Workforce Housing Basics

In many parts of the country, affordable housing is an increasing concern. Wage growth has been slowing since 2008, as rent and housing prices continue to rise.

This means that more people continue to search for affordable housing, particularly those with median incomes. According to Coldwell Banker Richard Ellis's (CBRE) report, 2018 The Case For Workforce Housing" was released. It highlighted the potential for multifamily investors in this market with such high demand.

What Is Workforce Housing?

Many people lump affordable housing and workforce housing into one conversation. Although workforce housing is more affordable than affordable housing, they are distinct.

The U.S. Department of Housing and Urban Development (HUD) creates an annual statistic based on a variety of factors for both metropolitan areas and nonmetropolitan counties to determine the area median household income (AMI). Experts in the industry place workforce housing units as targets households with roughly 60-120% AMI.

These classes of earners have traditionally been firefighters, teachers, and hospital and government workers. They are people who make the median income and want to live near their work.

These are people who make between $35,000 to $75,000 per annum. They account for roughly one-third of U.S.-based renters and are seeing a rising percentage of their income go towards rent, according to the CBRE report.

Multifamily investors see workforce housing as a way to get a foothold in a favorable marketplace. Here are some reasons.

A Rising Level Of Demand

There is a shortage of housing across the country that can meet the needs of renters with median incomes.

For the past eight years, housing costs have risen by about 6% annually. As a result, rent is increasing at a rate that is greater than income growth on average. Even though rent growth is moderated in many cases, it's still difficult for those with a moderate income.

CBRE's report highlights Class B and C properties as being ideal for multifamily development. However, these properties are typically older and in dire need of repair. They also tend to be far from prime locations.

Multifamily housing units for Class B and Class C have performed better than their Class A counterparts in terms of market performance. As a result, the vacancy rates for Class B and C properties are lower, and the rent growth is higher.

It is clear that there is a strong demand for affordable housing and that it will not be diminished anytime soon.

Potential for Urban and Suburban Growth

Multifamily investors will often look to suburbs for their workforce housing inventory. Rice highlights garden properties that were built in the 1980s or 1990s as being the most supply-friendly types of workforce housing units, particularly in Southern markets.

CBRE's report highlighting the positive appreciation and returns of these properties over others supports this assertion.

Investors who are open to exploring new ideas can find hidden gems in urban centers.

Know The Risks

Although the market fundamentals of workforce housing appear healthy at the moment, there is always a risk.

Rent-burdened tenants will resist substantial rent increases because affordable housing is so in high demand. Investors should also realize that returns will likely be moderate. These units can be priced out of workforce housing by upgrading their value-ads. Multifamily housing is a great option for investors.