The workforce housing segment faces a severe undersupply of attainable and quality rental housing. Investors would be wise to take notice.
The United States’ residential sector is chronically underserved; since 2017, the nation has been experiencing a large and growing shortage of housing. In 2017, this shortage was an estimated 731,000 housing units, but as of 2020 has now grown to between 3.8 – 6.8 million units, according to Kingbird Analysis of Federal Reserve Board of St. Louis, US Census Bureau, ACS IPUMS, and CoStar Data, along with Freddie Mac Housing Supply: A Growing Deficit May 2021 and National Association of Realtors Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing June 2021. The lack of supply relative to demand in the US residential sector, specifically within the workforce housing segment, has created an ideal, fundamentals driven environment for investing in workforce housing.
In efficient free market economics, the market will fill voids created by unmet demand. Demand drives the creation of supply. Aside from food, shelter (i.e., housing) is arguably an economy’s most necessary product, yet the production of housing in the US has not kept pace with housing demand, leading to a significant and growing gap between high demand and consistently low supply. Since the 2008/2009 Global Financial Crisis specifically, housing production across the country has not kept pace with household growth, which has created a historically large housing shortfall, now estimated to be between 3.8 to 6.8 million units.
While this trend began with the GFC, it is secular rather than cyclical, and has now become ingrained in the US economy and, barring a structural change in the functioning of the residential construction sector, shows strong evidence of persistence in the long-term. Unmet demand of this magnitude creates a market opportunity. Whenever supply consistently lags demand, as new supply becomes available, it is likely to be quickly consumed. Rapid consumption of new supply significantly de-risks new production and, thus, the possibility of investment principal loss is mitigated. The purpose of this White Paper is to assess: 1) The gap between housing supply and demand; 2) The contributory factors thereof; 3) Their impact on the housing market going forward; and 4) How capital can be prudently allocated to capitalize on the supply/demand mismatch in the housing market.
Among the groups most negatively affected by the housing gap is workforce households, those earning between $45,000 and $75,000 per year in household income. These households make up the largest group of renters, at 9.7 million, or 23.6% of total renter households, according to Kingbird Analysis of 2021 1-Year ACS PUMS Data. Despite this, the supply of housing affordable to this cohort is inadequate to their growing need.
Residential construction employment has yet to recover from the Global Financial Crisis. Employment in the sector peaked at 1 million workers in 2006, then troughed at 528,000 in 2011. Only 921,700 were employed in the industry as of August 2022 – a similar employment level to July 2004, according to Kingbird Analysis of Federal Reserve Bank of St. Louis Data. As a result, an estimated 70% of construction firms have difficulty finding qualified employees, per Exhibit 11.
Pricing and demand have an inverse relationship, all else being equal; as costs rise, demand falls. This has been especially true in the construction sector. Since 2017, costs associated with building new housing rose faster than general inflation, as shown in Exhibit 9. 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.