Work in Progress
Market challenges limit the supply of workforce housing, but zoning, construction innovation, and changing preferences could provide much-needed boosts.
In traditional real estate parlance, housing for middle-market customers is workforce or Class B housing. Many in the industry today prefer the term “attainable housing.” Whatever the name, in many markets, there isn’t enough of it, and prices can be a strain for those who need it.
“Everyone is aware that there is an affordability crisis in housing, and it doesn’t just affect people who don’t make any money — it affects people who make a decent living,” says Jeffrey Engelstad, CCIM, a clinical professor at the Burns School of Real Estate and
Construction Management at the University of Denver. “In some markets, you might need to make 130-140 percent of the [average median income] to afford a home.” The University of Denver, he adds, sees attainable housing as such a pressing issue that it’s hoping to offer a special semester-long course on the
topic this fall.
Supply is part of the issue. Rental housing construction has remained steady; 360,000 rental units were completed in 2018, according to the 2019 State of the Nation’s Housing report from the Harvard Joint Center for Housing Studies. But those were aimed at high-end renters, and, according to
the study, the number of units renting for less than $800 a month has decreased every year since 2011 — a net decline of four million units.
Economics play a part as well. Land and construction costs make building expensive, so housing is geared toward higher-end buyers or renters. Also, in many areas, wage growth hasn’t kept up with housing prices, leaving many renters and buyers scrambling for suitable
housing. The Harvard report says that, in 2017, 31 percent of U.S. households spent more than 30 percent of their incomes for housing, including 15 percent who spent more than 50 percent of their income.
At the same time, the issue poses challenges for municipalities as well. They lose the diversity of middle-income residents — teachers, police, and health care workers, for example — who are unable to afford housing in the community. They also face pressure from local business
that may be unable to attract employees because of the high cost of housing.
Because of its scarcity and demand, attainable housing presents opportunities for commercial real estate professionals, but they require creativity, patience, and a willingness to explore alternatives on the part of both the real estate community and municipalities needing attainable housing. Workforce housing “is not well defined in the industry, and
it’s certainly not legally defined in many places,” says Adam Ducker, senior managing director at RCLCO Real Estate Advisors in Bethesda, Md. He says that while attainable housing is often described as housing costing 80-120 percent of median income, “we sometimes use the range of 80-160 percent. That’s a range
that sociologists often use to describe the middle class.” Ducker adds that the term generally describes non-subsidized housing, in contrast with affordable housing, “which is also a vague term, but that’s often used to describe housing in which there’s some government program that’s making it affordable.”
Younger people in the home market gravitate toward location and amenities, rather than size and luxury.
Ducker co-authored “Attainable Housing: Challenges, Perceptions and Solutions,” published last year by the Urban Land Institute. The report focused on for-sale housing, but many of its findings have applicability for rental markets as well. One prominent note: Smaller and
more-affordable homes simply aren’t being built. “Small housing, under 1,400 sf, has historically represented about 16 percent of new construction but in the last cycle has averaged closer to 7 percent,” the report says. “When combined with the next size category, 1,400 to 1,800 sf, the overall distribution of
‘small homes’ has declined from just under 40 percent to 22 percent, whereas homes over 2,400 sf have increased from 32 percent to 50 percent of new construction since 1999.”
Land and construction costs, along with development and impact fees, drive up the cost of residential housing, and local zoning ordinances can make it difficult to experiment with smaller lot sizes, increased density, and additional rental units. A longtime solution to affordability — building farther from the city centers — has become less
appealing as communities struggle to contain sprawl and residents reject long commute times.
“For municipalities, there are all sorts of strategies that could put a dent in the problem,” says Engelstad. Towns could ease zoning and density requirements to allow accessory dwelling units and cottage homes or permit duplexes on single-family lots; they can also revisit
design standards that can add cost to new construction. Easing zoning regulations could also be a more appealing alternative than financial incentives such as relief for impact fees, adds Ducker.
“Vision 2030,” a recent report issued by the National Multifamily Housing Council and the National Apartment Association, included a range of local government initiatives that could encourage attainable housing, including expedited development review, establishing density
bonuses, and adopting separate rehabilitation building codes.
On the development end, “we see the door as opening a little bit — more and more people are focusing on it for several reasons,” says Ducker. “People are seeing there’s a huge market opportunity — there are a lot of people who are underserved for housing. If you can figure
out how to do it, you’re tapping into an underserved market and maybe even a market that’s less cyclical than luxury housing,” which can be affected by slower turnover or a downtick in the economy. Also, he says, “there are beginning to be enough signs of success of people who have figured out how to
make the economics work. There are more examples in every product type.”
Larger or more luxurious housing also becomes impractical for millennials entering the housing market and baby boomers looking to downsize. In fact, says Ducker, many millennials are less interested in high-end housing and instead focus on location and local amenities like walkable
communities, accessible transportation, and good schools. “Millennials are proving they will trade lots of things — their housing may be smaller, simpler, plainer, denser — but the location trade-off is a lot harder to get them to agree to.”
