Given the labor shortage that was already in existence prior to the wildfires, how is the construction industry dealing with recent natural disasters?

Deermount: The raging wildfires have leveled much of California’s wine region in Napa and Sonoma. Given current tight conditions with regards to both labor shortages and rising commodity prices, the construction industry is already hobbled and ill-equipped to deal with normal volume, let alone the deluge that we are beginning to see as large portions of Houston, Florida and now northern California seek to rebuild. How much needs to be rebuilt?

Deermount: CNBC’s Diana Olick attempted to quantify just how dire the situation is in a recent post:

“The exact tally is still impossible to calculate, but at least 10,000 homes and other structures have been destroyed by floods, winds, and fires in the past three months. Given the acute construction-labor shortage that was already at play before these disasters, reconstruction and its repercussions in residential real estate could pose yet another disaster.” And Nela Richardson, chief economist at Redfin, added, “The housing market can’t take the shock of a natural event … because we are so tightly wound with inventory. Any change is a big change, and you’ll see that play out across the South. The inventory of available homes for sale is acutely low across the nation and continues to fall, down 6.5% in August annually, according to the National Association of Realtors. As a result, home sales dropped for the past three months, and entry-level buyers are stepping aside. Supply remains leanest at the lowest end of the market.” What is being done to alleviate the problem?

Deermount: With little relief in sight, the National Association of Home Builders has begun to lobby Washington for something desperately needed: a guest-worker program to help fill some of the demand for construction workers.  However, anyone who follows politics at a casual level should recognize that getting that accomplished in today’s toxic environment is a long shot at best, positive economic impacts are damned.

CNBC has also said, “A successful guest-worker program will help alleviate the current labor shortage in the residential-construction sector, quicken the rebuilding efforts in Texas and support the overall economic growth of this nation,” according to NAHB chairman Granger MacDonald in a September statement.

“In California, the devastation from multiple wildfires still cannot be quantified, but it is already beyond imagination. Thousands of homes will have to be rebuilt from the charred ground up. That will take every available worker in the state and beyond.

“‘All the resources are being drained to the rebuilding effort,’ Redfin’s Richardson said. ‘That is going to increase the cost of housing and renovation across the nation.’” What impact could the fires have on the local and regional housing markets?

Deermount: As I’ve gotten back to work over the past couple of weeks, I have spoken with clients about this. My two main takeaways are:

  1. New demand, less supply: The fires aren’t even out yet, and I’m already hearing rumblings that demand for for-sale housing that is still standing in that region is off the charts. This is consistent with the Houston market where demand (and prices) shot up for anything on high ground after Hurricane Harvey However, there is a critical difference here: Much of the destruction in Napa and Sonoma hit million-dollar-plus luxury homes. So far, I’ve heard anecdotal evidence from Curtis Tischler of Level 4 Advisors of wealthy cash buyers just looking for a place to live regardless of price with the assumption that they will sell once their rebuild is complete. Add this to the fact that there is limited inventory in the region to begin with and relatively little new construction, and it’s a recipe for surging values. The lower end is even worse with displaced residents desperate to find a place to rent anywhere near home and sometimes cramming more than one family into a small apartment due to lack of available space. This is not a market like Houston where production can ramp up in short order when demand warrants. In fact, there were only about 1.5 months of supply before the fires hit, and displacement will only put downward pressure on this number. It’s probably a good time to be a builder or developer in Napa and Sonoma if you will be delivering units soon, assuming that they weren’t destroyed by the fires.
  1. Labor vacuum: I spoke with a client earlier this week who had an interesting take on the coming rebuild in Napa. The aforementioned wealthy homeowners who lost their homes are likely going to care less about the cost of rebuilding a home than they will about getting their home rebuilt. This is very different from the mentality of production builders who account for much of the construction employment in California. There is a potential scenario whereby the massive number of custom home rebuilds in Napa and Sonoma siphon off a lot of labor from production builders since the pay will likely be better and projects will not have the same profitability constraints—someone rebuilding their personal residence does not need to account for builder profit like a production builder would, according to Tad Springer, director of operations at Henley Investments, a full-service, private-equity real estate investment manager that originates and manages deals in its own SPV funds and invites institutional, family-office and high-net-worth Investors to join it in structured investments. Unfortunately, this has become a zero-sum game since there appears to be no ability to draw more domestic workers into the construction-labor pool and no desire to loosen up border restrictions to attract international workers.

These natural disasters have been incredibly tragic. Many people lost their homes, and some lost their lives. Unfortunately, the tragedy is likely to continue once the fires are finally put out since the already tight housing market feels even more pressure.