The supply mismatch between affordable lower-income housing and luxury market-rate properties is creating opportunities for investors to plug the gap, especially with raised interest rates, scarce new inventory and elevated residential prices.
US census data suggests that the number of cost-burdened households in the country, paying more than 30 percent of their household income on rent, has increased by more than a million over the past five years. An estimated 640,000 affordable rental units could also revert to market-rate status by 2030 as federal rent caps reach the end of mandates, to say nothing of potential losses related to the expiration of state and local restrictions.
“Simply put, there is a structural undersupply of housing, and this is exacerbating the US housing affordability crisis,” says Kevin Kaberna, head of US investment management at South Carolina-based Greystar. “We believe a robust, unmet demand persists for quality housing at attainable rents for the large and growing population of essential workforce residents.”
Eddie Lorin, chief executive and co-founder of Alliant Strategic Development, a multifamily real estate investor, echoes the point, adding that historically there has been far too much focus on the luxury end of the housing spectrum. “We estimate that approximately 85 percent of all new rental housing being developed in the US is luxury rentals [today], serving only 15 percent of the rental cohort.”
Investors have also been keenly aware of the structural mismatch in the market. Last year, Salt Lake City-based Bridge Investment Group successfully raised $1.74 billion for the manager’s second dedicated workforce strategy, nearly three times the capital of the first and more than double the previous largest ever workforce fund. Almost 90 percent of the fund’s LPs either maintained or increased their commitments from the first fund.
That was followed this March by Hillpointe Capital’s Workforce Housing Partnership IV, which closed at $510 million.
“We expect LP demand to continue to grow,” says Rachel Diller, senior managing director and co-CIO for workforce and affordable housing at Bridge. “We have been investing in workforce housing for many years and are optimistic that even more capital will come into the [asset class]. It is the largest segment of the US renter base, with 62 percent earning less than 80 percent of [area median income], and we believe supply demand dynamics [will] create strong appetite for workforce housing.”
Against the volatile economic backdrop, the asset class is becoming particularly attractive. Historically, luxury housing experienced more risk during time of economic hardship as residents downsized when funds were tight. Likewise, affordable housing typically comes with its own set of challenges – cashflow, property upkeep and maintenance, security and regulatory hurdles, among several other factors.
Workforce housing, by contrast, provides recession resilient characteristics as financial distress increases demand during an economic downturn. The affordable pricing and embedded value compared with new construction is particularly attractive to investors, argues Joseph Lubeck, chief executive at Florida-based multifamily specialist American Landmark, as “workforce housing assets with good value creation opportunities tend to have a discount to replacement cost.”
Lorin adds that most residential funds are also overweighted with luxury product and will soon likely look to spread the risk profile. “To rebalance and diversify multifamily fund portfolios, significantly more capital will be earmarked for workforce and attainable housing over the coming decade.”
Basking in the sunshine
Lack of workforce housing is clearly a nationwide problem, but certain domestic markets already stand out from the crowd. One of the outcomes of the pandemic has been an accelerated population shift toward the middle of the country, particularly among working-
class renters. Increasingly, Americans are leaving behind coastal cities and heading for states that provide a high level of opportunity, low cost of living and low taxes, such as Texas, Tennessee, Florida and Arizona.
“The Sunbelt cities are among the most popular destinations for people relocating,” says Lubeck. “Even though prices have increased, it is still considerably more affordable relative to many of the gateway markets. Austin and Phoenix are the markets most likely to be overheated – these [Sunbelt cities] still have strong growth and overall robust dynamics.”
Markets like Houston and Tampa have also experienced a big population surge accompanied by double-digit rental growth in recent years, explains Gerardo Mahuad, co-founder and managing principal at real estate investment manager Eagle Property Capital. However, the lack of available workforce housing has done little to solve the challenge of finding a home.
“People in the moderate-income bracket – teachers, healthcare workers and service workers – play a critical role in our economy, so our workforce communities generally lease up quickly,” he adds. “Our LP investors have a significant appetite for this kind of product, which has historically been resilient through different cycles.”
Further north, Colorado-based private equity group DB Capital says that it consistently gets over 600 leads a week for workforce housing. “By comparison, similar size assets that cater to moderate- to high-income workers might have a strong week with 50,” adds Brennen Degner, co-founder and CEO at the firm. “Investors recognize the potential for long-term growth and stability in workforce assets as a result of demand significantly outpacing supply.”
One unfortunate aspect of investing in workforce housing is that there can often be a fair amount of delinquency and resulting evictions. Against this backdrop, managers might favor landlord-friendly states such as Texas and Utah.
Scalability can also slow progress. Typically, workforce housing has seen a lot of niche strategies, both private and public projects, that were tailored by subsidies. Projects are undertaken differently in different cities, and traditionally managers have worked in
hyper-specific markets.
“If you look across the US, to really grow and support all the interest from investors, and to make a huge impact on the space, we need to have more scalable platforms,” stresses Diller. “We need more managers that can find a way like we have to operate at scale.”
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