Our babies are not growing up to be construction workers, and that appears to be taking a toll on multifamily development. Despite an ample number of units under construction, deliveries of apartment buildings are far behind expectations this year. The main reason — based on anecdotal and statistical data — is the shortage of skilled laborers.

The good news for the industry is that fewer deliveries at a time when development is peaking gives property owners time to fill new units coming online. That prevents vacancies from spiking — particularly in high-supply metros — and keeps rents from decelerating more than they otherwise would. However, the construction industry must find ways to create a stable workforce as older workers retire.

LONGER START-TO-FINISH TIMES

With roughly 600,000 units under construction in 2017, U.S. multifamily apartment deliveries were expected to reach a cycle peak of 360,000. However, through the end of the third quarter, only about 220,000 units were completed, which puts new supply running only slightly ahead of the 2016 total of 281,000 deliveries. Some 300,000 deliveries are expected for 2017.

An analysis of more than 1.5 million units developed over the past decade found that start-to-finish construction times are taking much longer than historical norms. The data, which encompasses apartment buildings of 50 units or more, shows that the average time to complete projects has ranged between 15 and 22 months since the mid-2000s. As of third quarter 2017, it was 22 months, and has risen steadily since 2013, when it was 16.5 months.

Although the reason for longer construction periods is hard to pin down with precision, the evidence points to the lack of available labor as the main culprit. Some analysts posit other reasons; for example, construction materials and structures are more complex today and therefore take longer to complete, and local government approvals are taking longer than in past years. However, there is compelling anecdotal and statistical evidence that demonstrates the available pool of construction workers is not growing as fast as the increase in supply.

Although the quarterly data on a metro level is inconsistent because the sample sizes are small, the data shows that markets with the biggest increases in average construction time have some combination of tight labor markets, lack of affordable housing for blue-collar construction workers or large increases in supply that has created competition for workers. Between third quarter 2013 and third quarter 2017, the increase in completion times was highest in California metros: Orange County (11.2 month increase) had the most significant jump, followed by eastern Los Angeles (10.6 months) and San Jose (9.5 months).

Longer construction times also were seen in metros with huge development pipelines such as: Charlotte (9.3 months), Miami (9.0 months), west Houston (8.6 months), Nashville (8.0 months), Phoenix (7.9 months) and Raleigh (7.5 months).

SKILLED WORKER SHORTAGE

Development of all types (not just housing) ground to a halt in the wake of the global financial crisis. Housing was particularly hard hit by a double-whammy of weak demand and unavailability of debt financing. Apartment deliveries fell to modern historical lows of about 100,000 annually in 2010 and 2011. Since then, multifamily construction has mushroomed. Demand has grown due to strong household formation, lower homeownership rates, growth in the millennial generation and downsizing baby boomers. The number of renters grew by 9 million during the past decade. New stock was clearly needed, and developers rushed to fill the void.

But there are not enough skilled workers to go around. The number of workers employed in the construction industry peaked at 7.7 million in 2007, dropped as low as 5.5 million in 2010, and stood at 6.9 million as of August, according to the Bureau of Labor Statistics. The proportion of construction workers as a total of all jobs peaked in 2005 at 8.6 percent, and stood at 6.2 percent in 2017.

By age category, the differences were dramatic. The 35 and older cohort experienced only a slight decline. The percentage of construction workers ages 45 and older as a share of all workers dropped to 1.4 percent in 2017 from 1.6 percent in 2005, and the 35–44 age category dropped to 1.9 percent in 2017 from 2.1 percent in 2005. Decreases were much steeper for younger age cohorts. The 25–34 category fell to 1.6 percent in 2017 from 2.8 percent in 2005, and the 25-and-younger category fell to 1.2 percent in 2017 from 2.2 percent in 2005.

Theories for the decline in younger construction workers include the opioid crisis, lack of interest in blue-collar professions and decreased immigration. A recent survey by the National Association of Home Builders (NAHB) found that only 3 percent of young adults between the ages of 18 to 25 wanted to pursue a career in building trades. While immigration is not as easy to track through data, fewer immigrants from Mexico and South and Central America are making their way into the United States to work in construction.

Both anecdotal evidence and surveys of employers reveal that finding qualified construction workers is growing increasingly difficult. One-third of construction firms reported that labor quality was their biggest problem, and 88 percent said it was hard to fill some jobs, according to the August survey of the National Federation of Independent Businesses, a trade group based in Washington, D.C.

In July, some 72 percent of contractors surveyed by the NAHB said they were finding it difficult to finish projects on time, up from 46 percent who responded to the same question in March 2013. About three-quarters reported in another NAHB survey they were having trouble hiring framing crews and carpenters, with 30 percent saying the problem was “serious.” The NAHB reports that employer response to surveys indicates that the labor shortage is as high as it has been since before the year 2000. In recent months, the Bureau of Labor Statistics’ Job Opening and Labor Turnover Survey has found an increasing number of unfilled construction jobs.

MORE TIME TO ABSORB NEW SUPPLY

The biggest impact of the labor shortage is that supply is not overshooting demand as much as anticipated. Nationally, occupancy levels have fallen roughly 50 basis points over the past year, but that drop would be steeper if 60,000 more units were delivered.

Units under construction will be completed eventually, but the added construction time gives apartment owners more time to absorb new supply. In metros with heavy pipelines, occupancy rates will likely level off or decline less than expected. Rent growth — which has been decelerating steadily for nearly two years and stands at 2.5 percent year-over-year as of November — should continue to grow moderately rather than turn negative.

Looking at the longer term, the industry must identify where its future labor force will come from. Older workers will retire, and without a pool of younger workers to replace them, developers will continue to have problems finding skilled labor.

Paul Fiorilla is associate director of research with Yardi Matrix.