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Small Businesses Fall Behind on Hiring – Inflation Takes a Toll

By Ruth Simon

Jim Gahlsdorf, owner of Gahlsdorf Logging, at a work site in Lincoln County, Ore.
PHOTO: CELESTE NOCHE FOR THE WALL STREET JOURNAL

Companies with under 50 workers lost head count in three of the past four months, data show, reflecting difficulties in keeping pace on wages and benefits

Small businesses are losing ground in the hiring game.

Head counts at companies with fewer than 50 employees declined in three of the past four months, according to ADP payroll data, even as employment at larger firms continued to grow.

Owners of many small companies say inflation has added to the pressures of an already tight job market, making it increasingly difficult to keep pace with the wages and benefits offered by large employers. The hiring challenges are stunting growth, small-business owners say, and further clouding their deteriorating economic outlook.

At Gahlsdorf Logging Inc., the head count is stuck at around 20, making it difficult for the Rickreall, Ore., logging contractor to keep its eight-person crews fully staffed. Owner Jim Gahlsdorf said he turns down an offer about once a month to look at or bid on a potential job because he doesn’t have the workers.

Some small logging operators have dropped to one crew from two in response to labor shortages. Mr. Gahlsdorf said he worries that a slimmed-down operation wouldn’t produce enough revenue to cover overhead. He is hoping that as the number of crews operated by competitors declines, customers will pay more for his services, allowing him to pay his workers more.

“If we keep retreating from this problem, we will never solve it, and that will be the end of my business,” Mr. Gahlsdorf said. “If we just hang on, we will be in a better spot.”

Sixty-three percent of small-business owners say that hiring challenges are affecting their ability to operate at full capacity, according to a June survey of more than 825 small businesses for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer advisory firm.

Some large companies that saw significant growth during the Covid-19 pandemic are beginning to take a more cautious approach to hiring, which could over time create more opportunities for smaller employers to bolster their ranks. For now, however, “small firms are still playing catch up,” ADP chief economist Nela Richardson said. If the economy weakens, small firms are also likely to change their hiring plans, she added.

Small-business confidence continues to fall, dropping in June to lows last seen in July 2020, the Vistage data show. Nine percent of small-business owners expect U.S. economic conditions to improve over the next 12 months, down from 12% in May and 53% in June 2021. Despite their economic worries, 52% of small-business owners expect head counts to increase in the coming year, the survey found.

Like companies of all sizes, small businesses are spending more to attract and retain workers. Seventy-six percent of small-business owners said they had boosted wages in response to labor-market challenges, according to the Vistage survey, while 44% reported adding employee benefits.

Mr. Gahlsdorf’s logging company has raised starting pay by about $5 in the past year. A recent Facebook ad offered starting pay of $25 to $26 an hour for “choker setters,” who fasten steel cables around logs. “[W]e will train the right person!” the ad said. “No drugs. Show up. Learn. Work Hard. Get Logs. Make $$.”

Black Earth Compost, an organic-waste collection and compost-processing company in Manchester, Mass., with 78 employees, starts drivers at $18 an hour. Last year, the company began offering a $3-per-hour bonus to drivers who start on time, make all their pickups and deliveries and meet other performance targets.

“That stopped the hemorrhaging, but it’s been tight ever since,” said owner Conor Miller, who recently brought in someone to help with hiring and has increased company benefits. The company added a 401(k) retirement savings plan last year and now allows employees to receive a portion of their pay in the form of bitcoin, which until the recent volatility in the cryptocurrency market was a big draw for younger workers.

Small-business owners often pitch in themselves when staffing shortages arise. At Goulding & Wood Pipe Organ Builders, which builds and maintains pipe organs, the employee responsible for installing control systems and wiring consoles quit in November after four years on the job. The Indianapolis-based company, which employs 13 people, still hasn’t found a replacement.

“I’ve pretty much taken over most of the responsibilities,” said owner Mark Goulding, who has raised wages twice since the fourth quarter of last year. “It’s why I am in Grand Rapids, Mich., today, finishing a job he should have done.”

The growth of remote work has made it easier for large employers to poach workers in faraway locations where the pay scales may be lower. Health Designs, a workplace wellness company, based in Ponte Vedra Beach, Fla., recently lost an executive to a company based in Boston and another employee to a Canadian company, both offering remote work and higher pay.

“We are no longer competing with other local companies in local geographies. We are competing against the world,” said Health Designs Chief Executive Chris Margolin, who recently filled one position but still has two openings in his 18-person home office.

Staffing gaps can take a toll on customer service. Freeway Towing Inc., in Monterey Park, Calif., has 46 employees, down from nearly 70 before the pandemic. The company, which provides towing, repairs and accident clean up, would employ 100 or more people if finding workers wasn’t such a challenge, said co-owner Nadia Haddad.

It now takes up to three hours for one of the company’s 67 trucks to arrive at an accident scene or pick up a stranded motorist, up from a more typical 20 or 30 minutes when the company is fully staffed, Ms. Haddad said. Angry motorists also call more to complain, which has led to more turnover among the office staff.

“The average office staff person in my company would stay for 10 to 12 years,” said Ms. Haddad. “Since the pandemic, I’m lucky if I keep them for two years.”

The company has boosted hourly wages and productivity bonuses and now pays for employees to be certified as Class A drivers, allowing them to operate wreckers, cranes and other heavy-duty vehicles. But it can’t match larger companies when it comes to paid time off and other benefits, she said.

“The pay is good. The hours are flexible. What we do for a living is rewarding,” said Ms. Haddad. “It’s just that the competition is magnificent. It’s significantly more magnificent than me.”

