Housing costs and the talent crunch

Many of the world’s biggest cities have become unaffordable for workers, creating deep labor shortages. Here’s how you can respond.
By Amanda Abrams

 Housing costs and the talent crunch
Image by Jennifer Maravillas/Ikon Images

In June, Google announced that it would invest $1 billion over the next decade to expand the supply of housing in the San Francisco Bay Area. The announcement was a welcome one, promising some relief to a region where housing costs have skyrocketed over the past 10 years, far outpacing incomes. The median sale price for a home in the greater Bay Area is $950,000, according to the California Association of Realtors, and renters need to earn at least $36 per hour to afford an apartment in the area.

Google clearly has several motives in making this commitment. In part, it's a public service and a public relations effort: Many residents blame it and other thriving technology companies for the tight housing market, and this initiative — which aims to add 20,000 new housing units to the area, including a proportion earmarked as affordable housing — should ease that crunch somewhat.

But the tech giant's talent strategy also is driving this initiative. The sky-high cost of living in the Bay Area, which includes Silicon Valley, has resulted in many workers' being unable to afford homes there and subsequently leaving the region — exacerbating an already sharp competition for labor. Google's housing initiative isn't intended specifically for its workers. But, by increasing supply, it should lower housing costs, giving the company an easier time recruiting and retaining the skilled workers it needs.

The labor pinch is being felt by a range of companies, and other mammoth tech firms like Facebook and Microsoft also recently announced ambitious housing initiatives.

"The big issue is that companies like Google and Amazon can be in these very expensive cities that only work for those in their 20s, or at the very top [of their industry's pay scale]," said Joel Kotkin, an analyst of geographic and economic trends and presidential fellow at Chapman University in Orange, Calif. "Everyone tells me the same story: 'We can't hold onto the 30-somethings' " — that is, the workers with experience who are now ready to put down roots and buy homes, Kotkin explained.

That can be a particular challenge for old-economy industries like engineering and manufacturing. "These are employers who need long-term employees," he said. "You're not going to have a 20-year-old designing a bridge; you need someone with experience."

Because of the increased popularity of urban living, which generally hasn't been accompanied by a surge in housing construction, the cost of housing has become an international problem. Most of the world's centers of business and industry, including Singapore, Beijing, Shanghai, London, New York, and Los Angeles, are extremely expensive places to rent or buy a home. Lower-tier cities have been affected, too. And when people can't afford to live in the cities where they work, the result is a very tight labor market, with companies fighting to find and keep good employees.

As the world becomes increasingly urbanized, there's no sign that this trend will ease. In response, financial managers in urban areas need to consider whether their company is ready to make strategic investments in property, time, or effort to give themselves a leg up on the competition — and some breathing room.

BUILD IT AND THEY WILL STAY

Perhaps the most obvious solution is to provide some kind of housing assistance to workers. In many of China's major cities, where employees face significant housing affordability pressure, the government is helping key companies remain competitive. The central government in Beijing is making the national rental housing market a priority and has begun to focus on quickly increasing the supply in larger cities, said Daniel Yao, head of research for the real estate company JLL's China operations.

Additionally, he said, local governments are offering large, important companies low-cost land for sale that can be for residential use. "The government understands the companies' need," Yao said. "Competing for talent is important for fast-growing companies."

In the United States, Canada, and Europe, however, local and central governments don't play that kind of role in the housing market. That means it's up to individual businesses to figure out their own strategies to attract and retain workers. There are no numbers outlining how many companies assist employees with housing, but the practice was popular in the early 2000s, before the housing crash. Some analysts predict that it's on its way back.

"I think we'll see more employers, especially in those really tight markets, thinking more seriously about how they can assist their employees in accessing housing," said Corianne Payton Scally, a researcher at the Urban Institute in Washington, D.C.

