Why Workforce/Affordable Housing Outperforms Other Multifamily Apartment Asset Classes
“Workforce” or “Affordable” Housing refers to apartment communities that are geared towards low-middle income renters. These apartment communities are often referred to as Class B or Class C apartments. This is in contrast to Luxury apartments with higher end finishes which cater to higher income renters. Luxury apartments are often referred to as Class A.
Research from CBRE has shown that Workforce housing has consistently outperformed other asset classes, with lower vacancy and higher annual rent increases. Why has Workforce housing been able to perform so well? In this article we answer that question.
Limited Supply
High cost of construction limits new workforce housing starts. Developers are creating luxury apartments as these are the types of new construction that are financially viable in the current economic climate. This creates limited supply to address the increasing demand caused by growing renter populations (Baby boomers, Millennials and Gen Z). Low supply and increased demand equal value to be realized by those who invest in workforce housing.
Recession Resilience
Workforce/Affordable housing is seen as a recession resistant asset class. During recessions, this class of housing is affordable for those who previously lived in luxury apartments but have to cut back on spending. In times of economic growth, those who have benefited from increases in salary can move up from lower income housing or may remain in the affordable housing bracket as luxury apartments are still out of their financial reach. This has proven true in the post 2008 economic cycle as slow income growth compared to cost of living has created an ongoing demand for affordable housing.
Discounted Prices with Hidden Value
As workforce/affordable housing typically is more dated than Class A assets, these properties provide a value-add opportunity. This means investors can purchase the property at a discount compared to luxury apartments and perform improvements via renovations to increase the value of the property and amount of rent that the property can command. This is often referred to as forced appreciation. As these properties are purchased at a discount and value is added to them there is equity placed into the property. This equity will allow the property to retain value above the purchase price and still command sufficient rent through recessionary dips.
Future Outlook
The demand does not look like it will slow down for the foreseeable future. In today’s economic climate of increasing costs of living, and increasing renter population affordable housing is a solution for many Americans. As noted previously workforce/affordable housing has the lowest vacancy rates.
There you have it. The reasons why workforce/affordable housing outperforms other asset classes:
High cost of construction limits new workforce housing starts.
Workforce/Affordable housing is seen as a recession resistant asset class.
Workforce/affordable housing properties provide a value-add opportunity.
Demand does not look like it will slow down.
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