Within the new proposed Covid relief proposed by the president is a requirement that the minimum wage increase nationally to fifteen dollars an hour.  What impact will this have on housing affordability?  How will this increase in minimum wage affect commercial and residential real estate?

A personal experience

A few years ago, I was inspecting a property in Crested Butte, Colorado, a ski resort in Southwest Colorado. It was during the summer and I was with my son.  We decided to go out to eat at a restaurant at the base of the mountain.  When we got there the hostess sat us down and showed us the menu.  Essentially there was a QR code on the menu, you scanned it and placed your order.  A person about 15 minutes later came out with the food.  When you were done, you paid with your cell phone.

I spoke with the owner of the restaurant and asked him about the new model.  He said that he could not find enough workers and even if he could find them, he could not pay them enough to make the restaurant profitable.  Using the online tool, he eliminated about 30% of his labor cost.

What does the nonprofit CBO say?

The nonpartisan Congressional Budget Office (CBO) said Monday the move would boost jobless rolls by 1.4 million by 2025, even as 900,000 people get lifted out of poverty. The scorekeeper also estimated in its report that the proposal would increase budget deficits by $54 billion over 10 years. In essence the report highlights that more people will be negatively impacted than positively impacted.

How does Covid impact the effects of a 15-minimum wage?

Covid has changed the employment dynamics and has brought rapid adoption of technology to industries that had not been on the cutting edge.  The pandemic forced a rethink of investment and the reliance on humans in the process.  Consumers immediately adopted technologies like online banking that pulled many industries forward 10-15 years.

  • Adoption of technology
    • Banking: This is probably one of the biggest recipients of the technology boost.  With branches closed everything migrated online from depositing check to taking out loans the efficiency gained in the pandemic is huge for banks and will lead to substantial cuts in their workforce.  With consumer adoption of online tools and wages rising due to min wage increases banks will further reduce their physical footprints along with headcount.
    • Restaurants: Millions of restaurants that had minimal online presences suddenly had to pivot to survive with takeout and reduced capacities.  Just like my example above, the changes to the industry will stick well into the future from online ordering to less interaction (or even no interaction) with waitstaff to reduce labor costs and risk of Covid.  You will further see a shift to “ghost kitchens” to reduce staffing and overhead.
    • Hospitality: like other industries has undergone substantial shifts in consumer preferences that will drastically reduce the human touch points in the process
      • Rental cars: I recently booked a car online, paid for it, when I get to the airport I select a car and drive out (they check my license at the gate), there is only one touch point where they check my license as opposed to going to a checkout counter, getting the key from them, etc…. This was possible pre covid, but now it is the norm.
      • Other hospitality: From hotels, cruises, airlines, etc… all are eliminating as many human touch points with the public as possible to reduce transmission of viruses but also to substantially reduce costs.
    • Grocery industry: is an exceptionally low margin business that has little room to absorb costs without passing it on to consumers. I am already seeing a huge push in the direction of automation from Amazon’s new cashier less store to the adoption of self-checkout.  These trends will not only continue but drastically accelerate with considerably higher wages.

What will happen in real life?

I always find it interesting that we have economists on both the far left and right 100% convinced on how the economy will react.  Unfortunately, they are often both wrong and the answer is many times in the middle.  Here are two real life implications from the higher wages.

California Grocery Store Closures

The City of Long Beach California passed an ordinance to require companies to pay a $4-5/hour increase in wages for “hazard pay”.  Kroger, one of the largest grocers in the country, was quick to react.

“As a result of the City of Long Beach’s decision to pass an ordinance mandating Extra Pay for grocery workers, we have made the difficult decision to permanently close two long-struggling store locations in Long Beach,” the company said in a statement.

An association official said Monday that an increase of $4 an hour represents about a 28% increase in labor costs.

“There’s no way grocers can absorb that big of a cost increase without an offset somewhere else, considering grocers operate with razor thin margins and many stores already operate in the red,” the association’s president and CEO Ron Fong said in a statement.

Seattle study on Minimum wage impacts

Seattle passed a law to increase the minimum wage to a “living wage”.  The wage increases will go in “steps” over time until the min wage is a “living wage”.  This “step” function has provided interesting economic modeling and helped determine when each economic theory is correct. What actually happened in Seattle?

A new study by the University of Washington (contracted by the city of Seattle and a traditional liberal college) has livened the debate about minimum wage.  In Seattle, as wages increased from $9.47 to $11/ hour, the effects on earnings were small, on average employees received about $288 more per year while at the same time employment declined slightly. Basically, the first increase in the minimum wage ended up a draw for economists with no clear winner since wages increased a little and employment fell a little basically canceling each other out.

In their recent study, they found that as the minimum wage increased from 11 to 13/hour workers lost about 1500/year; this amounted to a $100 million a year loss in payroll. (source: UW.edu)   How is this possible?  This study found huge effects: For every 1 percent increase in their hourly wage, low-wage workers saw a 3 percent reduction in the number of hours worked. (source Bloomberg).

How will a $15 minimum wage impact real estate?

  1. Residential:
    1. Higher build costs: as wages increase throughout the supply chain, costs will rise from flooring to appliances to installation costs. These costs will be passed on to consumers with higher house prices.
    2. Could be more prospective homeowners in low-cost markets: One benefit of higher wages is that in lower cost affordable markets there could now be more housing demand.
    3. Higher unemployment, more demand for subsidized/affordable housing. On the flip side, as wages rise the unemployment rate will also increase (and hours worked will decease according to the UW study) for many which will substantially increase demand for lower cost housing options.
  2. Commercial
    1. Smaller footprints: Many businesses will now have considerably smaller footprints from banks to retail to restaurants as they use automation to accommodate the new business environment.
    2. Large number of closures: As wages increase substantially it will no longer be profitable to operate bricks and mortar for many businesses from stores like Kohls, grocery stores, etc… any low margin business that can automate will eliminate less profitable locations.

Summary:

What the Seattle study tells us is that there was a “tipping point” for businesses on their ability to absorb large labor cost increases.  Increasing the min wage small amounts have little impacts on businesses and employees, but once this tipping point was crossed businesses adapted by increasing efficiency or reducing service.  Both resulted in less labor employment.  This trend will likely accelerate as wages increase across the country to $15 dollars per hour as businesses will not be able to absorb or pass on the large increase to consumers.

These changes in employment will be more profound in less expensive labor markets.  Take for example a low-cost state like Mississippi,  increasing the minimum wage to 15 dollars an hour will be a much larger jump than a high-cost market like California.  Residential and commercial real estate will feel the effects of the increased wages with higher demand in some markets for purchasing affordable housing along with lower income housing due to lost wages.

The impacts of increasing the minimum wage will not be as clear cut as economists on both sides are promoting.  There will no doubt be winners with the increased wages along with losers due to job loss and/or reduced hours due to automation.  If wages increase nationwide to fifteen an hour it will be an interesting experiment to see which side is “more right” in their analysis of the impacts.  Out of the gate, I am going to put my money on the UW study that there will be a tipping point for many businesses along with many negative impacts.  A substantial rise in the minimum wage will be coupled with substantial societal costs with higher unemployment and less hours for many workers as businesses adapt to the new paradigm.  On the flip side there will be a subset that enjoys increased wages, but I’m not convinced this will outweigh the negative benefits.

Additional Reading/Resources:

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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