Workforce Housing Explained
Workforce Housing Explained
Within the past 25 years, urban centers and other outlying communities that were formerly occupied by middle-income wage earners have become increasingly unaffordable. The Urban Land Institute considers all families or individuals earning anywhere from 60% up to 120% of their area’s median income to be within this “workforce” category. We discussed area median income in our 3 Effective High Level Development Strategies article that was previously published. Any housing that would be reasonably affordable to households in this 60%-120% AMI range would be considered workforce housing. These households are often underserved by traditional section 8 programs, and developments targeting these AMI ranges are less competitive in the process by which the government awards low income housing tax credits.
This situation has arisen for a number of reasons, but increased demand in major urban centers and already densely populated areas, combined with restrictive zoning laws in many of these desirable areas, have led to a severe supply shortage in the housing market. With wages that have not kept up with inflation, for many of these blue-collar families they have had the rug pulled out from under them with no systems in place to protect them. It’s easy to understand from a psychological perspective and also justifiable morally that more funds would be available to create or repurpose existing housing for the lowest AMI brackets, but this has created a situation where middle income households have been left out in the cold.
NATURAL WORKFORCE HOUSING
Luckily, you can find what is referred to as “natural” workforce housing within the existing housing stock. These are class B or upper tier class C properties with mid tier cap rates in satellite cities that are more affordable than large metro areas. Workforce housing is a very attractive option for passive real estate investing due to the severe supply shortage and growing demand. This provides a superior risk adjusted return to class A luxury real estate due to the higher demand and lower vacancies, even in a recessionary environment. Here are some things to look out for when considering offerings from real estate investment companies for workforce housing:
- Local economy: Look for the usual drivers that make up a thriving economy. As the name implies, workforce housing is for the “workforce” of our economy, so consistent job growth and several fields of industry working within the economy to circumvent the possibility of one industry becoming obsolescent and taking the local economy down with it.
- Satellite cities near economic hubs: Due to the increasing cost of living in major cities, families that would fall under the “workforce” definition are being pushed out to satellite communities. The important thing here is that these communities still fall within the general local economy of the economic hub. In simple terms this often boils down to distance more than anything else.
- Value add: Properties with the potential to qualify as natural workforce housing have often gone neglected and the opportunity to acquire mom and pop owned properties below market value makes workforce housing an attractive form of multifamily investment. With a skilled operator and their team, they can force appreciation by improving the asset through renovations over the course of their hold period.
- Accessibility: A large percentage of workforce tenants will be commuters that prioritize easy access to their local economic hub. In suburban and rural communities this typically means easy access to major highways and public transportation. If you’re a passive real estate investor interested in workforce housing, one of the first things you should confirm is that the community has some kind of accessibility.
- Affordability: These need to be areas that still haven’t seen enough upwards pressure on rental rates. We’ve seen areas that were previously affordable alternatives that were close enough to their major city that their market got absorbed into the trend of upward pressure. You can think of it like concentric circles. The innermost circle is the original core with the demand generators that keep the local economy buzzing. As prices rise in the core, renters flee further out, creating a new circle that then also eventually falls prey to the upwards price pressure, with the cycle repeating so long as there is outsized demand for housing in these areas, as is the case across the United States (and much of the world, for that matter).
DEVELOPING WORKFORCE HOUSING
The cost of construction can make developing new workforce housing more challenging without subsidy. We’ve mentioned in other articles the mosaic web of different funding sources you’ll need to pull together to engineer an affordable housing investment or development. Workforce housing real estate investments, given the lack of federal funding sources, is perhaps even more challenging. There is movement in the right direction towards addressing this issue. Policymakers are beginning to implement new affordable housing programs specifically targeted towards workforce housing. To get into this space will require a bit more local knowledge and research than usual, as federal grants and credits are not currently available for workforce housing as of the writing of this article.
What you will need to do is look at the state and local levels, both of which may have initiatives in place that provide funds for workforce housing investment. In Massachusetts, the Workforce Housing Initiative has been in place for several years now and has already provided more than $100 million in funds for the purpose of workforce housing. Massachusetts provides very low or no interest loans with durations up to 40 years through a quasi-public agency called MassHousing.
