I work in the LP space of the multi family world and I’m starting to see a lot of sponsors pitch market rate workforce housing, suburban garden product in Atlanta, Charlotte, dfw, Houston type markets with around a $150k/unit basis. Granted rent growth has remained pretty strong in the b/c space, I wanted to get your thoughts on the viability of this strategy.
-Would there be a deep enough pool of long term investors to provide a viable exit to merchant equity?
-Will all the class A product coming on line today be a direct competitor with product built to a b grade level.
-have many of you seen many sponsors push this strategy? What have your thoughts been?
-any other concerns any of you have on this emerging shift toward more production of market rate workforce housing?
I work in the LP space investing in workforce housing in those markets you described above. I have seen plenty of other LPs and sponsors push this strategy, we probably underwrite 30-40 a year. Workforce housing suffers from less occupancy volatility compared to Class A and its less susceptible to economic risk because of the supply/demand metrics. Basically we see the same yields sometimes even better compared to Class A investments and our investors like how safe it is. Not to mention there seems to be what I've noticed an overbuilding in those parts too.
Also in LP space focusing on this. We see a lot of social impact investors inquiring about this. We have also seen some lenders offer interesting terms if we are able to keep rents below a certain threshold (we call it "lowecase affordable housing).
Hey - Are you still active in the space? I have a few questions I'd like to run by you, thanks.
First q - i think yes, but as you touch on in your post, i think everything comes down to the purchase basis. 150/unit is not cheap. I've asked before on here, how to best ball park construction cost numbers, but did not get very deep answers.. the rule of thumb is always to purchase below replacement, but the problem is, after getting past market-specific nuances like building code, etc, everyone has slightly different numbers or methods of getting to a true replacement cost number. On top of that, you have highly disparate numbers for labor depending on your market, and during the 1 or 2 years it takes to deliver your product you can see material changes in markets like those you're referencing (credit freeze, jobs stall, wages decline in x city, no new product may be delivered but what if 100 comps receive renovations, etc.)...
basically, 150/unit is not cheap and it is not a stellar deal. The business plan needs to show you're creating enough value in cash flow that you can exit the asset at a reasonable price per pound. Its kind of like a puzzle between cap rate and price per unit. I see sponsors securing assets at 'market' price per unit, but i can tell there is no thought behind exit assumptions when the plan is to exit at like 200/unit in a year while the market is clearly buying and selling at 140/unit ...
Second q: yes. the key here is to determine what builders in each market are building for. This is tough and requires a lot of research. Basically, I try backing into what the builder is paying, layer over a profit, run sensativities on what their loan may look like and what the return profile for an LP liek this may be, and see what they NEED to rent at in order to break even or hit their returns. Once you know that, you can get comfortable with your acquisition assumptions.... I think
q 3: Not really a strategy lol... i think sponsors just want to do deals... will probably catch heat for throwing that out there
q 4 : only concern is that it will be priced in and get more expensive. renters will be squeezed and highly levered assets will take a hit bc you can only squeeze renters so far while offering shitty product until they leave to a less levered comp that rents to where they're willing to pay. I would think
Generally when you say "workforce housing" you mean garden style apartments. This issue with garden style apartments is:
1) Capex, you have a lot of roofs and parking lots to deal with and if you're in a market that gets freeze/thaw and snow its an expenditure that most do not properly underwrite.
2) Most over operate these investments. Only the guys that already operate thousands of garden apartments know how to run these, which is tight and with a "guy" for the complex. You cant slot in Greystar into these, they need to be run like a local operator would. In NY/NJ I have to give credit to both Murray and Charlie Kushner. Both sides of that family know garden style apartments and make great buys taking this stuff from out of state owners who over managed, cutting expenses and running them lean.
There's a reason why many of these investments are being sold with NO EXPENSES in the OM (atleast in NY/NJ). Because MOST, not just some but most, owners over manage these things.
Just make sure your GP already owns/manages a good amount of garden style apartments in the same market. Your GP is never more important then when it comes to workforce housing.
And that is my rant on this slow MLK day.
what would be an example of over managing?
