Best Value in Downturn May Be Workforce Housing

A white paper from Middleburg Communities assesses the impact a recession related to the COVID-19 crisis might have on apartment properties.

Where workers in vulnerable industries live. Chart courtesy of Middleburg Communities

A new white paper on multifamily industry resiliency during recessionary periods like the current COVID-19 pandemic concludes workforce housing may be best positioned to weather the current downturn despite the impact layoffs are having on lower-income workers in vulnerable industries like hospitality and food service.

The report, Finding Value in the Multifamily Universe: What Role Will Affordability Play in a Downturn?, was authored by Patrick Lynch, vice president of research and analytics at Middleburg Communities, a multifamily development, investment and management company that has acquired and developed more than 19,000 apartment units primarily in the Southeastern and Mid-Atlantic markets.

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The white paper notes a common assumption is that most workers in those industries vulnerable to the current social distancing measures live in low-rent apartments. But Lynch found of the nearly 18 million people who work in the most vulnerable industries, only about 3.3 million (18.6 percent) live in multifamily rental apartments. About 9.4 million (52.7 percent) lived in owner-occupied housing and the remainder (28.7 percent) lived in rental housing that is not multifamily, such as single-family homes, townhomes, duplexes or mobile homes.

“We were surprised to find that over 80 percent of the workers in the most affected industries, like hospitality and food services, don’t live in multifamily apartments. Of those that do live in apartments, you’re about as likely to find one in an apartment renting for $800 as you are in one renting for $1,500. Of course, this is national data from a sample and it won’t apply in every area. But I think it challenges the notion that workforce apartments will suffer an outsize loss of demand,” Lynch told Multi-Housing News.

The report notes that many renters live with another worker in the household and that makes it possible for some workers in low-wage industries to live in higher-rent apartments. Also some of the of the lowest rent apartments have a relatively high share of residents who are not in the labor force.

Competition for Urban Luxury

The downturn might impact urban luxury apartments the most because they are facing intense competition from recently delivered properties and units that are still under construction. The report notes that between 2004 and 2008, mid-rise and high-rise properties represented about 27 percent of all units delivered. In the past five years, they have made up about 60 percent of units delivered and 76 percent of units currently under construction.

Performance by Class. Chart courtesy of Middleburg Communities

These properties tend to be concentrated in urban areas because their construction costs require higher rents to be feasible, according to the report. Demand for the urban luxury apartments will likely shrink due to a recession at the same time as thousands of new units deliver. This could result in concessions and rent cuts.

“At this point, it’s difficult to imagine (luxury) rents not decreasing. The questions are by how much and for how long. At a minimum, the combination of competition and weak demand will probably force some steep concessions although operators may hold off on doing that until people are more willing and able to venture out,” Lynch told MHN.

The Middleburg report states the combination of less competition from new apartments and likelihood that the number of low-income renters could grow, might result in a more favorable supply and demand scenario for the workforce apartments. It also notes the contention that low-rent apartment residents will be overly impacted by potential layoffs is not supported by data.

The combination of factors should result in more affordable, or workforce housing, that is professionally owned and managed coming through a recession with less volatility and recovering faster than Class A urban luxury apartments, according to the report.

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