Making Workforce Housing Work

Ask five people in the affordable housing industry for a definition of “workforce housing,” and you’ll get five different answers. One thing they can agree on, however, is a great need.

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The federal Low-Income Housing Tax Credit (LIHTC) program defines workforce housing as affordable to a family of four earning as much as 60 percent of the area median income, or AMI. Paul Williams, CEO of Minneapolis nonprofit developer Project for Pride in Living, describes it as homes for “worker bees.”

“These are folks who are out working in our economy,” Williams said. “We desperately need them to be stable and productive, and quality affordable housing, especially along transit lines, is a huge need.”

The gap between wages and rents continues to widen nationwide, according to Out of Reach, the National Low Income Housing Coalition’s 2017 report on affordability. A full-time worker earning the federal minimum wage of $7.25 an hour would have to work 117 hours per week, every week, to afford a two-bedroom apartment without spending more than 30 percent of his or her income on housing costs, the report notes.

This problem is nothing new. Project for Pride in Living began as an affordable housing developer in 1972, evolving into a multi-service agency that also provides job training, education and assistance to the homeless. New light-rail lines, upgraded bus corridors and municipalities’ move toward mixed-income neighborhoods spurred its recent foray into workforce housing.

PPL opened the $18 million Hawthorne EcoVillage Apartments in north Minneapolis in December to households earning no more than 50 percent of AMI, or about $42,000 for a family of four. One third of the 75 units are reserved for people earning less than 30 percent of AMI. The development took 10 years to finalize, largely due to difficulties in assembling financing. PPL received about 500 inquiries before it began taking applications.

“That, to me, speaks to demand, and with demand there’s opportunity,” Williams added. “We need more private developers doing this work.”

However, private entities face significant barriers to delivering such projects, according to Dave Borsos, who helps coordinate the National Multifamily Housing Council’s workforce housing committee. The costs of purchasing land and building materials, and of meeting regulatory requirements for zoning and parking, can make such endeavors “economically unviable,” even with rents affordable for those earning as much as 80 percent of AMI, he said.

Bridging the wage gap

Nonetheless, demand can create viable opportunities. Phoenix Realty Group specializes in markets with little available land and high costs, according to company president Keith Rosenthal. The developer is completing a 380-unit high-rise in Jamaica, Queens, N.Y., next to the Jamaica train station. Move-in is expected in July.

In exchange for participation in a city subsidy program, Phoenix agreed to income and rent restrictions that allow for roughly one-third each of low-income, workforce- and market-rate rents. Alvista Towers cost $150 million to develop on land that had previously been zoned for high-density housing.

Phoenix’s primary focus is workforce housing, which Rosenthal defines as “market-rate that happens to be priced for middle-income folks.” The company also purchases and renovates Class B properties in primary and secondary metropolitan areas on the coasts and in mountainous western states such as Colorado, Nevada and Utah. It recently purchased a 248-unit, Class B asset near Tampa, for $28.2 million, and will rebrand it as Alvista Sterling Palms. In Englewood, Colo., the company bought a 312-unit garden-style community built in 1991 along Big Dry Creek Trail. It will become Alvista Trailside.

“All those markets have experienced significant rent growth that has outpaced wage growth in the last seven or eight years,” Rosenthal said. “The need is, simply put, widespread.”

Phoenix only raises rents on apartments after they are vacated and modestly renovated. Purchasing Class B property is much less expensive and more predictable than new construction, Rosenthal added. His company typically buys buildings at below replacement cost, which allows it to charge lower rents.

Working both coasts

Irvine, Calif.-based Avanath Capital Management purchases Class C buildings in expensive markets “with the goal of making them nice B-minuses,” said CEO Daryl Carter, a past chairman of NMHC. The buildings might have high vacancy rates or be in neighborhoods that institutional investors usually avoid.

When Avanath launched its first fund in 2009, those investment vehicles shied away because they wanted higher returns. Now the company has investments from two public pension funds whose beneficiaries—teachers and police officers—cannot afford housing in their communities.

“More capital has flowed into the sector,” Carter said. “The perception is there’s greater acceptability in older properties because of the affordability challenges, which are acute today.”

Avanath has focused on cities with strong job growth and lagging wages, such as New York City and Washington, D.C. Smaller markets such as Sacramento and Orlando have also proven attractive, the latter even more so lately, given the influx of Puerto Rico residents fleeing the hurricane-ravaged island.

The public-private recipe

Some private developers who have run out of Class B or C properties to convert along the coasts have set up shop in the Twin Cities over the last few years, making the need to preserve this so-called naturally occurring affordable housing (NOAH) even more urgent, according to Alan Arthur, CEO of Minneapolis-based developer Aeon.

States and municipalities can help. The Greater Minnesota Housing Fund’s NOAH Impact Fund joined Aeon and Enterprise Community Investment of Columbia, Md., in the $77 million purchase of 768 units across 10 apartment properties last year. It was the first investment for the public-private NOAH Impact Fund, whose investors include area banks and foundations. Freddie Mac is making as much as $100 million in debt available in first mortgage financing as a complement to the equity secured by the fund.

In 2016, the city of Denver established a $150 million fund to support affordable housing creation and preservation. The metro’s booming economy and need for workers translate to a deficit of 22,000 affordable units. Denver defines workforce housing as affordable to those earning between 40 and 80 percent of AMI, according to Erik Soliván, executive director of the mayor’s Office of Housing and Opportunities for People Everywhere (HOPE). That’s $33,000 to $67,000 per year for a family of four.

HOPE is encouraging private builders by leveraging city dollars to develop or preserve about 3,000 units by 2023, Soliván noted. Income restrictions on about 2,000 units will expire soon, adding time pressure.

“Part of our work on the affordable housing plan is really to stress the urgency of addressing these issues to leverage and collaborate with our partners,” Soliván said. “LIHTC is a great tool. How do we add more tools to that box to address our immediate affordability needs?”

You’ll find more on this topic in the April 2018 issue of MHN.