Pain, Pain, Pain: From Soaring Gas Prices to Rising Labor and Materials Costs, Inflation is Making Life Difficult for CRE Occupiers

Pain. That’s what inflation is bringing to both businesses and consumers today. Gas prices are soaring. Families are spending more at the grocery store. And the average interest rate on 30-year, fixed-rate mortgages has been inching ever closer to 6%.

Inflation is also upending the business models of commercial real estate occupiers, something that Cushman & Wakefield addresses in its latest research.

As the report says, the largest expenses for most businesses are labor costs, which range from about 30% of total operating expenses for transportation firms to 60% for office-using businesses such as accounting, legal, medical and professional services. And today, labor costs for real estate occupiers are rising more quickly than at any time in recent memory, according to Cushman & Wakefield.

According to the Employment Cost Index for the private sector, median wage growth in the first quarter of 2022 rose 6% when compared to the same quarter a year earlier. That’s tied for the fastest rate on record dating back to 1990.

Another challenge for occupiers? Retaining employees. Cushman & Wakefield reported that workers who changed jobs in April of this year received a year-over-year wage increase of 7.2% compared to the average wage increase of 5.3% that workers staying in their current roles saw. Workers understand that they’ll typically earn more by jumping to another company. This makes it especially difficult for companies to keep their best employees if they don’t want to match those bigger wage increases.

It’s little surprise then, that Cushman & Wakefield reports that the number of people quitting jobs remains near an all-time high.

These challenges aren’t likely to disappear soon, either. As Cushman & Wakefield says, escalating labor costs don’t ease as quickly as other forms of inflation. Wages tend to be sticky.

Rising labor costs aren’t the only inflation challenges that businesses face. Cushman & Wakefield says that commercial real estate occupiers are also facing higher electricity, heating and cooling costs. In the United States, the consumer price index for electricity rose 11% during the previous 12 months ending in April, while the consumer price index for natural gas rose 22.7%.

Then there are soaring transportation costs, increases that are especially difficult on companies that ship their product across the country. As Cushman & Wakefield reports there is no sign that these costs are heading down anytime soon.

Another rising expense? The cost of materials. According to Cushman & Wakefield, the Producer Price Index for industrial commodities — excluding fuel– rose 13.8% during the 12 months ending in April, with certain products such as plywood, steel and chemicals rising by even larger margins.