THE UNDERPRODUCTION OF HOUSING ACROSS THE U.S.: The Case for Investing in Workforce Rental 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.

The undersupply of housing is particularly acute in the workforce housing sector

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.


The construction labor shortage and slow productivity growth are so acute it is preventing construction at some points

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.


Construction costs outpace inflation, undermining housing supply

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.


The unintended consequences of pervasive zoning, land use, and environmental regulations in perpetuating the housing shortage

Increasingly stringent local zoning, land use, and environmental laws and regulations are arguably the most significant headwinds adversely impacting housing production. 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.


The chronic housing shortage: Understanding the structural market drivers of the undersupply

New housing supply (i.e., net housing deliveries) is the completion of new housing units, less demolished and newly uninhabitable units. A housing unit is any form of housing accommodation, such as an apartment, townhome, single-family home, condominium, or mobile home. Housing supply has two sources: 1) private construction, or non-governmental enterprises, which makes up 98.5% of new construction spending; and 2) public construction, or government funded construction, which is just 1.5% of construction spending. This White Paper will focus on private construction due to its prevalence as the primary source of new supply.

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