Workforce Trends Drive Investment Strategies

By Elie Rieder, Founder & CEO, Castle Lanterra Properties

The term “workforce housing” means different things to different people. While the definition may be open for debate, there is no question that the demand for quality, affordable rental housing in proximity to the workplace is growing in markets across the country. With a sound strategy in place, workforce housing can be a smart real estate investment.

The evolution of the U.S. workforce–driven by the Millennial generation as well as economic fluctuations–is impacting every sector of the commercial real estate industry, from office to multifamily. There are currently 80 million Millennials (ages 18-34) living in the U.S., and they make up one-third of the total U.S. workforce. A majority of Millennials (68 percent) are also renters, a clear indication that this mobile generation does not want to be tied down to a specific location. They choose to rent because it gives them the flexibility to pursue career advancement opportunities in other markets and quickly adjust to other life events, such as marriage or children.

Additionally, high barriers to homeownership such as higher down-payment requirements, limited construction of starter homes and stringent mortgage underwriting continue to suppress purchases by first-time buyers.

Restoring and enhancing existing–and often more affordable–rental housing is an essential strategy to address workforce housing needs. The key is to identify well-located, undervalued multifamily properties in primary and lower-tier markets with sound underlying fundamentals, such as positive employment, population growth and a favorable business climate. Also important are inadequate supply of high-quality rental properties and proximity to employment centers, mass transit, retail and recreation.

Post acquisition, properties must undergo a rigorous value-enhancement program, including thoughtful renovations, operational improvements and ancillary income development. The goal is to reposition each asset to provide a quality living experience at an affordable price, as well as to maximize NOI and achieve attractive risk-adjusted returns for investment partners.

The success of this strategy hinges on conducting meticulous due diligence. This requires a multi-disciplinary evaluation of each potential transaction that combines financial, operational and technical expertise with an in-depth understanding of local, regional and national markets.

While primary markets have historically accounted for the majority of deals and volume, economic momentum continues to spread into secondary and tertiary markets, raising apartment performance and enhancing the appeal of assets in these markets to investors seeking higher yield.

For example, Austin draws a highly educated, upwardly mobile workforce attracted by the city’s dynamic lifestyle and economic opportunities. Austin ranks first in the U.S. for net in-migration and has the lowest unemployment rate among the 50 largest metropolitan areas. Less than a year ago, Oracle announced a major expansion that will bring more than 4,000 jobs to a new corporate campus. Properties including the 1825 Apartments, situated in the heart of the growing tech sector, and Arrangement, located in the revitalized East Riverside corridor, provide upscale housing at a value-oriented price point.

Another example is Tuscaloosa, Ala., a stable and growing tertiary market with a strong, diverse local economy and a need for high-quality, affordable housing. Multifamily properties such as The Heights at Skyland–located in close proximity to the University of Alabama and the Mercedes Benz plant–offer an attractive entry point, higher yields at inception and value-add opportunity to restore and renovate units to a level similar to new-construction properties.

Continual strategic analysis and review, as well as implementation of value-add initiatives, is needed to ensure that acquired properties continue to meet the evolving demands of the local workforce. When people can afford to live closer to their jobs, the community reaps the benefits. Commute times and traffic congestion ease, neighborhoods are more diverse, and economies are strengthened by helping employers attract and retain essential workers.