NMHC Special Report: Working Towards Workforce Housing

By Mike Ratliff, Senior Associate Editor

Though we all like a slick rendering and discussing new trends in luxe amenities, the reality is that the median U.S. renter earns $36,000 a year. While employment growth averaged a healthy 246,000 jobs added per month in 2014, over 40 percent of the job growth over the past four years has been in lower-wage industries.

(Left to Right: Daryl Carter, Avanath Capital Management; Cindy Clare, Kettler Management; Larry Curtis, WinnCompanies; Hugh Frater, Berkadia.)

“The number of people that went from moderate income to low income increased dramatically since the recession,” said Hugh Frater, chairman of Berkadia, at panel covering workforce housing at the 2015 NMHC Apartment Strategies Outlook Conference in Palm Springs this Tuesday.

“Most working and lower income families are rent burdened. The number of people spending 30 to 50 percent of income on rent—and even more than 50 percent of income on rent in certain cases—has risen dramatically. When people are spending more than 50 percent of income on rent, they are also often deciding on whether or not they can afford food.”

Frankly, the amount of affordable housing hitting the market is not even close to meeting demand. Apartment starts for 2015 should fall in the 500,000-unit range. Of those, 100,000 units are developed with federal LIHTC as affordable to people earning 60 percent or less of AMI.

“If you happen to earn 61 or 65 or 68 or 80 percent of AMI there are no such programs,” said Larry Curtis, managing partner at WinnCompanies. “By virtue of math, there is a significant population of the industry that we can’t serve. Even if land and building permits were free, the cost to build could not be supported by rents. In the end—if we want to be honest—to create workforce housing we need to create some level of subsidy.”

The demand and business case certainly exists, as Daryl Carter, panel moderator and CEO of Avanath Capital Management pointed out.

“As an investor in the this space, our portfolio is about 98 percent occupied,” Carter said. “We are delivering double digit returns to our investors. That is why everyone in this room should have an interest.”

(Daryl Carter on trends in workforce housing.)

Cindy Clare, president at Kettler Management, said that any new workforce program should look to improve some of the shortcomings of existing affordable housing subsidiaries.

“The paper work can be a be burden on the landlord,” Clare said. “This is particularly true if you have layers, like a tax credit section and a rural land portion. You might have 12 different reports for four different agencies. All of the info is the same, but the documents are formatted differently.”

For now, one of the best ways to access the workforce space is by acquiring properties nearing obsolescence an executing a light value-add. But as Carter pointed out, it is easy to overshoot the mark.

“What happens is that some properties get over rehabbed to try and get the higher rents, when a perfect market to serve already exits. They overstep it.”

This overstepping, or “expense-added” rehab as Curtis dubbed the phenomena, has a habit of creating gentrification—an acute issue in many cities. WinnCompanies has instead found success in the mixed-income workforce space by executing adaptive reuse plays. Voke Lofts in  Worcester, Mass., is one such success story. The redevelopment of a vocational school into an 84-unit, mixed-income apartment community combined federal historic tax credits, and both federal and state low income housing tax credits, to achieve 75 percent of the capital cost.