Workforce Housing’s ‘Double Economy’ Benefits

By Chris Marsh

April 24, 2024

Chris Marsh of Revitate Cherry Tree writes on the resiliency of this investment.

At this juncture, no one knows which way the economy will go. Though talk of recession has declined, we continue to face economic headwinds due to inflationary pressures and geopolitical instability. As a result, investors worry about where to place their capital for the most likely returns.

Certain types of real estate investments—like multifamily properties—tend to perform well throughout all parts of the economic cycle. Within this category, workforce housing can be a solid investment choice for high-net-worth individuals, especially during periods of economic uncertainty or volatility, providing attractive and historically steady returns for investors.

As such, workforce housing can be a compelling “double economy” investment. This asset class can provide a robust defense strategy during economic downturns while offering stable and consistent investment returns in a strong economy.

What is workforce housing

Workforce housing provides safe, comfortable homes for working-class Americans who would not qualify for affordable housing but who don’t earn enough to rent higher-priced apartments. This demographic is often priced out of homeownership opportunities due to skyrocketing home prices, further compounded by interest rate hikes.

Contrary to some expectations, workforce housing is not the same as “Big A” Affordable housing, which is rent regulated, for the following reasons:

• The workforce housing segment serves occupants earning between 60-120 percent of the area median income. Affordable housing serves households with an annual gross income of less than 80 percent of the AMI.

• Most Big A Affordable rental housing is government-subsidized. Tenants can also receive government assistance for rent payments. Workforce housing isn’t government-subsidized, nor do tenants receive rental assistance.

• Affordable housing can occur through development or as set-asides within market-rate complexes. Workforce housing is an outgrowth of “naturally occurring affordable housing” or NOAH. Due to age or location, NOAH is less desirable to higher-income earners. But well-maintained NOAH can be ideal for middle-income Americans.

Perhaps more than other housing types, workforce housing as an investment opportunity is strongly supported by supply and demand fundamentals. Let’s take a look.

Dwindling Supply

NOAH properties are typically removed from the market at a higher-than-normal rate. Due to age and obsolescence, the multifamily industry typically removes about 100,000 units per year.  According to the Joint Center for Housing Studies of Harvard University, most states between 2019-2021 experienced a decline in low-cost rental stock, with 36 states losing more than 10 percent of their low-cost units. Instead of repurposing this vintage stock into workforce housing, developers might do the following:

• Renovate and revamp: Developers acquire older properties to upgrade them and charge higher rents.

• Tear down and replace: Developers buy, then demolish, vintage stock, replacing it with high-end, Class A multifamily assets.

In both scenarios, rents are beyond the reach of working-class residents.

Another problem is that it’s challenging to pencil the economics for ground-up workforce housing. The escalating costs of building materials, land and labor mean developers and owners must charge rents above what middle-income households can afford to profit after expenses.

Ever-Increasing Demand

The Joint Center for Housing Studies explained that renters continue facing affordability challenges because of rent increases and income lost during the pandemic. In 2021, the number of cost-burden renter households reached 21.6 million. Though post-pandemic jobs have returned, Pew Research reported that wages aren’t keeping pace with escalating housing costs.

Due to increased home costs and mortgage interest rates, most middle-class Americans can’t afford to buy homes. Nor can they afford market-rate rents. Yet this demographic earns too much to qualify for government-subsidized housing. The only option for these renters is workforce housing.

But this renter-by-necessity demographic has competition. Higher homeownership costs and rents are also impacting renters by choice. This cohort is also increasingly seeking reasonably cost-effective workforce housing apartments where they can live for a few years as they save money for a home.

To summarize, little workforce housing is available, while demand for this product continues to increase sharply.

The above represents a challenge for renters. It also offers unprecedented opportunities for investors, no matter where in the economic cycle.

Recessions and downturns

During economic downturns, working-class Americans are renters rather than owners. But they’re still employed and are earning steady salaries. They pay their rent on time, meaning fewer late collections or delinquencies.

Additionally, workforce housing tends to experience lower turnover during uncertain economic times. Because workforce housing properties are more affordably priced and often 20-40 percent lower than Class A rents, residents are not paying as large a percentage of their overall income, enabling them to stay longer and forge stronger ties within the community.

For an investment standpoint, it means a more reliable, ongoing cash flow. It also means fewer resources dedicated to finding and vetting new tenants.

Improvements and upsides

Workforce housing also does well during economic upswings. When times are good, higher-paying jobs become more plentiful. Workforce housing residents might move out to higher-rent apartments or buy homes.

But demand doesn’t go away. Those occupying big A affordable housing units find better-paying work. They might no longer qualify for government housing assistance or be ready to move up to a higher rent category. While the top of the market housing remains out of reach for many, there is still great need for these middle-level apartments, which are financially attainable, safe, and offer a quality lifestyle that is convenient for working class residents.   

This continuous stream of renters means continued elevated occupancies. While turnover might increase, so does demand. Units fill quickly, leading to steady, ongoing cash flow.

By its very nature, workforce housing has few units offline for renovations. Companies like Revitate Cherry Tree do not buy vintage apartments to make capital-intensive upgrades to transform the asset into luxury housing that would price people out. Rather, our upgrades are more practical and designed to preserve and extend comfortable and safe housing for working-class Americans. Fewer units require complete and costly overhauls and remain available to renters and generate income for investors. 

As an overall asset class, multifamily real estate can perform well throughout various points in the economic cycle. Yet certain property types within this sector can provide greater investment surety and stable cashflows, even during economically volatile periods.    

Well-maintained and well-operated workforce housing offers renters a safe, comfortable living environment within easy commuting distance of major employment centers. Supply and demand fundamentals mean low turnover, consistent collections, and less capital investment versus other housing types.

As a result, workforce housing can generate steady cash flows, attractive risk-adjusted returns, and asset appreciation potential in most economic climates.

Chris Marsh is co-founder & general partner of Revitate Cherry Tree, which focuses on the acquisition of workforce housing communities in Midwest growth markets.