What Investors Need to Know About Workforce Housing

Affordable housing is a growing concern across much of the country. As rent and housing prices have continued to rise over the last decade, wage growth has struggled to recover from the economic downturn of 2008.

That means more people are continuing to look for housing that is attainable, especially those in the median income range. In a 2018 report dubbed "The Case for Workforce Housing," analysts at commercial real estate services company Coldwell Banker Richard Ellis (CBRE) highlighted the potential opportunities for multifamily investors in a market that has such heavy demand.

Affordable housing and workforce housing often get lumped into the same conversation. While there's no doubt workforce housing is also more affordable, these are two distinct categories.

The U.S. Department of Housing and Urban Development (HUD) creates a yearly statistic based on several factors for metropolitan areas as well as nonmetropolitan counties to determine the area median income (AMI). Many industry experts place workforce housing as units that target households making roughly 60-120% AMI.

Traditionally, these classes of earners are teachers, firefighters, and hospital and governmental workers—people who make median incomes and want to live close to where they work.

Put another way, these are people who tend to make between approximately $35,000 and $75,000 per year. According to the CBRE report, they comprise roughly one-third of all U.S.-based renters, and have been seeing an increasingly higher percentage of their income go toward rent.

For many multifamily investors, workforce housing presents an opportunity to grab a foothold in a favorable market environment. Here are a few reasons why.

Across the country, there is a shortage of housing that fits the needs of median-income renters.

Jeanette Rice, CBRE's Americas head of multifamily research, points to recent economic activity as contributing factors to increasing demand.

“Housing costs are rising about 6% per year for the last eight years or so, and rent is rising at levels greater than income growth, on average. While many rents are moderated to rent growth, it's still tough for folks on a more moderate-income," she says.

The typez of properties that the CBRE report highlights for multifamily growth are Class B and C units. These properties are often older, in need of some repair, and not in the heart of prime locations.

When it comes to market performance, Class B and C multifamily workforce housing units have been performing better than their high-end, Class A counterparts. In terms of vacancy rates and rent growth, Class B and C properties see lower vacancy rates and higher year-over-year rent growth.

Rice says, “The demand for housing at a reasonable price is very strong, and I don't see that weakening anytime soon."

Many multifamily investors will look to the suburbs for workforce housing inventories. Rice highlights garden properties built primarily in the 1980s and 1990s as the types of workforce housing units that typically have more supply, especially in Southern markets.

Market data backs that up, as CBRE's report highlights favorable appreciation and returns for these properties versus others.

However, there are hidden gems in urban cores for investors who are willing to get creative.

Susan Tjarksen, managing director at Cushman & Wakefield, cites Chicago-based Cedar Street Companies as a brand that used innovative thinking to find ways to create workforce housing. Over the last decade, their investment strategy has been to purchase vacant and deteriorating buildings and refit them with microapartments at affordable rents.

Tjarksen notes that Cedar Street Companies Flats brand “provides microunits that are affordable by comparison to a traditional apartment unit, and their Livly app allows tenants to pay in increments should they need to."

While the current market fundamentals for workforce housing look healthy, there's always the potential for risk on the horizon.

As housing that is affordable is in such high demand, substantial rent increases are likely to get pushback from rent-burdened tenants. Additionally, investors should realize that returns are likely moderate. And, upgrading value-ads can price these units out of workforce housing. For many investors, however, multifamily workforce housing presents plenty of potential.