By Rob Love, President/CEO, Love & Company
In mid-February, I had the pleasure of attending the HJ Sims 2023 Late Winter Conference in Sarasota. And yes, while being in Sarasota in February was certainly a pleasure on its own, the Sims team did a nice job organizing the conference, and there were several very insightful presentations. Here are some of my key takeaways for those of you who were not able to be there.
- The workforce is dwindling and will continue to do so.
We all know we are experiencing a significant workforce challenge. But do we all know why, and what the labor market will look like in the future? Neil Irwin, chief economic correspondent at Axios, mapped out the challenge in an easy-to-follow way.
- 2000 to 2020 was the era of labor abundance due to having both the boomer and millennial workforces in the market concurrently.
- In the 2020s, boomers are retiring (at a pace of 10,000 to 11,000 a day, from a different presentation), and the birth rate is not even close to keeping up with providing enough new workers to take their place.
- In addition, immigration is down sharply from a peak in 2016, decreasing from about 1.2 million people in 2016 to only about 350,000 in 2021.
Given these factors, workforce challenges are only expected to get worse. (Sorry!) In the United States in 2000, there were about 4.8 adults ages 20 to 64 (the active workforce) for each person age 65+. By 2050, this ratio is expected to drop to only 2.6.
To me, this says we will need to take a hard look at our business model in the coming years.
- The cost of capital is going to stay more expensive.
As Neil Irwin continued his presentation, he laid out the reasons why capital costs had been so low in recent years, including:
- The globalization of the world’s supply chain brought more goods to market in the U.S. at lower price points than we would have had if those same goods had been manufactured here. That kept inflation low.
- The baby boomers, in total, saved a tremendous amount towards their retirement. This resulted in a large amount of ready capital to be invested.
- As a country, we did little from 2000 to 2020 to invest in the country’s infrastructure. Higher levels of spending would likely have resulted in higher interest costs.
Looking forward, Irwin expects deglobalization to increase as countries work on their own supply chains, and he notes that boomers will spend down their assets in their retirement years. In addition, the government has invested quite heavily in infrastructure over the past few years. Together, these factors will increase inflation and reduce the amount of capital available for investment, thus pushing rates higher—or at least higher than they were the past several years.
- The rate of inflation of construction costs is projected to decrease.
Finally, a little positive news. But it’s only a little.
In a panel discussion that included a senior living architect, builder, and developer, the speakers shared that the projected pace of inflation of construction costs is projected to decrease from the 12% to 14% increases experienced in 2021 and 2022, to the 3% to 6% range. Of course, that means costs are still going up, not coming down, which means we will need to find ways to make projects work at higher costs as well as higher interest rates.
- Sarasota is a great place to hold a conference.
(Okay, I know this doesn’t have anything to do with senior living, but I had to find something positive…)Being in Sarasota in mid-February could only have been improved on by being there in mid-March when I could have watched my beloved Orioles play a spring training game. Beyond that, one of the many activities the Sims team hosted was a boat tour around Sarasota Bay on which I not only got a wonderful little February sunburn, but also had more close-up views of dolphins than I have ever experienced. At one point, a pod of four or five dolphins were following and swam alongside our boat for about five minutes, circling around and around us. It was really cool!
- So…what do we do?
At the end of his presentation, Neil Irwin mapped out several takeaways for businesses based on his view of the economy and demographics in the years ahead.
- Labor, labor, labor. Focus on your labor pipeline as a core strategic effort. Think beyond wages in what it means to be an attractive employer. Support local and national initiatives designed to bolster the workforce.
- Embrace productivity-enhancing investments.
- Pursue fixed-rate debt options over variable-rate options.
Somewhat surprisingly, given much of his presentation, Irwin then ended on a positive note, saying that the coming decade represents an optimistic story for workers, which in turn will lead to an optimistic story for the country. And I can see that. The incomes of many workers will rise, which will in turn benefit the overall economy. And while the cost of capital may go up (or at least stay around current levels), our economy and country certainly have prospered at these interest rates in the past. If we can find positive solutions to our workforce challenges, we can return to more stable economic times.