Developers Are Finding Available Capital To Create More Workforce Housing

A nagging, notorious, nationwide shortage of housing is perhaps the most pervasive trend in real estate in the last decade, but the private sector has struggled to respond, finding the economics of such housing types untenable for their balance sheets.

But with an obstinate housing market that has seen prices continue climbing in spite of higher interest rates meant to slow the economy, developers and investors seem to at last see a path to profits that includes income-restricted housing.

“Our philosophy is that while there needs to be government interventions, that can't be the only way to resolve this problem,” said Scott Berka, Greystar senior managing director of brand and customer experience. “There has to be a private-market solution that can help consumers, but also make sense from a business standpoint.”

Greystar last month announced the launch of a new brand of workforce housing, called Ltd. By Greystar, which the company says will be “attainable” to workforce households. The first project under the brand, Med Center in Houston, leases for between roughly $1K and $1.1K per month for a one-bedroom and $1.4K per month for a two-bedroom unit. Properties developed under the Ltd. By Greystar brand will restrict annual rent increases to the consumer price index or 3%, whichever is greater.

The term “workforce housing” is most commonly used for households with incomes between 80% and 120% of area median income, or AMI, according to The Brookings Institution. The lack of housing for those households isn't usually as dire as for very low-income households, but it is significant.

Those who need access to workforce housing, or the “missing middle,” are often considered the backbone of communities, performing crucial but not particularly well-compensated jobs, like teaching, nursing or fighting fires.

In a report published in November, Fannie Mae grouped metro areas by characteristic and detailed their estimated shortfalls of low-income and workforce housing.

High-cost coastal markets like metro New York and Los Angeles were short more that 911,000 units affordable to low-income households, but 1.25 million units for households between 80% and 120% of AMI, according to Fannie Mae.

In tech-heavy areas like San Francisco and San Jose, the workforce housing shortage is 161,000 units, and in emerging markets like Austin, Dallas and Denver, the shortage is about 629,000 workforce units.

“There's a whole population of people out there who none of us typically think of as being cost-burdened, or, you know, stressed to be able to afford an apartment," PTM Partners CEO Michael Tillman said at a Bisnow multifamily event in November.

“It is the people who are young professionals, first responders, nurses, teachers, they can’t find a place to live within short distances of their jobs,” Tillman said.

Besides Med Center, Greystar says it will develop four other Ltd. projects, with about 1,600 units planned to deliver in the next 18 months.

To facilitate the promised rent levels, Greystar recently opened a modular construction factory called Modern Living Solutions, which will focus on building modular apartments for the Ltd. brand. off-site.

Greystar plans to manufacture its units in the new factory outside of Knox, Pennsylvania, in April. Manufactured components to cut costs in construction is an old idea that hasn't quite caught on in the United States for a variety of reasons, but Berka asserts that the manufacturing technology is advanced enough to provide the cost efficiencies needed to make the development process work.

“That helps us with the ways to reduce waste pretty consistently, and it helps with the speed of delivery and buying efficiency,” Berka said. “We buy in bulk a lot more than we'd be able to across multiple deals. All of those things contribute to a bit of cost savings, but also a pretty significant time savings.”

If Greystar can make development work from a cost perspective, it has no doubt that there will be demand for as much product as it can make, Berka said.

“For our two properties that are currently in lease-up, we're seeing double or triple our usual leasing volume,” Berka said. 

Investors are interested in the sector as well. In late 2022, Bridge Investment Group raised $1.74B for its second workforce housing fund, roughly triple the total of its first, with most of the investors in the first fund upping their totals for the second.

“Currently, 82% of our workforce and affordable housing residents earn less than 80% of AMI, and over 96% are not cost-burdened, typically defined as spending more than 30% of income on rent," Bridge co-Chief Investment Officer Rachel Diller said in a statement.

Hillpointe, which develops workforce housing in the Sun Belt, recently closed its $510M Hillpointe Workforce Housing Partnership IV, which the company says will facilitate the development of about 8,000 workforce housing units in Hillpointe’s pipeline.

“Over the past two years, our ability to control construction costs has differentiated us from our competitors,” Hillpointe Managing Partner Kelly Mahoney said in a statement.

“We have a wealth of great sites in our pipeline, our construction process is streamlined, and our supply chain has been optimized ... we are well-positioned to execute on our forward pipeline of 25 to 30 workforce housing projects," Mahoney said.

Financing is an issue throughout real estate, but there are factors mitigating that particular issue in the affordable housing sector, including workforce housing.

“There's a lack of credit available for any ground-up development, as community banks and even the national and international banks are starting to put their foot on the brakes for construction lending,” said Redwood Dev Co. principal Brian Sidman, whose company finances workforce housing projects.

On the other hand, bank regulators are pushing for more workforce housing and affordable housing throughout the country nationally, because there's a massive need for it, Sidman said. 

“Demand is pretty hefty,” Sidman said. “There's always going to be credit for construction projects that have a huge demand and lack of supply.”