Individual municipalities have their own programs in place that are specifically geared towards the adaptive reuse of existing buildings and the construction of new buildings for workforce housing. One way a city might encourage workforce housing development is by using city-owned land that they repossessed or owned by some other means. Cities looking to make use of these properties or vacant lots and have active policies to encourage affordable housing development may issue requests for proposals for these lots.
Requests for proposals, which is just one of many terms that are used for this type of affordable housing bidding process, are when the municipality takes publically owned land or structures, and issues guidelines to developers and investors for how they would like to see the land used moving forward. The investor groups then submit their proposal, usually including a resume and commitments and proof that you are hiring and working with local companies. The government then chooses which proposal and team they like best for the project and give control of the lot(s) to the winner, with oversight. As we discussed earlier, much of the attention in affordable housing is to the lowest income-earners and these local RFP or other systems are no different. You will have to be patient and keep your ear to the ground to ensure that you are the first to know when an RFP has been issued by one of the cities you invest in that is aimed towards workforce housing.
As you can see, this is pretty confusing just on the surface, but it’s something worth researching because the middle-income segment of the population is currently severely underserved and the problem will only become more dire in the coming years. We anticipate more focus will be put on workforce housing development and investment in the coming years. This will present an opportunity for savvy investors to get in early and master this niche before others become aware of it, while providing genuine value to the communities they invest in.
As a general rule, it’s always good to keep your eye out for new, arising problems like these and see if you can translate your skillset into being on the frontlines of solving the problem. This is where newer, but more ambitious operators can have a chance to break through and gain recognition and success at a pace that might be more difficult along the beaten path. We can already see that the lack of workforce housing is a genuine problem and that initiatives to combat the problem are in their infancy. Establishing credibility as a developer or investor group that focuses on providing workforce housing sooner rather than later could pay big dividends in the long term.
Using Google or another search engine, research workforce housing initiatives in your area. Look for programs at the state or local level and research if there are any community development corporations or other agencies that may provide grants or loans for workforce housing. Get in touch with the members of your local government that are involved with affordable housing, likely working in your city’s departments of neighborhood development or a similarly titled department. Keeping a focus on workforce housing and leveraging the existing systems in place for affordable housing funding might be an interesting strategy that could give your company a unique angle going into the next few decades. Also always remember to keep an eye out for updates to your local zoning code, which could include provisions incentivizing workforce housing.
Within the past 25 years, urban centers and other outlying communities that were formerly occupied by middle-income wage earners have become increasingly unaffordable. The Urban Land Institute considers all families or individuals earning anywhere from 60% up to 120% of their area’s median income to be within this “workforce” category. We discussed area median income in our 3 Effective High Level Development Strategies article that was previously published. Any housing that would be reasonably affordable to households in this 60%-120% AMI range would be considered workforce housing. These households are often underserved by traditional section 8 programs, and developments targeting these AMI ranges are less competitive in the process by which the government awards low income housing tax credits.
This situation has arisen for a number of reasons, but increased demand in major urban centers and already densely populated areas, combined with restrictive zoning laws in many of these desirable areas, have led to a severe supply shortage in the housing market. With wages that have not kept up with inflation, for many of these blue-collar families they have had the rug pulled out from under them with no systems in place to protect them. It’s easy to understand from a psychological perspective and also justifiable morally that more funds would be available to create or repurpose existing housing for the lowest AMI brackets, but this has created a situation where middle income households have been left out in the cold.
NATURAL WORKFORCE HOUSING
Luckily, you can find what is referred to as “natural” workforce housing within the existing housing stock. These are class B or upper tier class C properties with mid tier cap rates in satellite cities that are more affordable than large metro areas. Workforce housing is a very attractive option for passive real estate investing due to the severe supply shortage and growing demand. This provides a superior risk adjusted return to class A luxury real estate due to the higher demand and lower vacancies, even in a recessionary environment. Here are some things to look out for when considering offerings from real estate investment companies for workforce housing:
- Local economy: Look for the usual drivers that make up a thriving economy. As the name implies, workforce housing is for the “workforce” of our economy, so consistent job growth and several fields of industry working within the economy to circumvent the possibility of one industry becoming obsolescent and taking the local economy down with it.
- Satellite cities near economic hubs: Due to the increasing cost of living in major cities, families that would fall under the “workforce” definition are being pushed out to satellite communities. The important thing here is that these communities still fall within the general local economy of the economic hub. In simple terms this often boils down to distance more than anything else.
