BOSTON, MASS. (May 24, 2023) – Kingbird Investment Management, the real estate subsidiary of Puerto Rico-based Grupo Ferré Rangel – a century-old, family-owned strategic investment holding company – has released a white paper highlighting the chronic undersupply of the US housing market for workforce rental housing.
The paper, entitled “The Underproduction of Housing Across the U.S.—The Case for Investment in Workforce Rental Housing,” examines the long-term, secular trend that began after the 2008/2009 Global Financial Crisis and has worsened each subsequent year.
According to the white paper, the US housing market is currently experiencing a shortfall of between 3.8 and 6.8 million units as of 2020. This shortfall has been worsened and secularized by three trends:
- Implementation and intensification of zoning, land-use, and environmental regulations: Increasingly stringent local zoning, land use, and environmental laws and regulations are arguably the most significant headwinds adversely impacting housing production. Although the regulations began as well intentioned, the decades-long accumulation of state and local regulations impose significant risk elements and unproductive costs and serve to limit not only where new housing can be developed, but also constrain the asset class, product type, density, material, and style of new developments.
- Rising construction input costs, particularly land prices: Since 2017, costs associated with building new housing rose faster than general inflation, according to Bureau of Labor Statistics, and CoStar Commercial Repeat Sale Index Data. These dynamics limit the ability of developers to construct moderately priced product. Increased costs can also halt new construction altogether, on occasion, as projects become unprofitable to continue.
- Consistent labor shortages: An estimated 70% of construction firms have difficulty finding qualified employees, according to the national association of Home Builders. This labor shortage is a result of multiple long-term trends in the US that were exacerbated by the 2008/2009 Global Financial Crisis and the COVID-19 pandemic in 2020/2021. Many skilled construction workers, which are hard to replace, have recently or will soon enter retirement, with an estimated 22.7% of them aged 55 years or older, according to Kingbird Analysis of Bureau of Labor Statistics Data.
The undersupply of housing has resulted in historically low vacancy rates and rapid rent and home price growth, relative to incomes, across the nation. The workforce renter segment, defined as renter households earning between $45,000 and $75,000 annually, has been most affected by the shortage, with a constricted supply of high-quality, affordable rental housing available to them.
The white paper highlights the workforce rental housing sector as an ideal target for capital allocation within a well-diversified portfolio, as it improves cash distributions and enhances capital values for investors. Historically, investing in this high demand/low supply segment has yielded superior returns relative to other housing segments. “The central driver is a lack of supply relative to demand in the US residential sector,” explains Vincent DiSalvo, Chief Investment Officer, Kingbird Investment Management.
“As an investment management firm, we believe that understanding the underlying trends and dynamics of the housing market is crucial to making informed investment decisions that benefit our investors,” DiSalvo adds.