Commercial real estate investing is a dynamic field, and one aspect that’s gaining attention is workforce housing. Investors seeking to diversify and navigate market cycles can find distinct advantages in workforce housing investments.
In this blog post, we delve into the intricacies of workforce housing – its origin, current definition, and how it differs from affordable housing. We’ll also discuss the defensive role it can play during economic downturns – an essential factor in today’s uncertain economy.
The future demand for workforce housing forms another key area of focus. We’ll examine predicted vacancy rates through 2023, supply trends in Class B & C units, and rent growth expectations.
Furthermore, we will provide insights on financial performance expectations for investments in a downturn scenario including cash flow calculations and IRR impacts. Finally, we will explore potential risks associated with investing in workforce housings if the economy slows down along with institutional investors’ interest towards this sector within commercial real estate investing.
Understanding Workforce Housing
The concept of workforce housing originated in high-end resort communities and ski areas, where service industry workers needed affordable places to live. Today, it primarily refers to Class B and C multifamily properties that cater to middle-income renters such as teachers, firefighters, and law enforcement professionals.
Origin of Workforce Housing
In the past, workforce housing was a term used for accommodations provided by employers in remote locations like mining towns or oil fields. However, it has evolved into a real estate category addressing the needs of essential workers who may not qualify for low-income subsidies but still struggle with housing affordability.
Current Definition of Workforce Housing
According to Investopedia, workforce housing is residential units within financial reach of working individuals whose income is insufficient to secure quality rental accommodation without spending more than 30% of their income.
Difference between Affordable Housing and Workforce Housing
Affordable housing often serves those earning less than 60% area median income (AMI), while workforce housing targets households earning between 60-120% AMI. This subtle distinction ensures that middle-class families also have access to safe and comfortable living spaces.
The Defensive Role of Investing in Workforce Housing During a Downturn
When the economy takes a downturn, smart investors seek out defensive plays. One such strategy is investing in workforce housing. Unlike other sectors like office spaces or retail outlets that may suffer during recessions, multifamily commercial real estate assets often perform well due to their countercyclical nature.
Commercial Real Estate Executives’ Views on Economic Downturns
Many industry leaders agree with this perspective. For instance, executives at leading real estate firms believe that multifamily properties can provide stable returns even when the broader market faces turbulence.
Performance of Multifamily Asset Classes in Recessions
- Affordable Housing: These properties tend to be resilient as demand remains high regardless of economic conditions.
- Luxury Apartments: While these might face higher vacancy rates during an economic slump, they usually recover quickly once the economy improves.
- Middle-Income Rentals (Workforce Housing): This sector tends to remain steady throughout both booms and busts because it caters to essential workers who always need housing.
In essence, investing in workforce housing could serve as a financial safety net during uncertain times – making it an attractive option for those looking to safeguard their investments against potential downturns.
Future Demand for Workforce Housing
Fannie Mae predicts that the requirement for housing suitable for middle-income earners is anticipated to increase in the near future. Despite an increase in supply, vacancy rates will not rise significantly by 2023. Looks like the middle-income renters are here to stay.
Predicted Vacancy Rates Through 2023
This prediction stems from a steady growth of middle-income renters who are unable to afford high-end properties but earn too much to qualify for affordable housing programs. As such, they turn towards Class B and C multifamily units as viable options. Who knew being middle class could be so tough?
Decline in Class B & C Units Supply
A decline in the supply of these types of units can lead to higher rent growth due to increased competition among potential tenants. This phenomenon could be exacerbated if developers continue focusing on luxury apartments instead of more modestly priced dwellings. Hey developers, can you hear us?
Continued Higher Rent Growth
CoStar’s projections suggest that this trend may persist into the future, indicating continued demand for workforce housing investments even amidst economic downturns or other market fluctuations. If you’re in search of a sound investment, workforce housing could be the perfect choice.
Financial Performance Expectations for Investments in a Downturn
When it comes to commercial real estate investing, understanding financial performance expectations is crucial. This is especially true during an economic downturn, when investors must navigate through uncertain waters.
Cash Flow Calculations During Economic Downturns
First things first: cash flow calculations. In a downturn, vacancy levels may rise and repair expenses could increase. Therefore, it’s essential to have a clear projection of these factors when calculating your cash flow.
The Impact of an Economic Downturn on IRR
Another key consideration during a downturn is the Internal Rate Return (IRR). The IRR takes into account the time value of money using discounted cash flow analysis. It provides insight into how profitable potential investments are likely to be over time – especially vital during challenging economic periods like recessions.
It’s important to keep in mind that while workforce housing can offer strong returns and resilience in a down market, every investment carries some level of risk. Do your due diligence before taking any investment action.
Risks Associated With Investing In Workforce Housing If the Economy Slows Down
Investing in workforce housing can be risky, especially during an economic downturn. According to a CBRE research report, potential pitfalls include renters being unable to handle rent increases, a decrease in household formation, and an increase in rent control policies.
Rent Burden Among Households
In times of economic uncertainty, households may struggle with rising rental costs. This “rent burden” can lead to financial stress for tenants and higher vacancy rates for landlords.
Decline in Household Formation During a Recession
A recession often leads to a decrease in new household formations as people choose to live together or stay at home longer. This can result in lower demand for rental properties.
Impact of Rent Control Policies
The introduction or expansion of rent control policies can limit the amount landlords are able to charge for rent, impacting profitability and possibly deterring investment in this sector. New York City’s recent rent regulations are an instance of a decrease in rental prices due to policy changes.
Institutional Investors’ Growing Interest in Workforce Housing
In recent years, institutional investors have increasingly turned their attention to workforce housing investments. In spite of the potential dangers, these wealthy people and entities have discerned a special chance in this area.
Why Institutional Investors are Attracted to Workforce Housing
The appeal of workforce housing to institutional investors lies primarily in its defensive nature during economic downturns. The demand for such properties remains relatively stable even when other sectors are experiencing recessions.
Successful Examples of Institutions Investing in the Sector
- J.P. Morgan Asset Management: This global leader invested over $1 billion into workforce housing across the U.S., creating significant value for their clients and communities alike.
- The Carlyle Group: Another key player, they committed approximately $5.5 billion towards real estate funds focusing on multifamily assets including workforce housing.
Conclusion
Investing in commercial real estate can be a powerful way to build and preserve wealth, but it’s crucial to keep up with market trends and understand the risks involved.
One emerging trend in commercial real estate investing is workforce housing, which offers stable returns during economic downturns by catering to middle-income earners who are less likely to default on rent payments.
Don’t confuse workforce housing with affordable housing – the former is designed for middle-income earners, while the latter is for low-income earners.
High net worth individuals and institutional investors are attracted to workforce housing because of its defensive role and potential for higher rent growth rates.
During recessions, multifamily asset classes tend to perform better than other commercial real estate investments, making workforce housing an even more attractive option.
However, investing in workforce housing does come with risks, such as rent burden among households and the impact of rent control policies.
Despite these risks, the predicted demand for workforce housing in the future due to declining supply of Class B & C units makes it a smart investment choice.
When considering commercial real estate investing opportunities, it’s important to understand the financial performance expectations for investments in a downturn, including cash flow calculations and IRR impacts.
By keeping these factors in mind, investors can make informed decisions and potentially reap the rewards of investing in workforce housing.
