Drive down the road in most U.S. cities and it seems like every new multifamily development is billed as a luxury living experience. This situation is more than just clever marketing; it belies a growing problem: Many U.S. markets have a robust supply of high-end units but not much in the way of workforce housing.
According to the Urban Land Institute, workforce housing serves households making 60% to 120% of the area median income (AMI). In Georgia, for example, the AMI is $51,037. A household making 90% the AMI—the median of 60% and 120%—has income of $46,000. At that level, it’s very difficult to find housing options that don’t consume an outsized proportion of monthly take-home pay.
The average rent for an apartment in Atlanta is $1,597 and would consume 41% of gross income for a household making $46,000. Factor in living expenses like electricity, transportation, and child care, and the basics begin to consume the vast majority of a household’s paycheck.
Business leaders and municipalities have been sounding the alarm about the lack of workforce housing for some time, but the current abundance of luxury units in many markets has brought more attention to those who aren’t being served by existing inventory.
What’s Hindering Workforce Housing?
The obstacles to increasing the stock of workforce housing remain significant. The now-mature economic recovery has made it difficult to revive solutions that worked in the past. In prior years, when land was inexpensive in many places, interest rates were low, and construction costs were reasonable, mixed-income properties flourished. Subsidies were used effectively to encourage developers to set aside a percentage of their units for households within a certain income range.
Now, even with subsidies, it’s difficult to make the math work for new workforce housing units. Land prices in many places have increased significantly, interest rates are trending upward, and construction costs—driven by a tight labor market—are up substantially as well.
Another solution that used to be common was building farther out in the suburbs, but that’s now less acceptable to today’s renters. Expecting the breadwinners of middle-income households to endure ever-longer commutes—even as urban centers grow denser and traffic problems worsen in many places—isn’t a long-term solution. There will continue to be a need for suburban multifamily, but affordable housing options near job centers are still badly needed. (These job centers might be located in urban cores or satellite cities.)
How Can We Bend the Cost Curve?
There’s no single solution that will solve the housing affordability problem. Multiple tactics need to be deployed where they make sense and can have the biggest impact.
1. Increase density. Local governments can change zoning requirements and allow more density in certain areas. This enables developers to spread high land costs over more units, which can ultimately bring down rental rates.
2. Extend tax credits. Federal tax credits could be adjusted to raise the AMI ceiling for developments in certain neighborhoods. This would be especially effective in urban areas where families making even 120% of the AMI struggle to find adequate housing they can afford.
3. Consider inclusionary zoning. The success of inclusionary zoning is mixed, but it can be effective when implemented the right way. Some financial support from the local municipality, such as tax credits, could be paired with inclusionary zoning ordinances to encourage more development. However, simply requiring developers to produce affordable units within a certain geographic area won’t solve the interest-rate and construction-cost headwinds.
4. Maximize existing housing stock. Many cities have older multifamily units that could be renovated to provide affordable housing. This option is significantly less expensive than ground-up construction and serves local communities by improving existing developments.
5. Get creative. High-density cities where affordability is especially challenging, such as New York City, have experimented with micro apartments that offer very small units in exchange for lower rental rates. Cities experiencing housing shortages should explore creative solutions such as micro units and assess whether they are right for them.
Many lenders and other participants in the commercial real estate industry are supportive of deploying capital to help solve the workforce housing problem. However, widespread progress will only be made when municipalities, developers, financial institutions, and the federal government all work together to adopt a range of changes that make new developments more feasible on a broad geographic scale.
Serving the needs of those who struggle to find housing that fits their budget is crucial and deserves our attention.
