Shopping Center Business

MAY 2017

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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GROWTH ECONOMY 222 • SHOPPING CENTER BUSINESS • May 2017 F rom development slowdowns to property management challenges, the perils of a recessionary cycle are well documented. What is less well understood (and often overlooked) are the structural problems and difficulties that can arise with a booming economy. Obviously, there is no developer or property manager that prefers a slow- down to a robust period of growth and prosperity, but understanding the chal- lenges that come during a strong econo- my — that can range from a shortage of raw materials to a relative lack of available talent — (and appreciating the creative solutions developers and managers can deploy to overcome said challenges) is important for any commercial real estate professional who wants to capitalize on opportunities, maximize returns and pre- pare themselves and their businesses for the future. SHORTAGE OF QUALIFIED TALENT One of the most frustrating issues that can arise in a strong economy is a notice- able shortage of qualified talent. Skilled la- borers and craftsmen are in high demand, and are particularly hard to reliably staff. As a result, it can be a challenge to con- sistently ensure sufficient manpower on a job. Coordinating scheduling subsequent- ly becomes difficult, and managing man- power carefully is no longer a formality or an afterthought — but a priority. Further complicating the issue is that the pipeline of trained and experienced craftsmen is drying up. The pool of spe- cialized talent largely evaporated over the course of the last recession and has been slow to come back. Accompanying that is the growing social/societal pressure to go to college or pursue some other form of higher education, with skilled trades and vocational training increasingly viewed by some as less glamorous and desirable work. Trade professions are not valued the way they used to be, a dynamic that is exacerbating an already thin market for skilled labor. The property management side of the industry also struggles with personnel challenges in a growing economy. When times are good, there is heightened com- petition for qualified staff, and wage infla- tion and wage pressure is a real issue. With an abundance of job prospects, employ- ees are more mobile and are more likely to jump to another opportunity, and salary considerations tend to take priority over factors like the quality and professional culture of a company. SHORTAGE OF RAW MATERIALS Another downstream impact of pros- perity is the potential shortage of raw materials — as well as basic manufactured necessities such as drywall — with in- creased demand. In some major markets with big infrastructure projects, the price of concrete has spiked in recent years, as the pace of construction picked up and new infrastructure development acceler- ated. At least anecdotally, developers have had to make difficult decisions about how (and whether) to proceed in the face of significantly higher material costs. For developers, the inability to control or predict the pricing of materials makes budgeting much tougher, and introduces an unwelcome element of randomness into a business where predictability and stability is an asset. BUBBLES AND BANKING Even a positive economic cycle is still just that — a cycle — and depending where you are in that cycle, there are a range of different context-dependent challenges and considerations that need to be ac- counted for. At a time when most industry analysts and observers agree that we are approaching the end of the current period of e c o n o m i c growth, ac- cess to cap- ital is one issue. Con- s t r u c t i o n lenders are starting to pull back na- tionally, of- fering tough- er terms and starting to become more aggres- sive about managing their risk. For insti- tutional investors and developer-owners, high prices and a competitive market becomes a concern at times like these: the danger of overpaying and becoming overextended is more significant when tougher times may be looming around the corner. Another challenge is less of a concern for individual companies and more of an industrywide issue: the fear of over- building. The majority of great economic cycles are ultimately compromised by a bubble, and we are already seeing signs of overbuilding in markets like Los Ange- les, Miami and New York. While markets like Detroit are still underbuilt, bubble concerns are something to watch for go- ing forward. STRATEGIES AND SOLUTIONS Awareness and understanding of these issues goes a long way toward mitigating their impact on your business. In some cases, strategies and solutions ranging from straightforward to creative and unconventional can ensure that the "per- Too Much of a Good Thing? The challenges of a good economy. Richard Broder Richard Broder CEO Broder & Sachse Real Estate Inc.

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