One example: “America is awash in close-in, middle-class suburbs which have unexciting housing, but millennials seem perfectly open to it,” Ducker says. “They take ‘50s or ‘60s ramblers, fix them up, and give them some character. They don’t mind that they’re small and
simple. One of the things we see — and this might be healthy from an urban growth perspective — is they might be a big factor in helping to reinvent some of our aging inner suburbs. [Millennials] are not as hung up on the community being historical or tony. These places are interesting, they have quirky
housing, they’re diverse, and they’re affordable. It’s a creative way to reuse our existing inventory as well.”
Land and construction costs make building expensive, so housing is geared toward higher-end buyers or renters. Also, in many areas, wage growth hasn’t kept up with housing prices, leaving many renters and buyers scrambling for suitable housing.
One area where costs can be reduced is construction innovation, but Ducker says “that’s the place where we’ve made frustratingly slow progress, even though it seems like it would be a place to move the needle.” Downgrading cosmetic features and finishes — formica, say,
instead of granite countertops — doesn’t save significant amounts of money. “But suddenly you go from custom construction to manufactured, where it’s assembled on site,” he says “People talk about saving 15, 20, 25 percent or more. That could be meaningful. You would not only save time, you might
arguably also save on future maintenance costs because you’d have fewer defects. We have the technology to do it, and it’s happening, but the industry hasn’t moved quickly enough. It takes time, energy, and risk tolerance to figure it out.”
The ULI report included product solutions such as smaller houses, high-density detached housing, and “missing-middle” housing — units designed to fit into communities that might otherwise turn away attached housing. These have densities somewhere between single-family
homes and mid-rise apartments and include duplexes, triplexes, townhouses, and courtyard buildings.
Although progress has been slow, Ducker says, as people see and understand attainable housing, “they’ll begin migrating to it, and eventually they’ll flock to it.” The ULI report, he says, argues “there’s money to be made
in this. You may be doing good, but it’s not about being a do-gooder. I think the hope and expectation from people working on it is that this could be as economically compelling as building luxury housing.”
Phoenix-Area Developer Rises to the Challenge
Greenlight Communities, an apartment developer based in Scottsdale, Ariz., is hoping its new venture in the Phoenix area will demonstrate that workforce housing can be both attractive and profitable.
The company has 10 projects throughout metro Phoenix, including two scheduled to begin leasing in March, four under development, and four due to break ground. The Cabana apartment communities will offer studio and one- and two-bedroom units at monthly rents $300 to $500 less than the average rent for similarly sized units.
“Our group has been in business in Phoenix since 1996,” explains Greenlight cofounder Patricia Watts. “We were building for-sale properties — condos and townhouses — and we did a lot of apartment acquisitions that we renovated and brought back to life in good urban areas.” In doing so, though, Watts and her partners saw the need for attainable rental housing. “All the new properties that were being built were Class A properties. We didn’t see anybody building Class B.”
So two years ago, she says, “we challenged ourselves to develop a building prototype that we could construct for a cost that was low enough for us to deliver to the market and charge rents that the average renter could afford.” Location was also important. “We think it’s important to deliver attainable housing in locations where people want to live — good school districts, close to transportation, close to employment corridors. We don’t build out in the ring; we look for urban infill,” Watts says.
The company focused on two areas for cost savings. They looked at “really understanding what renters need,” says Watts, “and we removed all of the very expensive amenities that [Class A] buildings have.” These include luxuries such as climbing walls, wine storage, and large clubhouses. “Those things are expensive to build and maintain,” says Watts. “And what we knew about renters from our previous experience is that very often a lot of those amenities go unused.”
Greenlight Communities' Cabana development aims to fill a need for affordable, quality housing in the Phoenix area.
But the communities aren’t bare-bones. “We looked at what tenants do need,” Watts says, “and in Phoenix, everyone needs a pool. We also included a fitness facility, and, with our tenant profile, we determined that coworking space was also necessary, so we included that as part of our amenity area.”
The apartments themselves also boast nine-foot ceilings, an abundance of natural light, quartz countertops, and stainless-steel appliances. “We deliver an interior finish that renters can be proud of and is in keeping with new product in the market,” Watts says.
Greenlight also uses three-story wood frame construction, which is less expensive. But the company has been particularly intent on cutting out middleman costs. “We are our own general contractor,” says Watts. “We do everything in house, like the land acquisition and entitlements. We use third-party architects and engineers, but do everything else ourselves.”
The communities are also being built without government assistance, and Watts says that more than $150 million in capital was raised for the venture. “The response from the investor network has been fantastic,” she says. “This particular product type is getting everyone’s attention, because there’s so much need.”