Since the earliest days of the current inflationary run-up, experts have been touting the many inflation-resistant benefits of investing in multifamily real estate. While a strong investment in any part of the business cycle, multifamily is particularly well-positioned right now in the wake of a persistent national housing shortage and the rising costs of homeownership.
But “multifamily” is a broad sector encompassing a broad and diverse range of renters. High-end Class A apartments, off-campus student housing, two-story townhomes, and duplexes—all of these and more are often classified as “multifamily housing.” And yet, these renter segments have markedly different needs and behaviors. As a result, given the differences among these renter cohorts, some multifamily types are more inflation-resistant than others.
This is particularly true with workforce housing—one of the more overlooked and underappreciated segments of the multifamily market. Due to its strong fundamentals and lack of existing housing supply, workforce housing is a worthwhile consideration as an investment, especially during volatile economic times.
What Is Workforce Housing?
Mention the term “workforce housing” and the first thing that often comes to mind is “Big A” Affordable housing, which most perceive as either government-subsidized housing or “less desirable” housing.
But neither of these perceptions accurately represent workforce housing.
Here’s the “official” definition: workforce housing serves households earning between 60% and 120% of an area’s median income, or AMI. Said differently, workforce housing provides attainably priced homes to working-class Americans, who are often employed within the key segments of the local economy such as education, healthcare, and government. These are renters who earn too much to qualify for government-subsidized Affordable housing but also can’t afford market-rate rents of newer Class A apartments or homeownership altogether.
But crucially, workforce housing is not government-subsidized like Big A Affordable housing. Rather, it is an outgrowth of naturally occurring affordable housing, often comprised of Class B and Class C properties built during the latter part of the 20th century.
Far from being rundown properties, well-maintained and well-operated workforce housing communities offer safe, stable, and comfortable living environments within short commuting distances of major employment centers. Additionally, the fundamentals of this housing type demonstrate a stable investment that holds up especially well in times of economic uncertainty.
Workforce Rental Housing Investment Benefits
Drilling down into this category, there are typically three primary reasons why workforce rental housing can be an effective investment opportunity:
1. Supply/demand fundamentals. Workforce rental housing is characterized by two things: high renter demand and low supply.
On the demand side, the rise of home prices and mortgage interest rates results with working-class Americans who can’t afford to buy houses. But they still need somewhere to live. Renters, typically not by choice, are turning in higher numbers to workforce housing for an attainably priced living space.
Despite growing demand, not many more workforce units are coming online. Some of the reasons for this are:
• Older rental properties are being removed at higher-than-normal rates, often demolished and replaced with higher-rent, Class A properties
• Value-add investors are increasingly acquiring “vintage” properties with the goals of upgrading them and charging higher rents
• Higher material and labor costs mean ground-up workforce rental housing construction doesn’t make sense for most developers
For investors, the supply-demand imbalance means less unit turnover and consistently high occupancy. This, in turn, leads to consistent cash flows and property appreciation.
2. Greater stability and less risk. The above scenario typically lends itself to less investment risk, especially relative to value-add opportunistic multifamily strategies. Value-add requires capital expenditures and a delay in cash flow as units are taken offline for renovations and upgrades. Once those renovations are complete, there’s no guarantee of a reasonable return on investment through higher rents.
But the intent behind workforce rental housing isn’t to incorporate massive improvements with an eye toward raising rents. Rather, the goal here is to provide comfortable, secure housing for working-class Americans.
Because of this, many workforce housing owners target and acquire vintage properties that don’t demand such high-maintenance restorations and large capital expenditures. The focus instead is on improving operational efficiencies. Additionally, these properties already offer high occupancy rates and consistent rents, allowing for immediate cash flow.
3. Attractive, risk-adjusted returns. The above-mentioned benefits, combined with low turnover, mean ideal risk-adjusted returns. Revitate Cherry Tree’s multifamily investment strategy currently has a workforce rental housing portfolio with an average occupancy rate of 96.2% and a 71.7% average renewal/retention rate. In comparison, average overall retention/renewal rates as of June 2022 for multifamily product across all types stood at 57%, according to analytics firm RealPage. The retention rate in Class C apartments was 65%.
One reason for these figures is because the workforce rental housing demographic doesn’t have many other housing options. As long as a property is clean, secure and operates efficiently, workforce housing renters remain in place longer. Higher retention rates among workforce housing means fewer financial resources needed to be dedicated to filling units. Consistent rents and cash flow help provide more attractive risk-adjusted returns to investors, especially compared to other multifamily types.
Worthy Of Investment Consideration
Though multifamily continues to hold the title of “inflation-resistant,” it’s important to remember that this real estate sector encompasses many different unit types. Not all niches of multifamily housing may be as insulated to inflation as suggested.
Workforce rental housing doesn’t grab the same attention or headlines as do Class A, ground-up developments or value-add renovation plays, but this overlooked sector is worthy of investment consideration. This product type carries inherently less risk and generates relatively stable returns, even during periods of high inflation.
Additionally, workhouse rental housing fundamentals have a positive outlook. Working-class Americans will continue to need housing that works within their salary requirements. As such, and combined with the inherent supply-demand imbalance in this asset class, we anticipate that workforce housing will continue generating stable returns and increased property values over the long term.
Chris Marsh is co-founder and general partner of Revitate Cherry Tree.
