Articles

How Multifamily Owner/Operators Can Invest In The U.S. Workforce

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Rental housing markets across the United States have experienced unprecedented demand over the last decade, outpacing supply, according to the Joint Center for Housing Studies of Harvard University (JCHS). Today, there are more than 43 million renter households across the country — representing about 37% of all households — a figure that has grown at a rate of nearly one million per year since 2010.

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With most of today’s newly built luxury apartment stock targeting upper-income households, the supply of moderate- and lower-cost units is shrinking, leaving almost half of today’s middle-income renter households cost burdened. As a result, demand for high-quality workforce housing at an affordable price point is growing.

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The so-called rentership society is expected to add more than 7 million people through 2025. "Renters by necessity," folks earning less than $75,000, make up 80% of the renter demand and the workforce housing segment.

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According to the JCHS report, in 2013 11.2 million households below the area median income (AMI) competed for 7.3 million units. The new supply that has come online in the years since has been predominantly geared toward the luxury market. There has also been a 27% median rent increase (2011-2016) across the U.S., despite wages rising at a slower pace.

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While developers prefer to focus on the luxury housing market, local policymakers are more likely to focus on severely cost-burdened Americans who are paying more than 50% of their incomes for housing. Across the country, municipalities are enforcing an inclusionary zoning program, which requires that a certain number of units in new construction be set aside for families with low to moderate incomes; the units have set prices that are affordable for such families.

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As policymakers and municipalities focus on affordable housing and developers focus on luxury housing, the needs of the middle class continue to grow. While this segment of the market has historically been overlooked, that will start to change because of the opportunity this sector provides.

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A Niche Opportunity For Savvy Multifamily Investors

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The affordability challenge presents a unique opportunity for savvy real estate investors looking to strengthen and diversify their portfolios. Restoring and enhancing existing — and often more affordable — rental housing is a compelling strategy that also addresses workforce housing needs. While this market has not historically or typically been a focus for institutional investors, many are beginning to take note of the market.

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Investments in core apartment buildings were down 10% in 2017 from the previous year, with the sharpest decline being in major metropolitan areas. Concurrently, investors realized the opportunity in the higher risk, value-add properties, particularly in secondary markets. Investments in this segment of the market saw a 13% increase. As well, foreign investors are now starting to favor value-add properties that yield higher returns. Singapore’s GIC acquired $4.3 billion in apartment properties from Q1 2017 to Q1 2018 — much of which was Class B and C housing — while several Canadian firms followed.

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The workforce and multifamily housing market meets an important need for our society and the returns it could yield for investors. Workforce and multifamily housing continues to outperform other property sectors, and generally has the lowest vacancy and turnover rates of all major property types. It also has a history of steady rent growth and high occupancy, and it presents low volatility. These characteristics help protect against the cycle — they yield high ROI in up markets and are comparatively safe even in down markets.

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As the balance continues to shift toward renting versus owning among middle-income earners, there will be a greater demand for quality workforce housing. This demand can only be met if investors and developers focus more on this sector and if the government incentivizes the development or rehabilitation of this property type. In my view, it is a win-win for all parties involved — investors earn attractive risk-adjusted returns, developers have the ability to add a socially responsible component to their projects and the workforce benefits with more quality housing options.