [and unions] aren’t going to do that as much,” Belman said. “In the end … especially in the nonunion sector, owners have to be involved in training the workforce.”