Workforce Housing Remains an Attractive Investment

Mark Thomson. Photo courtesy of JLL Capital Markets

On the back of rising demand, workforce housing assets have captivated investors with strong investment returns, rising occupancy and elevated rent growth in recent years. Workforce housing is defined as affordable accommodation for residents earning moderately below to approximately the local median income – an expanding share of the renter base. For this reason, the product type is a beneficiary of declining housing affordability and a relatively tempered housing construction pipeline that has occurred this cycle.

The underlying demand drivers illustrate the ramp up in leasing and investment activity. Barriers to homeownership continue to rise throughout the nation, with the median home price climbing 55.2 percent from a post-downturn trough. Concurrently, median household incomes have not kept pace with rising home prices. Modest wage growth thus prolongs tenancy in rental housing for average families, with those earning less than $75,000 accounting for nearly 80.0 percent of renters.

Additionally, as developers struggle to make cheaper product work out, the multifamily construction pipeline has been concentrated in high-quality urban product. This type of asset is often unaffordable to the households described above. Meanwhile, private home development also remains slow – with deliveries 61.5 percent below their previous cycle peak.

Robust Demand

Investors that recognized the rapid urbanization, widening rent gap and subsequent opportunity in workforce housing earlier this cycle have marked notable gains. Since 2010, transaction volume has increased more than five-fold to $66.7 billion. However, higher asset valuations have accompanied rising liquidity, which may impact near-term returns and sentiment. While this concern is valid, this product type is expected to benefit from favorable leasing fundamentals in the near- to mid-term for several reasons.

There is no indication the demand for affordable housing will wane or that developers will bring suitable housing options to market. While all multifamily asset classes have marked healthy rent gains this cycle, Class B and C properties have outperformed in recent years. Annualized effective rent growth in Q1 2019 was 5.2 and 4.2 percent for Class C and Class A, respectively. Concurrently, “Garden-style” assets, which often serve as a proxy for affordable housing, marked a total annualized return of 8.3 percent in Q1 2019 – more than three percentage points higher than the rest of the sector. Lastly, cap rates have continued to compress both over the long-term (down 195-basis points from a cyclical peak of 7.2 percent) and in recent quarters, indicating continued desirability for this property type. Assuming occupancy remains high and demand is elevated, workforce housing will continue to be an attractive investment opportunity. 

Mark Thomson is a senior managing director and the co-head of the Philadelphia office at JLL Capital Markets.