The practice is most established in the field colloquially referred to as "eds and meds": universities and hospitals. Usually deeply rooted in a community and often holding onto surplus property, these institutions frequently offer a variety of housing assistance options to employees. At universities, in particular, professionals have come to expect some degree of housing compensation.

"Providing affordable housing for faculty and staff is a priority and highly related to the cost of living in Vancouver. It's a big challenge in terms of recruitment," said Tor Album, associate treasurer at the University of British Columbia's Vancouver campus. His university — located in a pricey neighborhood in one of the world's costliest cities — offers several options that assist those on the university's payroll with rentals and homeownership. They're worth the cost, Album said, though he didn't give any numbers.

But most companies aren't interested in becoming landlords or lenders. Instead, they almost invariably wind up working with an independent third party, usually a not-for-profit housing group that helps with the finances and details.

In the Chicago area, for example, Northside Community Development Corporation has helped many companies create a range of housing programs for employees. "Employers can't do this because they have to have the specialization, and the certification for secondary financing," said Chris Zala, Northside's executive director. Plus, he said, his organization can make sure employees receive the full education they need to be ­informed homebuyers.

One of Northside's clients is Hamra Enterprises, a company that operates restaurant franchises in the region. The business has worked with Northside to provide employees with a $3,000 loan toward a down payment that's forgivable to those who remain with the company for at least five years. Mike Hamra, the company's CEO, largely invested in the program for social responsibility reasons but said it has a financial upside. "It's certainly a value for the business because it ensures that people will stick around for five years. It helps keep people in place and at Hamra for the longer term."

Other housing organizations pool funding from several employers to invest in new housing developments. As in Google's case, the homes may not be targeted specifically to the companies' employees, but they're designed to increase the overall supply of reasonably priced housing — and they often offer a decent rate of return to participating businesses.

For some companies, that's the easiest way to create housing. "They look around and say, 'If we can't build it ourselves, what can we do?' " explained Julie Mahowald, the CFO of Housing Trust Silicon Valley. "This gives them a tangible way to do something." Tech companies such as Facebook, LinkedIn, and Cisco have contributed to the fund in return for an interest rate that's comparable to 10-year Treasury notes. The housing organization, meanwhile, uses those investments to fund an ongoing pipeline of affordable housing projects across the region.

USING GEOGRAPHY TO YOUR ADVANTAGE

There are other ways to address the high cost of living and the struggle for good labor without getting into the tricky business of housing. Probably the easiest is to employ remote workers, a popular option that's predicted to continue to grow.

According to a Gallup report, 43% of American employees worked remotely at least some of the time in 2016. The same study found that the practice is particularly common in the finance, insurance, and real estate fields.

Utilizing telecommuting has a number of advantages, but one of the biggest is the opportunity it gives an employer to source labor from a much wider area. "There's a growing awareness that being willing to cast a wider net beyond your current general geographic location could allow you to find people" beyond those you've been competing with everyone else for, said Cali Williams Yost, the chief executive of Flex Strategy Group, a consulting company in New Jersey.

That turned out to be very true for Career Karma, a San Francisco-based startup. The company, which connects coding students with those already working in the field, planned to develop an app and needed a few experienced workers to help.

"We started looking around in San Francisco and found that it was very hard to recruit someone," said Artur Meyster, one of the company's co-founders. Most qualified people already had jobs, and those who didn't were quoting prices of $80—$100 per hour — too much for a startup.

So Meyster, who's originally from Ukraine, connected with IT workers in Eastern Europe. Within two weeks, Meyster had recruited two experienced, English-speaking Ukrainian engineers. He added, "Salaries in Ukraine are significantly cheaper" — a quarter to a third of what they are in San Francisco.

Today, Career Karma has nine workers in Eastern Europe, a small customer relations team in the Philippines, and writers and editors all over the United States. "If you're willing to be a value investor and use undervalued assets, there's tons of talent internationally," Meyster said.

Career Karma employees have a variety of tools to help them collaborate: For file sharing and group conversations, they use Slack; Jira is for project management; Google Drive is a way to share articles; and for storing code and providing feedback, they use GitHub.

