Slow Economic Growth, Bright Multifamily Hopes: Why 2019 Spells Standout Housing Opportunities
Sluggish economic growth isn’t putting the brakes on promising opportunities in multifamily. Learn why 2019 is spelling standout possibilities — and just how you can maximize them.
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First, the bad news: U.S. economic growth is set to slow this year, estimated at 2.3 percent compared to 3.1 in 2018. Reuters links the drop to dwindling gains from President Donald Trump’s tax cuts and, at the same time, a rising federal budget deficit (climbing toward $900 billion).
Unfortunately, there’s more bad news — for those hoping to buy a home. According to Multi-Housing News, Freddie Mac reports that in 2018, the cost to own a home rose by 12.1 percent “due to house prices increasing by 4.8 percent and mortgage rates gaining 70 bps.” The article suggests this trend will hold for 2019, too: with the price of owning “inching up nearly 10 percent” as rent rates climb by 4 percent.
Multi-Housing News provides insights from Steve Guggenmos of Freddie Mac’s Research and Modeling team, who turns from stats to people when he stresses: “Millennials or others were on the fence a year ago and two years ago considering should they buy or should they rent, it’s becoming harder to buy, financially. That may create additional support for the rental market.” Tammy Kelly, SVP of Redwood Capital Group, frames the issue as a stark contrast between two generations: “[Younger adults] don’t want to go through what they saw their parents go through during the housing downturn. Living in an apartment is easy living.”
Needless to say, these trends present quite the silver living for multifamily operators. Despite slowing economic growth, 2019 is ripe with possibilities for rental housing — if decision-makers know which kind of community spells the biggest benefits. Fortunately, we have the answer: workforce housing.
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“Low vacancy rates and above-average rent growth.” In a single phrase, findings by property consultancy company CBRE makes clear: workforce housing is a tantalizing investment. The odds tilt even more in favor of property management companies when this supply-demand scenario is fleshed out: “slow wage growth over the past decade has contributed to a high number of potential renters and an extreme lack of new supply.”
For clarity’s sake, workforce housing is defined as: “housing where individuals and families making between 60% and 100% of area median income (AMI) live.” Kelly of Redwood Capital Group suggests these kinds of communities are sought after by a diverse group of residents. In addition to “blue collar workers,” Kelly argues “this type of multifamily housing is needed by hospital workers, law enforcement professionals, firefighters and teachers.”
Of course, like any great opportunity, there are multiple ways to reap rewards. Mike Aiken, VP of Acquisitions for Fogelman Properties, highlights the promise in “upper workforce” submarkets. Rather than setting your hopes on “core markets,” Fogelman recommends areas where “the rent levels for existing product don’t justify new construction but the submarket still contains a strong set of demand drivers for the ‘gray collar’ population.”
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As Fogelman puts it, these areas are a prime alternative to major markets, as they have all the ingredients to spur housing demand without bringing executives head-to-head in “‘A’ quality areas’” wherein competition is cut-throat. In the same vein, Fogelman points to “suburban Sun Belt markets” in the Raleigh and Charlotte outskirts as ideal targets for investment: “assuming job growth continues at its current pace.” Tammy Kelly of Redwood Capital Group highlights a void to fill in the Midwest, too, recommending Illinois and Minnesota as states where “employment is on the rise” and conditions are spot-on for workforce housing.
Yet, in multifamily decision making, it’s critical to consider the value of housing residents who come from a range of socio-economic backgrounds. As I note in this detailed piece on building communities of quality, creating affordable housing preserves the diversity of age groups and economic classes — factors that make cities function, make them successful. To that end, there’s a significant void to fill in resort markets, where a lack of local affordable housing can in some cases jeopardize an economy.
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Boasting rents even higher than the Hamptons, Nantucket has a problem that’s reaching a breaking point: housing its service workers. Bisnow reports on the distinctive (and distressing) circumstances: “workers can’t just live farther away and drive to work; Nantucket is 30 miles off the coast of Cape Cod.” Complicating things further? Land prices are quite steep; bringing materials to the island comes at a high cost.
Needless to say, the island’s insufficient worker housing is straining the local economy in significant ways. Bruce Percelay, the owner of two Nantucket hotels, stresses: “it’s a huge problem for employers of people at the lower end of the pay scale when you need those people to live close to work.” Unfortunately, some of the very locals who benefit from resort workers’ labor are against the rise of affordable housing on their behalf. Bisnow puts it frankly: “Workforce housing is the best-performing sector of multifamily development, but it has a one-percenter problem: People in tony towns don’t want it going next to their palatial estates.”
Still, Percelay predicts a hopeful turn of events — if private companies take initiative. “There is definitely a trend for larger employers to try and satisfy this on their own because they can’t wait for the government to act.” That’s where property management companies with the will and the way can step in, filling a void (and reaping the benefits) before resort communities unravel.
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A story out of Aspen, CO suggests a bit of campaigning can go a long way when it comes to creating workforce housing. Seeking to increase its affordable housing supply for workers, Aspen Skiing Co. decided to get a little political. Now, “the company’s leaders make a point of attending planning meetings to voice support for other developers’ projects as well as concentrate workforce housing proposals along transit corridors that are already densely developed.”
The company already has workforce housing with roughly 700 beds, but it’s still pushing to change a sobering reality for employees who have “daily commutes as long as one and a half hours each way.” Defying NIMBYism to spare workers this kind of daunting drive, Aspen Skiing Co. also has the big picture in mind: “creating more workforce housing is to key to maintaining the essence of the mountainous paradise.”
From Raleigh suburbs to coastal resorts, there are ample opportunities to go after one of the biggest opportunities in multifamily: workforce housing. But how can you take the lead once you enter the race?
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Though Redwood Capital Group’s Tammy Kelly stresses young adult residents want “easy living,” she never suggests their tastes are simple. In Kelly’s view, those looking for workplace housing “want affordable apartment units in a nice area. They will certainly pay a little bit more for an upgraded, modern space.”
Here’s a sense of some of the top amenities today’s residents are after:
* Gated Access - 35%
* Rooftop Terrace - 34%
* Amazon Lockers - 31%
* Shuttle Service to Public Transportation - 31%
As you consider investing in workforce housing, it’s critical to keep in mind that many millennial renters prize sustainability in their living spaces. From Energy Star appliances to LED bulbs to natural cleaners, there are plenty of ways you can appeal to the 83 percent of residents who feel strongly that living in a green community is “good for their health.”
Finally, diligent inspections are a must as you enter the ring of workforce housing. Far from defying your ROI agenda, mobile inspections can ensure your communities stand out from the competition. Preventative maintenance is set to save you considerable costs down the line, and regularly inspecting for fire and mold risks will keep your reputation strong among a range of workers.
While overall economic growth is on the sluggish side, multifamily operators have a powerful opportunity in the coming years: meeting the demand for workforce housing. From suburban markets to mountain resorts, there are many avenues to enter the race!
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