Workforce Housing: An Underserved Asset Class

SUFFERN, NY—According to Harvard’s Joint Center for Housing Studies, there are more than 43 million renter households in the US. These renters can be police officers, teachers, etc.— residents who make too much to qualify for subsidized “affordable housing,” but still don’t make enough to purchase a home or rent the types of luxury apartments that have proliferated in the past 10 years. As we speak, household growth is outpacing construction with more US households being formed now than at any point in the past 50 years. At this rate, the country would need to build an average of 325,000 new units annually through 2030 to satisfy renter demand.

“With workforce housing being a distinctly underserved asset class, it’s very fulfilling to help preserve the existing stock catering to middle-income households, while elevating the living standards for residents,” says Elie Rieder, founder and CEO of Castle Lanterra Properties. “We’re particularly attracted to assets within burgeoning submarkets with strong fundamentals, such as healthy population growth, highly rated school districts, high barriers to new development and positive supply/demand dynamics,” he tells GlobeSt.com.

Despite all of the housing development taking place this cycle, the construction of workforce housing has been fairly limited. A significant number of housing developers continue to focus on the luxury market with about 80% of the new product coming online consisting of high-end, luxury apartments in the largest metropolitan areas in the country. This glut of Class-A new deliveries is being driven by exorbitant land values and high construction costs, which make it difficult for developers to build accessibly-priced apartments and still turn a profit. The price of developable land skyrocketed by 62% from 2012-2016. Additionally, the costs of labor, building materials and construction fees have spiked 25% during the same period, while inflation has increased just 7%.

With limited incoming supply, much of the existing workforce housing stock is aging; however many of these properties can be reinvigorated through capital improvements and fresh, modern amenities.

“That’s why our strategy focuses on the acquisition and management of multifamily properties instead of ground-up development, which inherently comes with more downside risk as you’re re-risking your liquidity every time you build a new property,” explains Reider.

One strategy may be to acquire properties that have suffered from some level of neglect by previous ownership and implement property improvements and amenities such as internet cafes, playgrounds, upgraded business and fitness centers, increased security cameras, electronic key fobs and energy efficiency, Reider says.

“We also offer an abundance of community engagement and social impact activities to further amenitize the properties, such as our scholarship programs, resident events, educational classes, college internships and charity participation,” says Reider. “ In doing so, we not only create value at the property, we also elevate the standard of living for our residents while driving value to our investors.”

Looking ahead, several factors seem likely to continue to drive continued demand in the rental market such as increased demand from millennials and young professionals looking to reside near major city centers, the influx of aging baby boomers downsizing from their homes to enter the rental market and the new tax reform bill, which makes owning a home in select states less desirable than it was previously by capping mortgage deductions.