The Direct Labor Cost Impact
California’s minimum wage rises to \$16.90 per hour on January 1, 2026. While the 2.49% increase seems modest, the cumulative effect of years of wage growth is straining tenant operations—and landlords need to understand which tenants face the greatest pressure.
The direct impact is straightforward: higher labor costs for retailers with significant hourly workforces.
Fast food, casual dining, grocery, and service retail feel this most acutely. A restaurant with 20 hourly employees working 30 hours weekly sees annual labor costs increase by roughly \$15,000-\$20,000 from this single adjustment.
The Exempt Salary Threshold Jump
But indirect impacts may be larger.
The exempt salary threshold—minimum annual salary for overtime exemption—is calculated as twice minimum wage for full-time work.
At \$16.90 hourly, this threshold jumps to \$70,304 annually. Employees earning between the previous \$68,640 threshold and this level must either receive raises or be reclassified as hourly workers eligible for overtime.
This creates management cost pressure beyond hourly wages.
Assistant managers, shift supervisors, and department heads often fall in this salary range. Reclassifying them introduces overtime exposure; raising salaries maintains classification but increases fixed costs.
Sector-Specific Wage Premiums
Sector-specific implications are even more dramatic.
Healthcare workers at large systems must receive \$24-25 per hour by July 2026. Fast food maintains its \$20+ floor, subject to Fast Food Council adjustments.
These premiums create wage competition—workers migrate toward higher-paying industries, forcing all retailers to raise compensation.
Action Steps
Identify your most labor-intensive tenants—restaurants, service retailers, grocers.
Review tenant financials where available. For vulnerable tenants, consider proactive conversations about lease flexibility before distress emerges.
Let us help assess tenant wage pressure exposure across your portfolio.
Contact us: (213) 880-8107 | francisco.williams@williamscap.ai | williamscapitaladvisors.com
