Bridging the Gap: Workforce vs. Affordable Housing

“The rate increases have a two-pronged impact (1) the cost of capital for borrowers is higher, and (2) the value of these assets is lower. I think that there will be some forced sales, and some structured solutions, but very few workouts unless both the borrower and lender are impaired. Lenders likely won’t be inclined to do workouts with borrowers unless offering the borrower more time allows the lender to recover lost principal.”

- Jesse Wright, Managing Director at JLL/v

Hi Nuvo Community,

_{In the complex landscape of U.S. housing, two terms often create confusion: "Workforce Housing" and "Affordable Housing." While they might seem interchangeable, the implications of these categories differ significantly, affecting investment strategies, policy decisions, and public perception. In this article, we seek to delineate the differences and discuss why understanding these distinctions is vital for both housing providers and the investment community. For starters, we are not talking about housing affordability as a whole, which as you can see in the chart below has gone from pretty good to pretty bad in a matter of months as the Fed aggressively hiked interest rates over the last year. In the middle of 2022, the housing affordability index was close to 104 (Anything over 100 is considered more affordable). The index currently sits below 90, a drop of over 15% in a very short period of time and an indication that housing has become significantly less affordable in recent months.}

_{The Semantics Matter: Workforce vs. Affordable Housing}

_{"Workforce Housing" typically refers to housing that is affordable to households earning between 60% and 120% of the area median income (AMI). It's aimed at individuals who are gainfully employed but might find market-rate housing out of reach—think teachers, police officers, and healthcare workers.}

_{On the other hand, "Affordable Housing" generally targets those earning below 60% of the AMI. These are sometimes subsidized housing programs aimed at low-income families, seniors, and people with disabilities. While the target demographics are diverse, the underlying assumption—which is often incorrect—is that this category is not part of the working class. Take a look at the chart below to see an illustration of how “Affordable” and “Workforce” Housing incomes have changed over time.}

_{Breaking the Stereotype}

_{The term "Affordable Housing" often carries a societal stigma, conjuring images of unemployed individuals or economically depressed neighborhoods. This stereotype is both damaging and misleading. Many who reside in affordable housing units are indeed part of the workforce but earn incomes that make market-rate housing unaffordable. The connotation that "Affordable Housing" is not for the working class can perpetuate economic segregation and hinder investment in these critical housing segments.}

_{Why the Distinction is Crucial for Investors}

_{Understanding these nuanced categories is essential for investment decisions. Workforce housing usually requires less capital investment upfront and promises stable returns given the constant demand. Affordable housing, although often subsidized, can offer social impact returns and potential tax benefits. Knowing the difference enables investors to align their investment strategies with their financial and social objectives effectively.}

_{The Macro Picture: Economic and Social Impacts}

_{The gap between workforce and affordable housing isn't just a semantic issue; it has broader economic and social ramifications. The inability to clearly distinguish between the two can result in misguided policies, misallocated resources, and missed investment opportunities. Moreover, it can contribute to the ongoing affordability crisis, making it difficult for communities to thrive and for businesses to attract a diverse workforce. According to data we collected from the U.S. Census Bureau, “Affordable Housing” includes almost 1/4 of U.S. households (see pie chart below).}

_{Aligning with Investment Partners}

_{For investors, a deep understanding of these housing categories is not merely academic. It's a crucial component of any investment strategy. By distinguishing between workforce and affordable housing, you can better identify markets that offer strong growth prospects and social impact. As we continue to navigate the intricacies of the multifamily housing market, our data-driven approach ensures that we have numbers to back up our approach.}

_Conclusion

_{The terms "Workforce Housing" and "Affordable Housing" may seem simple, but their implications are far-reaching. Understanding the difference is crucial for breaking societal stereotypes, making informed investment decisions, and formulating effective housing policies. As we continue to explore the complexities of the housing market, we remain committed to offering nuanced, data-driven insights that serve the needs of our investment partners and contribute to broader social well-being.}

Implications

For real estate investors- know the market you are investing in, or at least make sure your operating partner does. Does the submarket already have a high percentage of burdened households? A high debt service ratio? These are just 2 of the more than 100 data points Nuvo Capital Partners collects and analyzes before investing in a market.

Happy Real Estate!

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Analytics Officer of Nuvo Capital Partners

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