Over managing to me means not being a slum lord... one of the names mentioned above has been in various lawsuits or news for evicting tenants, under managing, etc. while also seeing operational synergies through payroll, insurance, portfolio acquisition/disposition discounts, etc.
The market has been good to everyone the last 6-8 years so it's not really been rocket science for most groups to make 20%+ return. Strong rent growth and caprate compression. Now you have everyone looking at workforce housing...syndicators, REPE, etc. for downside protection play....these poor peeps have no where else to go except for the streets.
Some sleezy brokers/owners are hiding loss to lease in PL and showing actual revenue without vacancy, etc. Some of these assets are at 96%+ occupancy but once you dig in a little more, you will see economic vacancy is close to 8 to 12%... yet broker is using 5% vacancy factor to fool peeps. I met with a property management shop recently in a new market we are looking at, told me you are seeing high bad debt despite rent growth across class A and work force housing.
You can't keep raising rents 4 to 7% YoY on folks making $30-$40K, that's the majority of workforce tenants in Southern USA. These peeps will be lucky to get a 3-4% pay bump annually. Wonder how shit will unfold in the coming years as interest rates creep up or we go in a no growth environment.
Too many property managers, porters, overdoing landscaping and renovations. Experienced workforce housing owners will know renovations rarely appreciably raise rents, the typical workforce housing renter isn't looking for new faux marble quartz countertops in their 1970 vintage garden apartment. You have to renovate units to keep up with your competition, keep occupancy but don't count on 15% rent increase by putting in laminate hardwood floors and fancy counter tops.
If you want a big headline example of over managing workforce housing (even in urban environments) Tishman/Blackrocks plan for Stuyvesant Town is a prime example, even without the crash that investment would have under performed. But there are plenty of other Landlords doing the same thing with old garden apartments across the country, same playbook that doesn't work for that type of tenant.
People who operate this way are called "slum lords" and that comes with it's own set of risks.
If anyone wants a crash course in why New York State passed such restrictive rent laws last June, you need look no further than this attitude right here.
I dont understand where this attitude is coming from, the concept of running assets efficiently and treating class C assets different from class A cannot be so foreign to this board. Does everyone here just do asset management for Lifeco's?
What is "merchant equity"?
5-10 year institutional equity rather that permanent equity.
I work for a LP that is extremely active in this space. We have acquired somewhere around 7,500 market rate workforce housing units over the past 36 months, and I expect that pace to continue. At the end of the day we are looking for properties that are filled with tenants that are renters by necessity, not by choice. We believe this is the deepest and most durable part of the renter population. A lot of these properties are still owned (and mismanaged) by small operators. We have experienced a lot of success aggregating these properties and running them properly. The amount of interest in these properties has exploded recently. 5 - 7 years ago we used to see 3 -4 groups show up to bid on these properties. Now we see 10+ on every transaction.
I agree with the comments that others have posted. You can't buy these properties, put in high end finishes (hard surface counter tops, vinyl plank flooring, stainless steel appliances) and expect these tenants to pay up. It's about knowing exactly what things people will pay maybe $50 - $100 more for. Given the lower rents per sq. ft. and the fixed operating expenses, running these efficiently is crucial to success. I don't advocate being a slum lord, but no tenant in these properties cares about seasonal flower plantings, community engagement events, and extra services. They want a safe, clean, and affordable place to live.
I'm all in on this as an investment strategy so I'm happy to answer any questions you might have.
What do you think about developing this product type vs a value add play to existing product? Keep in mind, in my original post I'm seeing all in bases (Land, HC, SC) at $150k / unit to build this stuff new.
It is impossible to develop this type of product. The cost of land + construction costs will never allow you to hit this price point. I can't think of a single "workforce" asset in our portfolio that has an all in per unit basis of $150k+.
The tenants we target are truck drivers, manufacturing assembly line workers, medical techs, trades workers, retail employees, admins, etc.
Markets where you can develop that cheap won't have "workforce" rents (affordable to families from 60-80% AMI) that will produce your required return.
What kind of holds are you UW, what kind of net returns do you target?
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