Amidst the era of The Great Resignation, the ongoing pandemic workforce shortage has been further exacerbated by a housing crisis in key workforce geographies nationwide. Despite the fact that workforce housing has undeniably been in high demand for years, the lack of viable project opportunities has been a difficult reality for the industry.
As the requirements of the workforce shift, so also must its housing. It’s no secret that the housing crisis hit a fever pitch in 2021, with a 45-year record for price increase. With an average of 15 days on the market prior to sale and 60 percent of homes going off the market within two weeks, workforce housing needs are dire and require some sharp augmenting.
So, how can investors plot projects to meet demand and disrupt this challenging reality for the real estate industry?
Resourceful and intentional commercial real estate professionals are helping to turn the tides for financing and delivering workforce housing projects. To strike the perfect balance between housing affordability and profitability, investors must key in on non-primary locales, flexible design and risk mitigation.
As an industry, we need to appreciate that many of those in today’s workforce are veering away from major cities to secondary or tertiary areas. Until recently these locations were not as highly considered for real estate investments, but this perspective is changing amidst the influx of residents seeking to benefit from the lower cost of living while still retaining many of the same work opportunities and benefits in this remote work environment. Living with greater access to active, outdoor lifestyles that offer better schools, better flexibility and a healthier environment make an enormous difference for residents.
There are two location groupings that investors should evaluate when it comes to workforce housing. Certainly mid-size cities have been on investors’ and developers’ radars, such as Phoenix and Tucson, Ariz.; and Austin and San Antonio, Texas. But we also must not overlook the scale of cities under 250,000 in population, such as Boise, Idaho; St. George and Logan, Utah; or Bozeman, Mont.
While many opportunities still lie in major cities, the industries with the highest demand for workforce currently—like manufacturing, state and local government, transportation, warehousing and utilities—are also able to shift to these locations. Additionally, many positions may also allow for a refreshed approach to the status quo of office work. What’s more, real estate in these areas comes at less of a premium than in the major cities many in the workforce are moving from, improving accessibility.
Flexibility is key to workforce housing, and this extends to the property’s design. Developers ought to account for multiple uses for housing, to cater to a variety of residents. The most creative investors will utilize every opportunity available within this new reality, including short-term vacation rental space, student housing and coworking spaces. Smaller properties often help the project to remain nimble and better account for any quick shifts.
The units themselves also must offer flexibility to residents. The transition of many employers to a primarily remote workforce has arguably changed the shape of business permanently. The United States is seeing an entire decoupling of full-time work in offices, with full-time remote or hybrid schedules here to stay. Where units would once feature dining rooms, now office space is of critical importance. Primary features to consider include connectivity, Wi-Fi and a place to keep work organized within the home such as alcoves.
The multifamily space is also seeing a tremendous need for multiple young professionals or multigenerational living arrangements, further highlighting a need for flexible, better-equipped housing.
One consistent reality of workforce housing projects is the high turnover rate. Factoring in conservative deal structures when building the project underwriting model can help offset this inherent risk. We have seen very dynamic projects that account for a turnover rate as high as 60 percent, as compared to typical pandemic era turnover of multifamily residents at 47 percent. It is important to limit the financial impact of turnover by establishing rapid and repeatable turnover maintenance procedures and constant unit re-marketing pipeline.
Opportunity Zones, which are primed for a workforce boom and located throughout the nation, can also play an important role in sourcing viable project opportunities given their tax benefit. Capital gains in Opportunity Zones are tax free for 10-year investments and tax basis is stepped up by as much as 15 percent after seven years. But with any tremendous opportunity, overzealous investors can often focus too heavily on the tax benefit, instead of keeping sight on the investment itself. Investments need to produce capital gains, best done through value add to the project to make best use of the tax advantage. The project must be able to stand on its own first, regardless of a project’s Opportunity Zone designation.
By tending to the finer points of workforce housing projects through thoughtful partnering and planning, the real estate industry holds great opportunity to shift what has been a grim reality to one of prosperity.
Shawn Miller is the CEO of Archwest Capital, a direct commercial lender focused on the multifamily and mixed-use marketplace nationwide. Over the past 15 years, Archwest’s founders have managed more than $8 billion of assets and originated more than $2.7 billion of business purpose loans. Shawn can be reached at [email protected].