Invest Smart: Why Workforce Housing is the Bright Spot in Today's Real Estate Freeze
Like polar bears, most real estate investors have gone into winter hibernation while they wait for the market to return with lower interest rates and increased inventory. Private equity and the commercial market are also “on pause” to preserve their capital to cover higher rates when loans renew and the risk of a capital call.
Additionally, there is the added threat that the Feds will maintain the current inflation-fighting rates and turn them into their new baseline. Will this “winter of our discontent” ever end? You can choose to go down the rabbit hole or not.
Niches in the marketplace ignore the above and march to their own drum. This is the first of three articles addressing niche opportunities within the current residential and commercial real estate markets. Let’s jump in and explore how workforce housing might be a potential investment opportunity with your self-directed IRA (SDIRA).
What is Workforce Housing?
Have you vacationed in a resort town lately only to find many restaurants that don’t have enough staff? Or was your emergency room wait unusually long after your untimely ski accident because the hospital couldn't hire enough medical staff? This is a problem many communities are facing, and often, it's because workers can't find affordable housing near these tourism-dependent communities.
Workforce housing caters to a specific demographic: the backbone of our communities — teachers, firefighters, nurses, and other essential workers who earn between 60% and 120% of the Area Median Income (AMI). These folks are the lifeblood of our cities but often find themselves priced out of the luxury housing market or struggling to find decent, affordable rentals.
The nationwide shortage of workforce housing has reached crisis levels. According to Harvard's Joint Center for Housing Studies, a staggering 22.4 million renter households with incomes between $30,000 and $75,000 faced severe cost burdens in 2022 (spending over 30% of income on rent). This troubling statistic has only worsened as home prices and rents continue to be on the rise nationwide.
Why Invest in Workforce Housing?
Here's the good news — the demand for housing remains strong, particularly in areas with growing populations and job markets, and is expected to remain that way. A persistent shortage of quality, affordable units translates to stable occupancy rates for you as an investor.
There are several reasons why workforce housing presents an attractive investment opportunity:
Stable demand: Workforce housing caters to a large and growing segment of the population. As the economy continues to recover, demand for affordable housing is expected to remain strong.
Potential for appreciation: While workforce housing properties may not appreciate as quickly as luxury properties, they tend to be more stable investments. Over time, these properties can provide steady returns and build wealth for investors.
Tax benefits: Investing in workforce housing can provide tax benefits, such as depreciation deductions and the ability to defer capital gains taxes through a 1031 exchange.
Social impact: By investing in workforce housing, you can positively impact your community by providing quality, affordable homes for middle-income families.
National Housing Market Trends
Experts expect little change in the current housing market in 2024. Home prices are expected to rise slightly, and most do not expect interest rates to drop to the low rates we all enjoyed in the early 2020s. These trends will continue to make it difficult for middle-income families to find affordable housing.
Several converging trends have set the stage for workforce housing investments to thrive in the years ahead:
Relentless housing shortages: Nationally, we're millions of units short of what's needed to meet demand. Supply deficits are especially severe for moderately-priced rentals, as housing construction heavily favors high-end apartments and single-family homes. Even in the wake of pandemic disruptions, this shortfall persists due to chronically underbuilt markets.
Demographic shifts: Overall population growth, immigration levels, and the increasing number of millennials forming households will continue driving up rental demand. Meanwhile, homeownership affordability remains elusive for many due to high prices and rising mortgage rates.
Urban job growth: Major job hubs like Phoenix, Dallas, Atlanta, and sunny Florida markets are experiencing an influx of new residents clamoring for nearby, reasonably priced apartments. Employers now view workforce housing access as a key factor for attracting and retaining talent.
Friendly regulatory environment: Many states and municipalities have rolled out incentives, zoning allowances, and public-private partnerships aimed at increasing workforce housing development in their communities.
With a lack of inventory, robust population growth, urban employment opportunities, and cooperative policymakers all contributing tailwinds, the investment outlook for workforce housing is stellar.
Strategies for Investing in Workforce Housing with Your SDIRA
Investing in real estate requires a strategic approach, particularly in a specialized segment like workforce housing. Here are some strategies to consider:
Location selection: Focus on areas with high employment growth but inadequate housing supply. Regions with growing industries but high living costs are ideal targets.
Value-add investments: Look for properties that can be improved to increase rental yields and property value. Simple upgrades can significantly enhance attractiveness and competitiveness in the market.
Leverage expertise: Partner with local experts who understand the market dynamics and can provide insights into specific communities and the regulatory landscape.
What’s the Next Step?
How do you take advantage of this opportunity? As with all investments, doing your homework and due diligence is vital. My clients using their SD-IRA/401k are masters of niche opportunity due diligence. So, as you begin to do your research, here are a few tips to help you start the process:
What does the community need? Interview the directors of Economic Development, Construction & Zoning, major employers, and town council personnel. Spend time on-site touring and asking what is available for development that may not be on the market.
Ask what has been attempted and why it has not succeeded. What have been the impediments to resolving the situation? Have those impediments changed, i.e., zoning changes, a drop in affordable housing components, or a change in parking requirements, to name a few often cited reasons?
What is the cost of construction? What is the timeframe from start to finish? Note: the average time in California to start construction is five years! What innovations can you bring to the market? What repurposing of existing buildings could be considered?
Lastly, understand that financing is still an issue with most local commercial banks. Seek alternative financing options as well as community-based TIF, LEDA grants, and other development incentives being offered.
The Sustainability Angle
Another trend that is gaining traction in the real estate market is sustainable housing. Sustainable housing refers to properties designed and built with a focus on energy efficiency, environmental impact, and long-term sustainability.
Interestingly, many workforce housing properties are well-suited for sustainable upgrades. Investing in workforce housing and incorporating sustainable features can potentially increase your properties' value while reducing operating costs and environmental impact. Many states also offer incentives for green building practices, further improving financial returns.
How Chicago Trust Administration Services Can Help
The need for workforce housing today is immense, yet traditional funding sources have been slow to catch up. Public housing agencies, federal programs, and typical private multifamily builders are ill-equipped to meet the national demand.
That's where forward-thinking investors utilizing investment vehicles like SDIRAs can move the needle. By leveraging such versatile capital, you can partner with cities, nonprofits, and mission-aligned developers to bring transformational workforce projects to fruition.
At Chicago Trust Administration Services, we specialize in helping investors leverage SDIRAs to capitalize on promising real estate opportunities. Our team of experts can guide you through the process of investing in workforce housing through your SDIRA, ensuring compliance with all relevant rules and regulations.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
This underserved market represents a chance to generate compelling returns while tangibly uplifting communities across the country. I encourage investors intrigued by this space to begin exploring workforce housing opportunities. Those with the vision to act first will be game-changers shaping a better future.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.