Shortage of Labor and Supplies Could Stall San Francisco Growth
Jun 11, 2013
At the time of San Francisco's dot-com boom, the overall vacancy factor for office space dropped to less than two percent while a housing boom quickly developed, with massive new condo projects decorating the skyline of our city. A simultaneous development was the resulting shortage of construction workers and materials necessary continue to fuel this unbelievable growth cycle.
Over time, the shortage of laborers and materials caused delays and major cost increases to complete the build-outs needed for the new tech tenants of the time. Although the eventual dot-com bust occurred for a number of reasons, an often-overlooked reason was the underestimate of infrastructure costs because of labor and supply shortages. Along with delays to the start of small businesses, the additional fees and cost overruns contributed to a drain on company cash that was denoted for product and service development, not build-out costs. With such a low vacancy factor, these new startups had no choice but to pay the additional costs and absorb delays even though it lead to the eventual demise of some of these companies.
Today, we are beginning to experience similar labor and supply shortages with increased costs, in some cases, well in excess of thirty to forty percent. Even though the vacancy factor has dropped significantly, we are still not at a rate of less than two percent, and this time it is the housing boom that is taking off faster than commercial tenant development projects. As a result, housing build-out costs are skyrocketing, causing high cost overruns, which will result in the need to secure higher rental rates for apartments along with higher purchase prices for condos. All of this could lead firms and their employee bases to reconsider San Francisco as home and take other, less expensive cities into consideration if it eventually proves to be too costly to operate and live here.
To find a solution for this problem, I believe that there are steps that can be taken to proactively address the pending shortage of labor and resulting increase in cost to start-up companies. First, we need to introduce more construction workers into the field; this means that trade unions need to push for more people to become certified as skilled laborers and expand the workforce. Next, trade unions need allow more outside union workers from surrounding counties to work in San Francisco. For instance, electrical union shops from Oakland should be allowed to compete for jobs in downtown San Francisco and that is not currently happening. Non-union shops should be allowed to compete for smaller jobs without fear of reprisal from union jobs. These smaller jobs help get start-ups going and tend to be loss leaders for larger construction companies. Finally, suppliers of materials need to carry more inventory stock, gone are the days of large warehouses carrying surplus supplies. Today, a number of supply vendors are still operating like they were in the real estate bust years – little or no inventory stockpiled and every order filled and built as needed to match orders. This way of doing business leads to delays and higher costs and it has to change now.
The key to surviving and remaining profitable during this boom is for unions to push to recruit and for businesses to demand that suppliers fill up their inventory. It is easy keep established laborers in the workforce with a raise in wages and job security to in order to keep labor low but this will prove to be shortsighted. Increasing the accessibility of labor and supplies needs to be done quickly to keep the engine of growth going; otherwise San Francisco will soon become prohibitively expensive and business will take their business elsewhere, killing momentum and eventually leading to a backwards economical slide.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 28 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, www.commercialspacefinder.com.