Although the number of people who need affordable workforce housing in the US is rising, the supply and availability is shrinking according to Fannie Mae’s recent Market Commentary. At the same time, rental rates for workforce housing are increasing faster than wage growth. What is causing this situation and is there a solution that makes sense?
What Is Workforce Housing?
Workforce housing is loosely defined as market-rate rentals that do not receive support from government housing programs but are more affordable due to age, location, or condition than Class A properties. Most workforce housing is Class B and Class C type apartment buildings. Other affordable options may include manufactured housing communities and some single family rentals.
Workforce Housing’s Many Challenges
- Vacancy rates for Class B and Class C properties have hovered around 5% for the last 4+ years (subsidized housing vacancy rates are even lower at ~3%).
- Higher rental rate Class A properties have vacancy rates around 8+%. This discrepancy illustrates the high demand for lower cost housing.
- Vacancy rates will likely remain low due to the points below on low supply, high cost, and low wage growth.
- Most new apartments are in the Class A market, where a renter should earn ~$90,000 to safely afford the average $2,224 a month rent on newly constructed apartments.
- Over the last 10 years, the percent of workforce housing units has decreased ~7% from 59% to only 52% of the total apartment housing stock.
- Between 120,000 and 165,000 affordable workforce housing units were lost per year over the last 10 years, that’s more than a million units.
- Rent growth for affordable workforce housing is higher than Class A apartments due to the lower supply and competition for open units pushing up rental rates.
- Although some rent growth moderation is likely to occur in the coming years due to completion from new construction, rents are expected to continue to rise.
- Income and Wages
- Rent growth has outstripped wage growth for the last 7 years (and rent declines only occurred for a short time during the great recession).
- Nearly half of renter households (20.2 million) are “cost-burdened” meaning they spend more than 30 percent of their income on rent and utilities.
- Nearly a quarter of renter households (11.0 million) are “severely cost-burdened”, spending more than half of their income on rent and utilities.
Can Anything Be Done and Is Anything Being Done?
- Preserving the existing supply is one of the best ways to combat the shortfall.
- Maintaining access to debt and equity to support existing workforce housing will help preserve it.
- Focusing on rehabilitating and extending the useful life of each property rather than repositioning as a higher class property.
- Increasing subsidized housing, whether in the form of vouchers, tax credits, or construction support. Vacancy rates are very low (<3%) which drive more demand to workforce housing. Construction and availability for subsidized housing is also declining.
- Requiring affordable units as part of new construction or providing incentives for building a portion of the new units as of affordable units; some local governments are already experimenting with this concept.
- Reducing the cost of construction for new apartments by loosening zoning restrictions and regulations (which some studies have found amount to over 30% of the cost of new units).
Are you interested in investing in workforce housing? If you’d like to learn more, contact us and we will be happy to discuss how you can get started!