Why you should care
New financial models could offer a lifeline to young professionals struggling with costly housing.
When Ben Jones listed an apartment on Craigslist in March, he received more than 40 replies within two days. Some desperately pleaded that they were ready to move in the next day, he says. His apartments in Mohave County, Arizona, are in high demand because Jones hasn’t raised rents in the eight years since he became a landlord. His apartments start at $650 a month, while the average in the area is $1,400. Luckily for middle-income homeseekers, Jones isn’t the only one offering unique solutions to a housing crisis that’s crippling millennial dreams.
Rents in America rose by 64 percent between 1960 and 2014 (adjusted for inflation), while real household incomes only increased by 18 percent, according to census data analysis by real estate platform Apartment List. But millennials, many of whom began working on the heels of the Great Recession in 2008, have been worst hit. Since the recession, developers have largely abandoned new construction of housing within a monthly rental range of $750 to $1,000 — some call this “workforce housing” — says Patrick Lynch, vice president of research at Middleburg Real Estate Partners. For developers, such units haven’t offered the attraction of either the government tax incentives that encourage companies to invest in low-income affordable housing or the high margins possible from costlier homes.
Now, a growing band of investment firms, public-private partnerships and tech companies are devising creative interventions to fill this workforce housing void. They recognize there’s an increasing market gap waiting to be filled, with the added attraction of good PR for giants currently battered by negative publicity. The workforce housing market has attracted nearly $375 billion in investment over the past five years, translating to about half the total investment for multifamily assets.
These units — costlier than government-subsidized housing for the poor but cheaper than market rates — are geared toward professionals who typically earn between 60 percent and 100 percent of their area’s median income — that’s $61,650 to $102,750 for a single-person household in San Francisco, and $43,837 to $73,062 in New York, according to the U.S. Housing and Urban Development Department. An estimated 12.6 million households fell in that income range in 2017, taking the national median income as a benchmark. And while industry analysts say it’s too early to determine the estimated monetary value of the sector in coming years, that demand for workforce housing is expected to grow sharply by an average of 245,000 households every year to reach 14.7 million households by 2023, based on the latest American Community Survey data.
The in-between [housing market] just got forgotten about.
Alonso Garza, Middleburg Real Estate Partners
Some companies, like Virginia-based Middleburg Real Estate, are raising funds to refurbish dilapidated properties and bring them back onto the market at rates tenable for middle-income families. Others, like mortgage loan company Freddie Mac, launched a social impact program in 2018 that offers low-cost loans for workforce housing developers. And high-profile tech players like Microsoft and Facebook that have faced accusations of contributing to rising rentals are now beginning to commit to workforce housing.
“There’s been all this attention with shiny, new or affordable [housing], and the in-between just got forgotten about,” says Alonso Garza, partner and head of funds management at Middleburg.
Missing tax incentives and high margins aren’t the only deterrents for developers when weighing investments in workforce housing as opposed to low-cost affordable housing or luxury apartments. Throw in rising land and construction costs along with restrictive zoning laws, and it doesn’t make sense for developers to build without charging higher rates. For renters, that means people either need to endure longer commutes or “rent up” and pay for apartments they can’t sustain, says Bob Simpson, vice president of Affordable and Green Financing at Fannie Mae.
But tech companies are recognizing such projects could help them correct perceptions that they’ve contributed to America’s housing crisis. In the greater Seattle area — home to the headquarters of Microsoft and Amazon — the 21 percent job growth since 2011 has outpaced the 13 percent growth in housing construction. This has led to a 96 percent jump in housing prices over the past eight years, acknowledged Brad Smith and Amy Hood, president and chief financial officer of Microsoft, in a January blog post.
In January, Microsoft pledged to loan $225 million at below-market interest rates to help developers build and preserve workforce housing on the Puget Sound’s Eastside. That same month, the Chan Zuckerberg Initiative (co-founded by Facebook CEO Mark Zuckerberg and pediatrician Priscilla Chan) joined forces with other organizations to launch a $500 million investment fund focused on affordable housing in the Bay Area — right around the time when median monthly rent for a San Francisco studio apartment hit $3,700.
Smaller firms, meanwhile, are discovering that a “fixer-upper” strategy could make the numbers work for them. By buying decaying properties and substantially renovating them, Middleburg plans to offer homes at a workforce-friendly rent — while still earning profits. In January, Middleburg closed on its first asset: Vesta Derby Oaks, a $30 million apartment redevelopment in Louisville, Kentucky. Only 15 percent of the units were occupied at the time, and Middleburg hopes to spark a revival by bringing 418 apartments back onto the market. Others, too, are entering the fundraising arena: Allstate Corp. has acquired more than 7,600 units of workforce housing for $90 million through a joint venture with the Los Angeles–based real estate money manager, TruAmerica Multifamily. And LEM Capital closed its fourth fund targeting Class B, value-added multifamily properties at $300 million, in 2017.
To be sure, addressing the workforce housing gap isn’t simple. For one, the tactic of finding, rehabilitating and overseeing properties is difficult to scale and takes time, Garza says. And even with the financial model companies like Middleburg are using, workforce housing can’t compete on profitability with luxury buildings that yield higher rents. But the unprecedented investments these firms are drawing also suggest that this untapped housing market has caught the eye of investors with real fundraising prowess — and the growing market for affordable middle-class housing is becoming hard to ignore.
What’s more, a shifting political landscape could bring new incentives. Under the 2017 federal tax overhaul, those who invest in so-called Qualified Opportunity Zones — most are areas with poverty rates above 20 percent and household incomes no more than 80 percent of the neighborhood’s median income — can gain exemptions from capital gains taxes. Some experts believe this program could bring to middle-income housing projects some of the benefits developers have traditionally received only for low-income affordable housing. A March study by market analytics firm Preqin found that while at the end of 2018 only 8 percent of U.S. institutional investors in real estate had invested in such zones, 52 percent said they would in 2019.
On the other hand, Democratic presidential hopefuls and senators like Elizabeth Warren, Kamala Harris and Cory Booker are targeting renters — not only homeowners — in their housing policies. Recession warnings continue to flash red as the 2020 election rolls closer, and research by real estate consultants CBRE suggests that workforce housing is projected to perform better in the next economic downturn than it has before.
All of which offers a ray of hope for many middle-income millennials who’ve slogged through the lagging effects of the Great Recession. Getting steady jobs might remain difficult, but at least finding an affordable home could get easier.