There are many other collaboration tools, including proprietary ones tailored to specific industries. They're all relatively affordable, especially compared to overhead costs. But what's more important, Yost said, is figuring out a broader communications strategy.

"You need to establish how to maintain a high level of quality and effectiveness" — a big-picture plan, she emphasized — "and then look at what you need." That way, the various platforms aren't simply isolated applications.

It's also critical that managers understand how to do their jobs in a flexible work culture; that is, how to manage beyond face time. They need to be trained to clearly set expectations, get regular updates, and use communication technology effectively. Managing remotely may mean scheduling fewer meetings and relaxing supervision in order to promote a sense of inclusion. However, it can be tough to maintain team cohesion in a remote working situation.

One alternative is to establish a remote hub. That's what Airside Mobile, a company that makes digital identity products, did. The company's headquarters is in the Washington, D.C., region, but its communications wing is in North Carolina. There, a handful of employees all work from home but meet in person weekly at a co-working space. That setup is low-cost but creates more of a team environment than a traditional remote structure.

And telecommuting is very popular with workers. When Airside recently posted two North Carolina-based part-time positions, it received almost 600 responses. "There are a lot of people who really want to live a certain lifestyle," said Hans Miller, Airside's founder and CEO. "If we can make it work with talented people who want to live where they want to live, everyone wins."

TAKING THE LEAP

If a company wants to improve its chances in the labor market but needs to maintain a close, collaborative atmosphere, however, the answer might be relocating or establishing a satellite office.

Of course, moving a business to another city or region is a highly significant decision that requires months or even years of deliberation. Among factors to consider are a region's potential market for the company's product, business climate, labor rates, median education level, cost of living, and quality of life. It's not a choice to make lightly.

But an increasing number of companies are making the choice. In the United States, businesses on the expensive West Coast that don't need to be there are leaving. (Texas, with its pro-business environment, is a favorite destination.) In 2017, Toyota moved its longtime North American headquarters from Los Angeles to Texas, largely because of California's high housing prices; this year, Southern California-based Mitsubishi announced it would be decamping its U.S. headquarters to Tennessee. And many major engineering companies have left the state.

Others are establishing branch offices elsewhere. The online real estate company Redfin, for example, is still headquartered in Seattle but recently opened an engineering office near Dallas. With the Texas city's lower housing costs, "we are already seeing just as much interest from [job] candidates looking to relocate from higher-cost cities as we are from local candidates," the company's vice president of engineering said in a Redfin blog post.

It's not just big companies that might consider a move, said Joseph Vranich, a relocation consultant who specializes in firms leaving California. Actually, "the smaller the company, the more important housing costs are," he said. Small companies, after all, often have many longtime employees and deep trust — qualities company leaders want to hold onto. "They don't want to lose their people."

And a move to the Midwest, for example, where housing is perhaps a third of its California price, would feel like a pay increase if a worker's salary remained the same. That could mean even the administrative staff might be able to afford homes, something that would be unthinkable in California.

Of course, it's perhaps easier for technology firms to make that kind of move; some use remote workers and employ technology to easily connect with colleagues around the world. But the technology is available to anyone these days.

The same kind of moves are happening around the world, including in China. "We see large companies putting their office or second headquarters in those tier-two cities," said Yao, the JLL head of research. "They have several advantages. They're really growing fast; and also, there's been a rapid development of transportation infrastructure — within the cities, but also connecting them with tier-one cities."

Indeed, Xiaomi, the world's third-largest smartphone maker, currently based in Beijing, recently announced it was building a second headquarters in Wuhan, a smaller city, and is offering incentives to existing employees to move there.

That's the kind of strategic response that will save companies from tight, expensive labor markets. And it may just begin to balance out the cost-of-living differences between the world's cities, to boot.


About the author

Amanda Abrams is a freelance writer based in North Carolina.

To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.


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