Property NOI Faces Dual Hurdles of Labor Shortages and Supply-Chain Issues

Even as the overall economic outlook remains positive, recovery in property NOI could be slowed by continued labor shortages and supply chain issues, particularly in the retail and lodging sectors, says Fitch Ratings. These challenges could be exacerbated by the Omicron variant or any subsequent severe variants that affect travel or trigger business shutdowns.  

Increased costs, due to higher wages in a strong job market and broad-based building material shortages, are raising property costs, reducing NOI and increasing capex for commercial real estate, potentially weakening CMBS credit profiles. 
 
There is strong demand for labor due to the robust economic recovery but labor participation remains below pre-pandemic levels even as federal unemployment relief programs were phased out,” according to a recent Fitch Wire posting. “The labor force participation rate was 61.6% in October 2021 compared with 63.4% in January 2020.” 

The rating agency cites workforce exits due to early retirements, continued issues with childcare, vaccine mandates, and concerns over COVID-19 as contributing factors to an increase in job vacancies, particularly for service-oriented sectors. Job opening rates in September were 9.5% for accommodations and food services and 6.8% for retail. 
 
As a result of labor shortages, retailers in some cases limited store hours or temporarily closed locations in order to keep a nearby location more suitably staffed. “This often can cause a ripple effect on other retailers in the same center as foot traffic is likely to diminish,” Fitch says.  

In addition, shipping and transportation backlogs led to difficulty stocking shelves, and retailers that rely heavily on November and December holiday sales may see volume and revenue declines, resulting in lower sales revenues and further store closures. 
 
In the lodging sector, there’s difficulty with staffing to appropriate levels to operate guest services, food and beverage outlets, and amenities comfortably. “Destination hotels, often dependent on foreign workers for staff, will have greater challenges in filling these roles and may face greater operating pressures,” according to Fitch. “Insofar as staffing issues affect the guest experience, this may diminish the ability to attract new or repeat business.” 
 
Hotel and retail operators alike are finding it necessary to increase payroll expense to hire new staff and retain current employees. Private sector wages and salaries rose 8.1% for accommodation and food services and 5.9% for retail in Q3, according to the U.S. Bureau of Labor Statistics. 

Further, says Fitch, higher building materials costs or the inability to source needed materials are likely to increase expenses and/or delay capex for property improvements. This in turn could postpone new tenants from taking occupancy or reduce appeal to consumers.