As the real estate cycle lengthens and property prices continue their decade-long rise, many commercial real estate professionals across the country are finding it increasingly challenging to identify value-add acquisition opportunities. In my view, one of the few exceptions to this rule is workforce housing.
The dearth of accessibly priced housing in major metros like San Francisco and New York City has been widely discussed, and in my mind, there is no question that our society has to do a better job of enhancing and expanding the stock of housing that is affordable to middle-income-earners. Fortunately, the current supply-demand dynamics have made workforce housing properties in strategic growth markets near city centers some of the most compelling investment prospects available today.
Defining Workforce Housing
By way of definition, workforce housing is housing that meets the needs of families and individuals generally earning between 60% and 120% of the area median income (AMI). According to a Pew Research Center study analyzing U.S. Census Bureau statistics, the total number of U.S. households increased between 2006 and 2016 by 7.6 million. And, while the number of homeowners remained flat, the number of renters increased from 31.2% to 36.6% of the total, representing one of the highest rates of rentership the country has experienced in 50 years.
Essentially, workforce housing often appeals to those residents who earn too much income to qualify for subsidized affordable housing accommodations, but not nearly enough to satisfy the necessary income thresholds to purchase a home or rent the luxury apartments that have proliferated in recent years — a segment of the population that is only growing.
Millennial Demand
With 65% of millennials renting today, as opposed to 37% of Americans overall, markets with significant millennial in-migration have particularly strong demand. Millennials are less inclined to own homes than previous generations. According to a 2018 Urban Institute report, the millennial homeownership rate is roughly 8% lower than previous generations due to generational preferences that dovetail with renting, including delaying marriage and having children at later ages.
Geographic preference is also part of the story. According to the report, “Millennials prefer living in high-cost cities, where housing supply is inelastic. Within a city, millennials prefer living in counties with a more urban environment, where the house prices have increased more than in the surrounding areas. The shift in geographic preference is mostly observed among highly educated millennials.”
With young professionals favoring neighborhoods with expensive housing, buying a home is not often an option, which contributes to the increase in rental demand in these neighborhoods.
Despite the flurry of development that has taken place this cycle, the construction of workforce housing has been fairly limited, and the stagnant supply (amid increased demand) has strengthened occupancy and bolstered its investment appeal.
Market ‘Intangibles’
To fully capitalize on renter demand, investors looking to acquire workforce housing properties have to identify markets poised for growth.
Finding the right acquisition requires in-depth research and a keen eye for a market’s “intangible” qualities, including proximity to job centers, highly rated school districts, convenient access to mass transit and strong retail, entertainment and dining options.
Adding Value
In these markets with strong demand and muted supply, investors can still find compelling acquisition opportunities that pose limited risk and also provide an opportunity to add value through physical improvements and proactive management practices.
As a third-generation multifamily owner-operator, I grew up immersed in the multifamily real estate industry. My father specialized in value-add renovations, while my grandfather focused on developing rental properties with a long-term hold strategy. The most strategic investors blend those two strategies — the long-term controlled-growth ownership with the innovative, opportunistic and creative approach.
As part of a long-term controlled-growth strategy, I encourage investors to look primarily in burgeoning submarkets with strong track records of job growth and industry diversification. Focus efforts on identifying opportunities to acquire and modernize quality, income-producing workforce housing assets, rather than ground-up development, which inherently comes with more risk. Consider even acquiring assets that have suffered from some level of neglect by previous ownership, and implement improvements and amenities to better serve residents, such as providing internet cafes, playgrounds, upgraded business and fitness centers, yoga rooms and more.
In doing so, investors will be able to improve the existing housing stock of workforce housing while generating strong risk-adjusted returns.