The current demand for multifamily rental units is outpacing supply in many areas across the country; however, there’s one segment of the rental market that sees a very high demand and a critically low supply almost everywhere – that’s workforce housing. Workforce housing has lost out in recent years, as most of the new construction inventory is luxury apartments catering to the rental demographic renting by choice and/or renting as a secondary home. Workforce housing, on the other hand, tends to garner necessity renters: be they military members displaced by moves and living off base, or those renting from economic necessity. Today in the BAMblog, we look at the current state of workforce multifamily housing and what might improve the supply in this market.
What Is Workforce Housing?
Workforce housing occupies the middle ground between luxury, high-end rentals and truly subsidized housing. These apartments are often older, perhaps by 15-20 years, and cater to working families who rent by necessity. Workforce housing is typically classified as B and C class properties, depending on condition and location.
Why is There Such a Shortage?
The good news for the multifamily industry is that rental demand remains high across the board; however, the bad news for certain segments is that it has negatively affected other segments of the market. The renters-by-choice demographic have increased construction of luxury properties and most of the inventory being delivered in many major markets is Class A properties. The reason is simple: for developers, the cost on their end is high whether they build a luxury or workforce property – and in order to recoup expenses and make any sort of profit, it makes more sense to develop the higher-end property.
Why is the Demand High for Workforce Housing?
Rental demand has been consistently high, regardless of asset class. National Real Estate Investor (NREI) online cited a Harvard University study in which they tallied 43 million American homes as renters; of those 43 million homes, almost half are spending 30% of their budget on rent, while 28% are spending a full half of their budget on rent! Those numbers definitely point to the need for obtainable workforce housing.
What Could Improve Workforce Housing Availability?
According to an article published on GlobeSt.com, GSE’s are targeting the typical workforce housing properties that lie between the luxury Class A and subsidized housing class. They note that in one year, both Freddie Mac and Fannie Mae together closed over $150 billion in multifamily mortgage financing – 80% of which would serve households fitting the workforce description. Both large lenders have programs making financing more appealing, with attractive interest rates and loans for qualifying workforce properties. (We even recently wrote about Freddie Mac’s new Mezzanine Loan program for this asset class.) Although this is a good start, the substantial gap between available units and renters needing workforce housing will take time and effort to bridge. One other plus in workforce housing’s favor is its typical resilience in the face of economic instability, making it a good bet for investors. If more investors make the move to betting on safer workforce housing and eschewing the pricier luxury properties, these properties may make more sense for a multitude of reasons for investors and developers alike.
The BAM bottom line: workforce housing is a consistent rental need and finding the right property can make a great investment. With lenders like Freddie and Fannie rolling out new financing designed for these types of properties, you can land a solid deal while helping fill a real need for housing. The need for workforce housing won’t be going away anytime soon, although there may be some light at the end of the tunnel thanks to GSEs and smart investing.
