Despite a multifamily construction boom, many U.S. renters are still being left behind. Even as new construction starts have added up to a thriving multifamily building environment, a housing crunch remains in many American cities – with many people unable to find or afford a place to live.
A large segment of the apartment-seeking population doesn’t qualify for subsidized housing, but also doesn’t make enough for the “market-rate” rentals in their cities. The need for less expensive housing within close proximity to job centers that caters to this working population of renters – and the opportunity for investors – is clear, and it is aptly referred to as workforce housing.
Over the past five years, several demographic, cultural and sociopolitical events converged to create a greater demand for rental housing, and in particular, housing that is economically accessible to more people.
- Younger and older people both move toward rentals. Millennials face significant barriers to home ownership with unprecedented student loan debt, rising home prices and more rigorous mortgage requirements. Even though 80 percent of millennial renters would like to purchase a home, the ability to afford one remains an obstacle that could take one or two decades to overcome. At the same time, baby boomers are downsizing and looking for lower maintenance and more flexible living situations. The number of renters in their early 60s increased by 84 percent between 2006 and 2016, the most of any age group.
- Effects of the Great Recession linger. The repercussions of the housing market collapse from 2007 to 2009 are still being felt a decade later. At least 1.2 million Americans lost their homes during the recession, many of whom have had their ability to finance in the future impacted. Banks also responded to the subprime mortgage crisis by tightening their lending criteria, making it more difficult for some first-time buyers to obtain a mortgage.
- Luxury development may be entering a glut. Most of the new development that has happened over the past five years has been focused on new luxury towers in prime markets. The addition of hundreds of thousands of new, high-end units is leading to downward pressure on rents. Concessions in Manhattan and Brooklyn hit record highs as an influx of new inventory converged with renters hitting a wall of what they are able to afford. As a result, municipalities are also being asked to consider rent control measures, including Orange County and Chicago.
With younger and older and lower- and higher-income people all coming into the renter pool, people in the middle are being squeezed in the availability and affordability of apartments. According to CoStar, this “rentership society” is expected to grow by more than 7 million through 2025, and 80 percent of the renter demand, representing 4 million units, is from renters with incomes less than $75,000 – the “renters by necessity.” These “renters by necessity” make up the increasingly important workforce housing segment.
Workforce housing is distinct from affordable housing, targeting middle-income families and individuals with good quality rental units command lower rents than the luxury class A and A+ new construction buildings. The class B and C multifamily buildings that comprise workforce housing offer good fundamentals for investors – steady demand, low vacancy rates, and the ability to incrementally raise rents with low capital expenditure on improvements.