Workforce Housing Positioned to Outperform Market

Strong market fundamentals are attracting a wide variety of investors to workforce housing, creating good returns and helping preserve affordable accommodation in lower-income communities, reported CBRE, Los Angeles.

Workforce housing–rental communities affordable for low- and median-income workers–has outperformed the overall multifamily market for several years, with relatively low vacancy rates and above-average rent growth, CBRE said. And “strong and sustained” demand for workforce housing apartments should continue in 2019 due to slow wage growth over the past decade, an extreme lack of new supply and limited alternative options.

“The balance of the market forces points to continued strength in workforce housing, justifying the strong investment appeal,” said CBRE President of Institutional Properties Brian McAuliffe. “Investment in this segment also benefits the housing market by preserving much-needed rental accommodations for lower income renters.”

McAuliffe noted value-add investment in particular helps preserve workforce housing inventory directly by improving the physical quality of the asset through renovation.

Reis, New York, reported the vacancy rate for affordable housing has remained in the 1.9 percent to 2.2 percent range since early 2016. “And Reis forecasts this to remain at or around this very tight level over the next five years” said Reis Economist Mary Le. “Demand for affordable housing remains strong.”

But Le said construction figures are declining despite the “crying need” for more affordable housing in many major metropolitan markets. Affordable housing inventories grew just 0.5 percent in the third quarter compared to 0.7 percent a year ago, yielding 5,500 new units delivered, down from the quarterly average of nearly 8,100 units over the past year. “This represented the lowest figure since the first quarter of 2016,” she said. 

Reis had anticipated a slowdown in new apartment deliveries funded by Low-Income Housing Tax Credits due to last year’s tax cuts, which dulled the attractiveness of tax credits on the financing side. The data firm estimated inventory growth for LIHTC apartment properties could fall by about 40 percent over the next five years unless policymakers find a way to “reinvent” the incentive structure to make what was lost through tax credits attractive again. “It is perhaps too early to tell at this point if the decline in LIHTC deliveries for the third quarter is an early manifestation of this forecasted decline, but anecdotal evidence from slowing LIHTC deal flow in capital markets suggest that the tax cuts are already making an impact on the sector,” Reis said. “Given how the LIHTC framework provided an incentive compatible way of financing affordable housing, sidestepping the problems associated with rent control, it is imperative that policymakers find an alternative to the current situation.”

The market performance of workforce housing has attracted investment approaching $375 billion over the past five years–more than half of the total for all multifamily assets, CBRE noted. Capital is increasingly coming from new sources including institutional and cross-border investors.

Over the past decade, only small amounts of new workforce housing have been built, while many older apartment communities have been demolished to accommodate new higher-end properties, CBRE said. The multifamily industry removes more than 100,000 units per year due to obsolescence, and these are predominantly workforce and affordable housing units rather than Class A assets. 

The markets with the highest workforce housing rent growth are predominantly higher growth metros, CBRE reported. Orlando, Fla. and Las Vegas lead the country with 7 percent rent increases for the 12 months ending in June. Another nine metros (Jacksonville, Fla., Columbus, Ohio, Tampa, Fla., Phoenix, Houston, Inland Empire, Calif., Atlanta and San Diego saw growth rates exceeding 4 percent.

“The marketplace is not without risks,” CBRE said. “Workforce housing affordability has begun to create some resistance to rent increases and may limit them further in the future.” The report noted 35 percent of workforce renter households were considered rent burdened last year, meaning their rent payments represented 30 percent or more of their incomes compared to 21 percent in 2006. “Proposed rent control policies, if enacted, could also limit rent growth, while the wide array of public and private programs focused on trying to improve housing affordability may improve the supply/demand situation for renters at the expense of owners,” the report said.