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Two purported enemies took the stage to open the ISSA Altus Summit at ISSA headquarters in Rosemont, Illinois, on Tuesday to share differing viewpoints on challenges facing the cleaning and maintenance of commercial and industrial buildings. Mike Fitts, 4M Building Solutions’ chief commercial officer, shared how the COVID-19 pandemic reshaped the cleaning industry and led to three years of recovery, followed by today’s issues of increasing prices due to tariffs along with other geopolitical effects. Commercial real estate broker, Dan Smolensky, founder and principal of Chicagoland-based TMG Real Estate Advisors, helps companies find space in the industrial and office sector. Smolensky offered his perspective on the industry and what he hears from the tenants and buyers he represents. He said COVID-19 impacted the real estate industry in two extreme ways: a decrease in office space occupation and a boom in industrial space with e-commerce’s growth. Fitts said that the janitorial market has grown to an US$112 billion industry at a 2.7% compound annual growth rate year over year. With this growth, more competitors entered the market at a rate of 4.2%. Currently, 1.23 million janitorial businesses operate in the U.S. Labor makes up 80% to 85% of janitorial businesses’ cost today, and wages are up 4.3% year over year. The average cost for a full-time cleaner is over $35,000. Turnover is the silent tax that plagues the industry, Fitts said, and janitorial employment experiences a 200% to 400% a year turnover. The janitorial industry’s turnover rate is the highest of any blue-collar industry, and new hires also cost 15 times the average blue-collar worker to place. Fitts added it costs roughly $18,000 to replace a janitorial employee. This turnover rate translates to a $1billion loss due to nonproductivity. Unfortunately, the result is a net margin that is negative to 1% to 2%. Smolensky asked the question of how this translates to client services. “Everybody wants the best that they can afford,” Fitts explained. “And unfortunately, you translate that into price way too often.” Building service contractors (BSCs) and building managers are dealing with these tight margins in different ways. Some BSCs will be willing to take a low margin with large volume. Other BSCs are going to be niche. Office space has a different pricing nuance than industrial space, Smolensky added. As a real estate advisor, cleaning doesn’t come up when considering spaces, but Smolensky makes tenants aware of the cleaning requirements in the exit agreement. Smolensky shared an anecdote about an industrial building tenant who was vacating a building but didn’t prioritize cleaning. Floors were not maintained over the course of a lease and needed to be replaced. The building’s restroom had never been cleaned, leading to another $25,000 gut to replace. “Had they had the right custodial cleaning situation, it probably would have been zero,” he explained. “We both learned a lesson there. We talk about cleaning more with our clients. It’s important to take care of your space because ultimately you are going to pay for it.” Regarding janitorial pricing, the producer price index (PPI) is up 9.7% year over year for nonresidential cleaning. Fitts said this is the fastest growth in years and driven by minimum wage increases. The average wage increased 8.7% year over year. Benefits for employees are up 6.7% this year. On labor trends, most industry employees are immigrants that work two jobs. This year in certain areas of the country employees’ fear due to immigrant deportation policies impacted service in acute cases. Additionally, the janitorial market is experiencing a labor shortage, and wage competition discourages company loyalty. Additionally, 72% of facility managers said they are cutting cleaning costs. Supply and equipment costs are up anywhere from 3% to 26%, Fitts added. Commercial and industrial real estate spaces also are being impacted by higher prices. For example, industrial vacancy in Chicago always ran about 7%. Chicago has 1.4 billion square feet of industrial space. During COVID-19, industrial vacancy dropped to below 3% in Chicago. In turn, rent on industrial space in Chicago went up on average 40% to 70%, while some Chicago suburbs are seeing over 100% increases. “They have some costs as well that are going on, and they are looking at everything,” Smolensky explained. He added that industrial space pricing is up nationwide along with Canada and Mexico. With office space, more businesses are still considering if they need the space, especially as more long-term leases come up for renewal after the pandemic. Ultimately, the conversation centered around partnership, understanding your enemy’s pain points, and increasing productivity. “It just comes down to how you can do better with less,” Fitts said. “…What can we do as a business to be better and faster without a sacrifice to quality, which can influence our costs. I think that’s the purpose of Altus.”

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