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The Untapped Value of Workforce Housing

By Soren Godbersen, October 5, 2017

America’s cities and suburbs are in the midst of a gradually worsening workforce housing crisis. Urban and suburban populations continue to rise, while wages have essentially stagnated for moderate and middle-income households over the past two decades. With homeownership rates dropping to the lowest figures since the 1960s and many upper-middle-class professionals preferring to rent in urban cores and transit-rich suburbs, rents continue to rise in markets across the country.

Developers have largely responded to this demand by building class A units, but this has done little to meet the shortage of affordable rentals. Nationwide, only 65 affordable units exist for every 100 low-income renters.

An adequate supply of workforce housing not only helps lower-income renters, but also has a broader positive social impact. Moderate and middle-income workers encompass critical roles in our country and form the backbone of industries ranging from hospitality and retail to education and healthcare. When such workers are able to live close to work and/or public transit, local economies and labor forces are stronger, and traffic congestion is mitigated.

While many cities are attempting to tackle this issue through legislation and subsidies, private real estate markets can and should allocate more capital than they currently do to the development and improvement of workforce housing. Fortunately, aided by an emerging set of financial instruments and technology, there is now greater profit-based imperative for focusing on workforce housing.

The focus on class A property repositioning and development is unsurprising—the rent premiums that class A properties can achieve in strong, growing markets offer the potential for outsized returns for real estate developers and investors. Stagnating wages for worker class Americas make rapid increases in rents less likely for class B or C+ workforce housing properties.

However, the combination of strong demand, relative low cost and potential for long term appreciation provide a strong case that there is untapped value in workforce housing. These market factors, in combination with new financial channels and instruments that favor workforce housing, may help boost returns in the sub-asset class and spur greater development and improvement of the workforce housing stock across markets:

Below-market debt funds. In several densely-populated markets, these entities have emerged as partnerships between private, philanthropic, and public capital. These vehicles lend at more favorable interest rates to qualifying projects, helping them reduce loan servicing costs, fill gaps in the capital stack, and improve bottom-line NOI to provide compelling returns for investors.

One notable example is the Bay Area Transit-Oriented Housing Fund, a partnership of government, nonprofit, and private entities, including Morgan Stanley. Operating in San Francisco—arguably the least affordable rental market in the country—the fund offers a host of loan types to qualifying residential projects.

Funds, private equity vehicles and REITs. Many institutional investors have made affordable housing an investment focus in recent years. While some make use of low-income housing tax credits (LIHTCs) and other subsidies to reduce costs, others have sought to improve margins by better catering to the needs of their tenant base. On-site amenities are a good example: while class A value-add developers may seek luxury upgrades like pools or in-unit laundry, workforce housing operators may instead focus on providing on-site services for families and modest income workers such as after-school programs, shared transportation, and computer or financial literacy classes. These amenities fuel modest increases in rent and help attract and retain a stable tenant base, which in turn helps generate compelling returns for equity investors.

Real estate crowdfunding may also emerge as an alternate source of funding for affordable housing projects, and ultimately be a boon for communities and markets presently challenged by a lack of affordable options. Through real estate crowdfunding, individual investors can now participate as partial owners of workforce housing properties, a unique way to potentially earn a strong return, while also contributing to improving the stock of affordable housing locally or across the country. As impact investing and “triple bottom line” investments become more popular—and more accessible via personal finance apps and robo-advisors—crowdfunded investments in the workforce housing sub-asset class may join the ranks of “responsible investing” alternatives.

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