Senior housing construction has kept up a torrid pace in recent years as providers and developers try to build enough communities to satisfy the ever increasing demand for senior housing services. As fast as these facilities are built, developers still need to pick up the pace in order to satisfy all of demand that is projected to occur for senior housing services in the future. Because interest rates have stayed extremely low for a prolonged period of time, many developers got used to low construction costs.
However, low borrowing costs are now partially offset by recent increases in labor costs. Rising wages in the skilled labor market could lead to substantial increases in building costs, which in turn could force senior housing providers to raise room fees in order to offset them. This could ultimately result in lower occupancy rates and decreases in net operating income. Accordingly, many providers are beginning to look into ways to save money in other areas as labor costs continue to rise.
Labor Costs Continue to Rise
Labor costs are on the upswing because growing construction in multiple real estate categories increased the demand for skilled labor. At the same time, the number of workers in the construction industry decreased from 7.5 million in 2007 to roughly 5.5 million today. Consequently, in order to find the workers they need to continue building senior housing properties at a fast clip, providers and developers are now forced to offer higher wages.
In addition to wage increases, the cost of land is also rising in many areas due to increased competition for the most sought after parcels. Fortunately for developers, there is some good news on the cost front, as falling gas and oil prices should help keep the price of many building materials from rising significantly in the coming months.
In addition to taking advantage of falling energy costs to help offset higher wages for skilled labor, developers are also seeking new ways to build facilities with fewer workers. For example, senior housing developers are automating as much of the construction process as possible with robotics so that they can reduce labor costs by hiring fewer people. They are also creating large models of communities before beginning construction on a property so that they can discover potential problems early on in the process and then determine ways to avoid them before they begin building the actual facility.
While developers continue to search for ways to manage their building costs, senior housing providers and investors who are interested in acquiring these new properties to bolster their portfolios should contact Cambridge Realty Capital to learn more about the different financing options that it offers for acquisitions, sale/leasebacks, joint ventures, and other purposes as well.
