Workforce housing—rental communities that are affordable for low- to median-income workers—has outperformed the overall multifamily market for the past four years, with relatively low vacancy rates and above-average rent growth. Slow wage growth over the past decade contributing to a high number of potential renters, an extreme lack of new supply, and limited alternative options means strong and sustained demand for workforce housing apartments is expected to continue in 2019.

The healthy market performance of workforce housing has attracted major investment of nearly $375 billion over the past five years—51.3% of the total for all multifamily assets. This capital is increasingly coming from unlikely sources, including institutional and cross-border investors.

“The balance of the market forces points to continued strength in workforce housing, justifying the strong investment appeal. Investment in this segment also benefits the housing market by preserving much-needed rental accommodations for lower income renters. Value-add investment, in particular, helps to preserve workforce housing inventory directly by improving the physical quality of the asset through renovation,” says Brian McAuliffe, president, institutional properties, capital markets, CBRE.

Approximately 13.5 million households currently live in workforce housing, with most of these individuals and families “renters by necessity” (i.e. paying off student debt, saving to buy a house, proximity to family/employment) who do not have the financial means for homeownership or for higher-quality multifamily housing.

Over the past decade, only a small amount of new workforce housing has been built, while many older apartment communities have been demolished to accommodate the development of high-end properties.

The multifamily industry removes more than 100,000 units per year due to obsolescence, and these are predominantly workforce and affordable housing units. The redevelopment of older housing units is tremendously valuable to the multifamily sector, providing better-quality and updated units for renters. The physical improvement to the older multifamily housing stock has also made it more attractive for investors.

The marketplace is not without risks. Workforce housing affordability has begun to create some resistance to rent increases and may limit them further in the future. More than one-third (35%) of workforce renter households were considered “rent burdened” last year in that their rent payments represented 30% or more of their incomes, compared to 21% 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.