By Amnon Cohen, Managing Director, Lever Capital Partners
Over the last 5 years Multifamily Investors have been gravitating towards Workforce Housing. According to HousingWire, 51% of all multifamily investments over that time period are considered to be Workforce Housing. The increase has been steady across most of the large MSA’s, but particularly in Orlando and Las Vegas.
What is Workforce Housing?
“Workforce housing tenants include those who fall outside of the 60 percent area median income (AMI) requirements of the Low-Income Housing Tax Credits (LIHTC) program. These individuals are unable to economically qualify for LIHTC properties, but are also unable to financially afford new class A communities being built in desirable urban centers. As a result, they are forced into older communities that are further away from economic centers and lack amenities, and often end up either paying a high share of their income to be in centrally-located communities or living further away from their jobs” (NREI Online).
About 13.5 million households live in workforce housing, according to a new CBRE report cited by Housingwire. Most residents are “renters by necessity” due to reasons like paying off debt or not having the financial means to own a home. Still, affordability remains a risk — as rents rise faster than wages due to increased rental demand. The report noted that 35 percent of workforce renter households were “rent burdened,” meaning rent payments were 30 percent or more of their incomes. That’s up from 21 percent of households in 2006.
“Urban Pacific Group has a workforce housing construction model that it claims is able to generate 25% internal rates of return over an 18-month to 24-month period. “We started looking for a new workforce-housing model, and we identified a marketplace for rental townhomes with multiple bedrooms to serve multi-generational working families,” Scott Choppin, founder of Urban Pacific, told real estate publication GlobeSt. “We found that if we build five-bedroom units, we could house a larger family and given the way that the rent structures work, we could be around $3,000 per month for a five-bedroom unit. When we finished the underwriting, we found that this model would produce market-superior yields to equity.” The new project model is referred to as an Urban Town Home, and Urban Pacific plans to create properties with 10 to 30 five-bedroom units” (HousingWire)
The challenge in buying or developing workforce housing is capital. Unlike true lower income housing markets that have a slew of LIHTC financing solutions both in terms of senior & junior debt as well as equity partners, workforce housing doesn’t have any government subsidized programs and the equity market might shy away from a product that isn’t really sexy. However, as the Class A space becomes more competitive and developers pulling no punches in term of amenities and innovation, conventional thinking is that margins and returns will shrink to a point where it makes more more sense to look at products like workforce housing, which are cheaper, safer and provide higher returns than the top end product.
Similarly, in the past JV equity shops shied away from older vintage properties as newer properties and new developments were surpassing IRR threshold requirements. As land prices and cost of construction increase and cap rates for newer products decrease, institutional equity players have found it harder to pencil out Class A apartments. As a result, the equity market has begun to rethink workforce housing as an interesting alternative in the multifamily space.
At Lever Capital Partners we have noticed the equity markets warming up to this segment over the last few years and have had recent success in financing older apartments being rehabbed into workforce housing in various parts of the country.