Where We Need More Workforce Housing Development

It is no secret that the nation is plagued by an affordable housing crisis. The alarm bells were ringing before the pandemic, but in the last two years, the problem has only worsened. Investment capital is responding, ramping up investment activity and new development of workforce housing—defined as rental housing for households earning 80% to 120% of AMI. With critical supply shortages across the country, the most in-need markets are those where rent growth is outpacing wage growth.

“I think developers and investors of affordable and workforce housing will do better in areas with high employment growth, expensive single-family housing, and where average rent growth is outpacing income growth for middle- and lower-income workers,” Eric Maribojoc of the Center for Real Estate Entrepreneurship at George Mason University’s School of Business, tells GlobeSt.com. “The demand for affordable and workforce rental housing will be high and consistent in these markets.”

Demand for workforce housing has increased steadily since the Financial Crisis in 2008, when investors turned to class-A luxury apartment development, which offered better rent growth and overall better yields than workforce housing. However, wage growth remained stagnant. “The large increase in the supply new market rate class-A apartments predominantly in urban and near-urban markets over the last few years has increased competition and lowered returns for class-A market investments,” explains Maribojoc. “At the same time, the increase in home prices and apartment rents after the Great Recession outpaced increases in lower- and middle-income workers’ incomes.”

While the strong demand is supporting new development in markets that meet this set of criteria, developers are still facing challenges bringing properties to market. Access to developable land is the top challenge, according to Maribojoc, but access to affordable capital is also a challenge for developers. Due to the inherent risks of operating a workforce housing property, including vintage buildings with more repairs and maintenance, these properties generally have higher interest rates and capital reserve requirements.

That has changed during the pandemic. Low interest rates have created better yield opportunities in workforce housing, attracting new capital to the market. “Low interest rates made investments in higher yielding workforce housing more attractive to investors,” says Maribojoc. “The pandemic has only accelerated these trends.”