Effective May 1, 2021, the Virginia legislature mandated an increase in the Commonwealth’s hourly minimum wage to $9.50 … to be followed by increases to $11.00 on January 1, 2022, and to $12.00 on January 1, 2023. Additional increases to $13.50 on January 1, 2025, and $15.00 on January 1, 2026, will be contingent on the General Assembly’s enactment by July 1, 2024.
We’re Already There!
That said, I submit that the hourly minimum wage in Central Virginia already approximates or exceeds $15 based on federal fiscal responses to the financial scourge triggered by the pandemic (so-called “enhanced unemployment”) … along with post-pandemic compensation and benefits demands by workers incentivized to return to the workforce. As employment figures rise, wages will as well … and represent a significant driver of wage inflation.
That means the potential for 3 consequences:
- Employers will need to pay a premium over current wages to retain and attract quality talent as the post-Covid economy builds steam.
- Post-pandemic workers will have a magnified mind-set in their compensation demands.
- In the wake of C-19, pent-up demand for pandemic-deprived products and services will propel more consumer spending that will drive prices in an upward trajectory … including rents.
Immediate - Short-term Prospect for Profit
So, what does that mean for residential rental landlords and investors? In a nutshell, a near-term opportunity to increase rents, make needed property improvements and appeal to tenants who can afford to upgrade their housing.
Why the emphasis on near-term? Simply put, it’s a basic consequence of supply and demand that prices, including housing prices, will eventually respond to wage increases. The question becomes how quickly various categories of expenses accelerate and at what rate.
Wage inflation occurs when employers, to maintain profits, must increase prices for the goods and services they provide to compensate for increased wages. Here’s the key … price increases reflect a circular effect on wage increases. As goods and services in the overall market increase, higher wages will be needed to compensate for the increased prices of consumer goods.
My contention is that landlords … large and small … are positioned to be the leaders in increasing pricing (rents) in advance of the likely upsurge in expenses for such things as groceries, gas and child-care. The combination of rising wages and limited rental housing construction during the pandemic are the underpinnings for this opportunity.
Additionally, current tenants who enjoy a bump in wages are not inclined to endure the aggravation and expense of moving when presented with a rent increase. Likewise, prospective renters seeking upward mobility in their residential accommodations will accept the added cost for enhanced quality of life.
Admittedly, landlords with properties in the affordable-housing sector of the market are likely to be the initial beneficiaries of wage inflation by increasing rents to track with low-income tenants enjoying a higher percentage boost in income. Note: Seeking affordable housing additions to your residential rental portfolio is worthy of consideration.
An Ambidextrous Look at The Future
What will the effect of an increase in the minimum wage have on the next higher-paid tier of workers?
On the one hand … it may have a positive impact on the median income sector of the renter pool as well.
We may see heightened increased wage pressure for this group.
On the other hand … companies may use more robots and automated processes to replace employees … especially those in the service sector. That may cause unemployment to increase among the lowest paid workers with a corresponding freeze on wages for the median income sector.
Takeaways
Given an objective to attract affordable-housing tenants, now is the time to consider the current “perfect storm” to capture the benefits of historically low long-term mortgage interest rates coupled with wage hikes and anticipated inflation rates. Be sure to read our June article for more detail on the power of leverage in light of these … perhaps once in a lifetime … concurrent economic phenomena.