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REAL ESTATE

Soaring Rents Make It a Very Good Time to Own an Apartment Building

The 10% rise in national asking rents in August is highest on record, helped by more young workers returning to cities

Apartment occupancy rates hit a record high of 97.1% in August.

PHOTO: SKYSITEIMAGES

Article by: Will Parker for The Wall Street Journal

Despite a yearlong national eviction ban and continuing pandemic, it has rarely been a better time to be a big apartment-building landlord.

National asking rents rose 10.3% in August, measured on an annual basis, according to Real Page, a rental-management software company, which analyzed more than 13 million professionally managed apartments. That marked the first double-digit increase in the more than 20 years this data has been collected, and in several hot cities the rent increases were much greater than the national figure.

“The rent growth that we’re seeing in places like Phoenix and Las Vegas and Tampa, it’s obviously unprecedented,” said Jay Parsons, deputy chief economist for Real Page. August rents rose more than 20% year over year in each of these cities. Monthly rents were up more than 20% in smaller markets like Boise, Idaho, and Naples, Fla., too.

Fast-rising rents reflect several factors, analysts say. Younger adults who lived with family last year are now renting their own apartments, in many cases as they prepare to head back to the office. Middle-income workers who have been priced out of the scorching housing market have little choice but to pay higher rents. Limited growth in new apartment supply, meanwhile, can’t keep up with demand.

Apartment occupancy rates, a key metric for helping landlords determine how much they can increase rent, hit a record high of 97.1% in August. Household incomes for new renters at professionally managed properties also reached a new high of more than $70,000 a year, according to Real Page. An end to the federal eviction ban last month is likely to further strengthen landlords’ hands.

Multifamily-property values have increased 13% since before the pandemic, according to real-estate securities advisory Green Street. More money is being invested now in apartment buildings than in any other type of commercial real estate, according to data company Real Capital Analytics.

Few analysts predicted this scenario 18 months ago. When Covid-19 hit, the U.S. unemployment rate rose to nearly 15%. Surveys showed an increasing number of renters falling behind on their payments, and federal and local eviction bans often meant these tenants couldn’t be replaced. Uncertainty about rent collections sent chills through the debt markets, raising concerns about a liquidity crunch in multifamily real estate.

Now, most segments of the multifamily market look strong. Even as more renters migrate back to cities, suburban markets continue to sizzle as record-high home-sale prices keep more people in rental housing. Others are relocating and working from home.

“Multifamily is able to capitalize on both of those trends,” said Karlin Conklin, principal of Investors Management Group, which has buildings in the suburban areas of cities like Raleigh, N.C., and San Antonio.

Multifamily-property values have increased 13% since before the pandemic, according to real-estate securities advisory Green Street

The rent increases mean that tenants who enjoyed big discounts last year are in for a rude awakening. In Nashville, Tenn., 27-year-old business analyst Zachary Wendland rented a one-bedroom apartment in a luxury rental high-rise for $1,420 a month in October. In June, the building was sold to Camden Property Trust, a publicly traded landlord, in one of the priciest-ever multifamily sales in the city.

Mr. Wendland wasn’t given the option to renew his lease with the new owner, but a similar unit in the building is now on the market for $2,199. “I couldn’t imagine a year ago paying $2,000 to live here,” he said. Now, he is apartment hunting again.

Some individual investors have felt excluded from the rent rally. These landlords own about 41% of all rental properties nationwide, including the majority of single-family rentals, according to U.S. Census Bureau surveys. Unemployment for lower-income workers caused many renters to miss payments, and eviction bans usually meant landlords had limited recourse. These building owners don’t have the scale to absorb unpaid-rent problems as easily as a corporate owner with thousands of apartment units.

A recent survey of about 1,000 small rental owners from the National Rental Home Council, a landlord trade group for single-family rental-home owners, found that one-third had sold or planned to sell a rental home because of the effects of the eviction moratorium on their business, with most selling to owner-occupiers.

Still, if unpaid rent is pushing more rental-home landlords to exit the business, it couldn’t come at a better time. National home-sale prices are up 18% over the past year.

Mortgage lending to multifamily owners has returned to pre-pandemic levels. Many landlords have tapped ultralow interest rates to refinance their mortgages, increasing their cash on hand and lowering their mortgage payments, said Jamie Woodwell, vice president of research and economics at Mortgage Bankers Association, a real-estate-lending industry group. Much of the pandemic lending was driven by the government-backed mortgage programs, he said. But other lenders have since ramped up their multifamily business.

“You don’t have a single private source of capital that isn’t interested in lending on multifamily,” said Willy Walker, chairman and chief executive of commercial real-estate firm Walker & Dunlop Inc.

Where landlords have problems with their loans, the federal government has stepped in to help. The Department of Housing and Urban Development, and the government-backed mortgage giants Fannie Mae and Freddie Mac, crafted forbearance programs for covered building owners who saw drops in their rent collections. The Federal Reserve Bank also stepped in to purchase more than $10.5 billion in multifamily mortgage-backed securities since last spring, which helped encourage more lending.

The $46 billion in emergency rental assistance provided by Congress—and in most cases paid directly to landlords—is also slowly starting to help more building owners with unpaid rent. “That assistance has been extraordinary,” said Ms. Conklin. Her company has earned back 25% of its unpaid rent and expects more in the coming months, she said.

For most real-estate companies, going under because of unpaid rent is “unlikely,” Mr. Walker said. “There are not many operators who have such a high level of nonpayment that it is going to cause them to default on their loan,” he said.

This article appeared in the October 14, 2021, print edition of The Wall Street Journal as ‘Soaring Rents Make It a Very Good Time to Own an Apartment Building’ by Will Parker.