- Value add: Properties with the potential to qualify as natural workforce housing have often gone neglected and the opportunity to acquire mom and pop owned properties below market value makes workforce housing an attractive form of multifamily investments. With a skilled operator and their team, they can force appreciation by improving the asset through renovations over the course of their hold period.
- Accessibility: A large percentage of workforce tenants will be commuters that prioritize easy access to their local economic hub. In suburban and rural communities this typically means easy access to major highways and public transportation. If you’re a passive real estate investor interested in workforce housing, one of the first things you should confirm is that the community has some kind of accessibility.
- Affordability: These need to be areas that still haven’t seen enough upwards pressure on rental rates. We’ve seen areas that were previously affordable alternatives that were close enough to their major city that their market got absorbed into the trend of upward pressure. You can think of it like concentric circles. The innermost circle is the original core with the demand generators that keep the local economy buzzing. As prices rise in the core, renters flee further out, creating a new circle that then also eventually falls prey to the upwards price pressure, with the cycle repeating so long as there is outsized demand for housing in these areas, as is the case across the United States (and much of the world, for that matter).
DEVELOPING WORKFORCE HOUSING
The cost of construction can make developing new workforce housing more challenging without subsidy. We’ve mentioned in other articles the mosaic web of different funding sources you’ll need to pull together to engineer an affordable housing investment or development. Workforce housing real estate investments, given the lack of federal funding sources, is perhaps even more challenging. There is movement in the right direction towards addressing this issue. Policymakers are beginning to implement new affordable housing programs specifically targeted towards workforce housing. To get into this space will require a bit more local knowledge and research than usual, as federal grants and credits are not currently available for workforce housing as of the writing of this article.
What you will need to do is look at the state and local levels, both of which may have initiatives in place that provide funds for workforce housing investment. In Massachusetts, the Workforce Housing Initiative has been in place for several years now and has already provided more than $100 million in funds for the purpose of workforce housing. Massachusetts provides very low or no interest loans with durations up to 40 years through a quasi-public agency called MassHousing.
Individual municipalities have their own programs in place that are specifically geared towards the adaptive reuse of existing buildings and the construction of new buildings for workforce housing. One way a city might encourage workforce housing development is by using city-owned land that they repossessed or owned by some other means. Cities looking to make use of these properties or vacant lots and have active policies to encourage affordable housing development may issue requests for proposals for these lots.
Requests for proposals, which is just one of many terms that are used for this type of affordable housing bidding process, are when the municipality takes publically owned land or structures, and issues guidelines to developers and investors for how they would like to see the land used moving forward. The investor groups then submit their proposal, usually including a resume and commitments and proof that you are hiring and working with local companies. The government then chooses which proposal and team they like best for the project and give control of the lot(s) to the winner, with oversight. As we discussed earlier, much of the attention in affordable housing is to the lowest income-earners and these local RFP or other systems are no different. You will have to be patient and keep your ear to the ground to ensure that you are the first to know when an RFP has been issued by one of the cities you invest in that is aimed towards workforce housing.
As you can see, this is pretty confusing just on the surface, but it’s something worth researching because the middle-income segment of the population is currently severely underserved and the problem will only become more dire in the coming years. We anticipate more focus will be put on workforce housing development and investment in the coming years. This will present an opportunity for savvy investors to get in early and master this niche before others become aware of it, while providing genuine value to the communities they invest in.
As a general rule, it’s always good to keep your eye out for new, arising problems like these and see if you can translate your skillset into being on the frontlines of solving the problem. This is where newer, but more ambitious operators can have a chance to break through and gain recognition and success at a pace that might be more difficult along the beaten path. We can already see that the lack of workforce housing is a genuine problem and that initiatives to combat the problem are in their infancy. Establishing credibility as a developer or investor group that focuses on providing workforce housing sooner rather than later could pay big dividends in the long term.
Using Google or another search engine, research workforce housing initiatives in your area. Look for programs at the state or local level and research if there are any community development corporations or other agencies that may provide grants or loans for workforce housing. Get in touch with the members of your local government that are involved with affordable housing, likely working in your city’s departments of neighborhood development or a similarly titled department. Keeping a focus on workforce housing and leveraging the existing systems in place for affordable housing funding might be an interesting strategy that could give your company a unique angle going into the next few decades. Also always remember to keep an eye out for updates to your local zoning code, which could include provisions incentivizing workforce housing.