They don’t come adorned with saltwater infinity pools, and you’d be hard-pressed to find a juice bar or a yoga studio on the premises. But while workforce housing communities don’t have the pizzazz or the fashionable amenity packages of their Class A counterparts, they serve a vital role.
Per the generally accepted definition, workforce housing apartments are those built for renters who make 60% to 120% of the area median income. In practice, this means relatively modest income earners, such as police officers, teachers, firefighters, nurses, and emergency medical technicians—the kinds of workers who are critical to the well-being and safety of our towns and cities.
Unfortunately, the apartment industry as a whole in recent years has in some ways become less hospitable to those who don’t make a high salary. The number of U.S. apartment homes renting for $2,000 per month or more nearly doubled in real terms from 2005 to 2015, according to the 2017 State of the Nation’s Housing report, published by the Joint Center for Housing Studies at Harvard University. Over the same period, the number of homes renting for less than $800 declined by 2%.
While it’s certainly understandable that apartment owners and developers might want the abundant revenues that high-end communities are poised to produce, multifamily firms in the workforce housing space are quick to note that their communities offer attractive investment options while also fulfilling an important mission.
“We feel a real sense of purpose in providing quality housing to renters in this market,” says Tony Perichino, vice president of residential operations for Bethesda, Md.–based ROSS Management Services, which manages more than 10,000 workforce housing units on behalf of its parent company and third-party owners. “Everyone is entitled to clean, well-run housing, not just the biggest wage earners. And these are communities that perform very well. There are real opportunities here.”
By the Numbers
Simply put, in recent decades rising rents and stagnant or even declining wages across vast swaths of the American workforce have made paying for a lease more of a burden for more renters. Approximately 41% of all renter households in the U.S. were cost burdened in 2001, meaning they were paying more than 30% of their gross income for housing, according to 2017 State of the Nation’s Housing. By 2015, that percentage had increased to 48%.
Alarmingly, another study by Harvard’s Joint Center forecasts that the number of severely cost burdened renter households—those paying more than 50% of their gross income for housing—will increase by at least 11%, from 11.8 million to 13.1 million, over the 10-year period ending in 2025.
The construction boom of recent years has been heavily slanted toward Class A communities while many owners have purchased old, workforce-style properties and renovated them into higher-end communities. “The shift in the rental stock toward the high end is also clear from the 32% rise in real median asking rents since 2000,” notes 2017 State of the Nation’s Housing.
While many owners and operators have focused mostly on Class A communities, ROSS and Rockville, Md.–based CAPREIT are two examples of apartment firms that hold significant amounts of workforce housing units in their portfolios.
The benefits of such communities for owners, operators, and investors are numerous, says Ernie Heymann, chief investment officer for CAPREIT, which manages about 16,000 apartment homes, a portfolio that includes both owned and fee-managed communities. Approximately 50% of those units are either workforce housing or affordable units. (Affordable housing refers to communities for households earning less than 60% of the AMI; these properties are typically supported by federal programs such as low-income housing tax credits and Sec. 8.)
“Workforce housing is a stable sector of the apartment business in the sense that occupancies tend to be a little bit higher than Class A because the demand is so strong and the supply is more limited,” Heymann says. “The turnover certainly tends to be lower, and the product’s a little bit less volatile to economic swings, whereas, in a recession, renters might be more likely to back away from high-end product.”
Perichino echoes similar sentiments. “One of the benefits [of workforce housing] is a lack of turnover and the customer loyalty,” he says. “You really do get to reap the benefits of longer-tenured residents and higher occupancy. Part of that is the demand, but you can’t take it for granted, either. You have to bring real operational expertise to the table and work to build those relationships with your residents.”
Still, workforce housing isn’t without its challenges, including residents’ risk profiles.
“Recessions have hit people in this segment pretty hard over the years, and their debt has increased,” Perichino says. “That can create a challenge from a lease-approval standpoint. With a lower credit score, there can be an increased risk of a potential delinquency.”
Heymann also notes that workforce communities are obviously not immune to the sea of rising costs that’s affecting the entire apartment industry. Everything from construction and renovation materials to employee benefits and real estate taxes is rising. “It’s not always easy to provide decent, quality housing at affordable rents in today’s environment,” he says.
CAPREIT seeks to manage its costs in a variety of ways.
“We do a pretty good job of monitoring the expense levels, trying to bid stuff out more extensively when we think something is being priced too steeply,” Heymann says. “And we really place an emphasis on building the kind of company culture that leads to employee retention, which in turn creates more efficiencies and less turnover costs on the employment side.”
Owners seeking to acquire workforce housing communities also need to be careful not to overpay for workforce housing, which is beginning to exert a powerful allure on investors, according to Heymann.
“Over the past decade, equity has moved from pursuing high-end, luxury downtown properties to seeking value-add properties, and now some of the big providers are focusing more and more on the workforce/affordable housing sector,” Heymann says. “The increased demand from capital providers and investors is putting pressure on pricing, in terms of both acquisitions for buyers and rents for residents.”
With housing affordability an ever-growing concern in the U.S., it won’t be easy to ensure there will be a sufficient supply of housing that’s within comfortable financial reach of modest income earners. Both Perichino and Heymann admit the answer is complex and multifaceted.
More government incentives to build workforce communities, or to at least set aside a portion of Class A communities as workforce units, would help, they say.
“Some cities have begun to do progressive things like incentivize developers to build new workforce housing,” Perichino says. “I think this is particularly interesting because new development often includes amenity options you typically don’t see in traditional, older workforce communities, so it would make those developments all the more attractive to residents.”
Incentives for preserving and rehabilitating existing workforce communities are important as well, Perichino adds.
Revamping the construction process so that it’s less expensive could have a major beneficial impact on the construction of more workforce housing too, Perichino and Heymann say.
“We’ve seen labor costs and construction costs go up significantly over the last five years,” Heymann says. “I think building communities in a pre-fab manner— where most of the production is done in factories, perhaps robotically, and then assembled on-site—can save considerable construction costs and could very well become a more pronounced trend over the next decade.”
In the end, both Heymann and Perichino say their companies are committed to the workforce housing sector. “It’s critical that we focus on this issue,” Perichino says. “Everyone deserves quality, affordable housing.”