By John Salustri
Columbus, OH – “The outlook is very concerning. It’ll take years to balance supply and demand in this multi-housing space.”
The speaker is Trent D. Brooks, the recently named president of RED Mortgage Capital, LLC and head of the lender’s national production initiatives. The “space” he speaks of is known as “workforce housing”. “Simply put, demand for workforce and affordable housing by far outpaces supply,” he says. “It’s a real challenge we need to address.”
He points to a number of drivers behind the imbalance. First, “new multifamily construction has traditionally served class-A renters or truly subsidized affordable housing. On a continuum, there’s class A on one side and true subsidized affordable on the other. In the middle you’ve got everything else, which is primarily unsubsidized workforce housing.”
Value-add investments can also contribute to the dearth of workforce housing. A 25-year-old class B or C asset gets significantly upgraded, and the rents increase accordingly. “The new post-renovation rental price points are often out of reach for the workforce-housing renter,” he says. Partially as a result of deeper value-add plays and the demolition of older multihousing stock to make way for new construction, the “the naturally occurring affordable housing stock is declining. Some reports show tens of thousands of workforce housing units being lost annually from the overall multifamily inventory. ” The end result is a “diminishing inventory against growing demand.”
Defining Terms
Workforce housing does not have a uniform definition in the industry. Brooks refers to “big-A and small-a affordable housing with workforce and naturally occurring affordable housing being the latter. “It’s generally affordable housing without subsidies. RED typically views workforce as households earning less than 100% of area median income.”
The other defining term is the type of multifamily stock. Workforce housing typically points to “older, garden-style class B and C multihousing stock,” he says, “typically 20-plus years since construction. You know it when you see it.”
Against this diminishing stock, there is another metric that Brooks says “is important, and very concerning considering more than 40 million Americans spend over 30% of their income on rent, and over 12 million spend more than 50% of their income on rent. This is simply not sustainable.”
Why aren’t contrarian investors flocking to this underserved niche? Big A affordable housing comes with restrictions that can be appealing to certain investors. Often the mix of market-rate and affordable units is 80/20, with 20% affordable. “Workforce has no specific rental restrictions,” he says, “and no government subsidies. Often this segment just doesn’t pencil out for developer and investors.”
Good News Coming
Not all the news in workforce housing is bad, of course. Brooks points to studies showing “more capital coming into the space, capital that’s looking for more durable returns.” But it’s good news with an asterisk. Despite this influx, “The amount of capital we need in the naturally occurring affordable housing space is much greater than the pace of capital coming in.”
There is other good news says Brooks. Namely, the GSEs are very focused “on that middle section between class A and subsidized affordable. Last year, Fannie and Freddie each put out over $70 billion in multifamily debt, and together closed nearly $150 billion in multifamily mortgage financing. Of that $150 billion, approximately 80% serves multifamily rental households earning median income. That consistent liquidity will help with the financial modeling needed for the preservation of this housing and will hopefully attract private capital to help develop new workforce housing.”
Further, some lenders “like RED offer attractive bridge loan programs to owners who want to do renovation work to extend the economic life of older assets,” he notes. “Between the agencies and lenders like us, solutions to the diminishing workforce housing stock are being realized.”
And there is another positive avenue which comes in the form of ‘green financing”. “Often, investors acquiring an older asset as well as owners recapitalizing their investment are already planning to make property improvements that make them eligible for agency sponsored green finance programs,” he says. “Our job is to assist those owners regarding which improvements they can make to best qualify for the economic benefits of the green loan programs.”
Nevertheless, the workforce outlook is still very concerning, and Brooks sees no real tipping point coming in the foreseeable future. “The fundamentals indicate there’s still much work to be done, and long-term solutions to the affordable housing crisis are not likely to be accomplished in the near term,” he says.
But he remains optimistic, in large part due to the movement of capital he mentioned before. So he is quick to add: “It will take time and persistence but there are good things happening–on both the public and private side.”
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