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In recent decades, real estate has evolved from being a sideline investment to becoming a viable alternative asset class. Experts often advocate for real estate investments as ideal strategies for portfolio diversification, risk mitigation, and consistent cash flow, regardless of economic conditions.
However, it's essential to recognize that "real estate" encompasses a wide array of assets, and the notion that all real estate is recession-resistant oversimplifies the complexity of the market. Different types of real estate respond differently to economic variables, depending on various factors such as product type, age, location, life cycle phase, and more.
Multifamily housing, particularly workforce housing, is emerging as an astute investment choice during turbulent economic periods. This is because it serves as a fundamental need—providing people with a place to live—making it more resilient during economic downturns.
Workforce Housing and Its Resilience
Multifamily housing typically excels during economic downturns because it fulfills a basic necessity: shelter. However, multifamily housing caters to two types of renters: those who choose to rent based on personal preference and those who rent out of necessity due to financial constraints.
Workforce housing primarily serves renters by necessity, typically working-class Americans who earn enough to disqualify them from "affordable housing" but not enough to afford higher-end apartment complexes. This segment of housing differs from affordable housing in various ways:
1. Income Range: Workforce housing accommodates individuals earning between 60% and 120% of the area median income (AMI), while affordable housing typically targets households with annual gross incomes below 80% of the AMI.
2. Subsidization: Workforce housing is generally not government-subsidized, whereas most affordable housing receives partial or full support from public agencies.
3. Development Origin: Workforce housing is often an outgrowth of "naturally occurring affordable housing," arising from properties that may be less attractive to higher-income earners due to their age or location.
Well-maintained and efficiently operated workforce housing offers a secure and comfortable living environment within easy reach of major employment centers. The fundamentals of this housing type make it a stable and resilient investment choice in times of economic uncertainty.
The Supply-Demand Imbalance
The strength of workforce housing as an investment is rooted in the fundamentals of high demand and limited supply. On the demand side, workforce housing caters to working-class Americans who cannot afford homeownership at current property prices and interest rates, nor can they afford standard market-rate apartment rentals. According to analyses by CBRE and CoStar, at least 13.5 million households require this type of housing.
Unfortunately, the existing supply is only approximately 12 million, leading to a significant supply-demand imbalance. Building new workforce housing faces financial challenges due to high labor and construction costs, making the available stock primarily consist of older properties constructed before 2000.
Additional market trends exacerbate this situation:
1. Slowed Housing Production: Housing production has declined since the early 2010s.
2. Replacement of Older Properties: Older Class B and C properties are being replaced with new Class A developments.
3. Value-Add Upgrades: Existing "vintage" properties are undergoing upgrades to command higher rents, which exceed the budgets of middle-income households.
These factors further diminish the pool of available workforce housing opportunities.
A Sensible Investment Choice
The supply-demand imbalance, while presenting housing challenges for working-class families, makes workforce housing an attractive defensive investment strategy.
One key advantage is low turnover. Workforce housing tenants have limited options, reducing the likelihood of them relocating. This translates to more reliable and continuous cash flows, as well as reduced resources spent on tenant search, vetting, and onboarding.
Additionally, there are fewer instances of late rent collections and delinquencies. Workforce housing tenants usually have stable and predictable incomes that consistently cover monthly rent costs, leading to on-time payments and fewer delinquencies.
Moreover, there is potential for a positive social impact. Firms like Revitate Cherry Tree, for instance, acquire workforce housing with the goal of preserving and extending safe and comfortable housing for working-class Americans. This approach entails fewer capital expenditures and less downtime for unit overhauls.
For investors, these fundamentals translate into immediate and attractive risk-adjusted returns, particularly when compared to other multifamily housing types. Experienced property managers can enhance these returns by implementing operational efficiencies that reduce operating costs and boost net operating income.
Furthermore, the high demand for this housing type, combined with the stability of its tenants, can lead to asset appreciation over time, especially for properties located in metropolitan areas with promising long-term population and employment growth trends.
In conclusion, amid significant economic uncertainty, workforce housing offers a compelling path to stability for both investors and tenants.