Above: Texas Workforce housing communities currently/previously owned & operated by Shravan Parsi, CEO of American Ventures
When financial journalists and advisors are nervous about the housing market, investors in multifamily workforce housing are calm. It is no secret that housing can be as volatile as other sectors of the economy. And, like manufacturing, it can indicate whether trends will be more or less favorable in the next year.
However, in times of increasing general volatility, investors and advisors often see the housing sector as a safer haven, if not a safe haven. What makes multifamily workforce housing, when it is properly bought, a safer investment is the dependability of its cash flows.
Ron Rose, founder of Value Creation Strategies Holdings, favors this idea: “In times of financial stress, asset allocation and cash flow take center stage. Good assets that have productive cash flow not only preserve the original capital but can accelerate low-cost, high-quality bargain hunting, which then becomes a key accelerator of future wealth creation.”
Investor equanimity rests on the fact that multifamily workforce housing—just one subsector of the larger housing industry—remains relatively stable long after a downturn begins. But what protects it from the volatility that other sectors of the housing industry experience?
At American Ventures, we believe in three pillars of success: buy right, finance right, and manage right. A well put-together multifamily real estate investment deal is self-sustaining. An apartment complex can generate a positive cash flow starting on day one. Rental revenue can pay predictable operating expenses and can generate enough net operating income to cover debt service, property taxes, and, further, positive cash flows that provide returns for investors.
With this self-sustaining characteristic, along with the right business plan, you also have a preferential mortgage market through Fannie Mae and Freddie Mac. Loans from Fannie Mae and Freddie Mac are not available for other asset classes within the commercial real estate industry. These financial institutions provide a backbone for multifamily mortgage funding, and there are abundant bank and private financing sources as well.
Rental leases, which are short-term—six months to twenty-four months compared to five-year or longer leases in other commercial real estate—enable immediate adjustment to market conditions. During economic downturns, if specific local markets or specific properties demand it, it is possible to lower rents (an unlikely scenario, but possible) to maintain occupancy rates, as was seen in Atlanta, Georgia, and Philadelphia, Pennsylvania, during the 2008 downturn.
During upturns, rents adjust upwards, depending on what the local market will bear. Dynamic pricing models lie behind the ability to make these adjustments overnight.
During the 2007-2008 financial crisis and the Great Recession following it, the U.S. government took extraordinary measures to ensure that Fannie Mae and Freddie Mac remained solvent, bailing out the two financial institutions. Why? Affordable housing—synonymous with workforce housing—is one of the country’s biggest problems. Providing stable, accessible funding—that is, a preferential mortgage market—is essential for an economic environment that supports affordable housing.
The two sides of the affordable housing equation are middle-income jobs and the cost of housing. Middle-income jobs include customer service representatives, primary school teachers, police officers, firefighters, emergency medical technicians, managers, and even software developers. The national median annual income in 2018 was $61,937, and median monthly rent for a two-bedroom apartment in workforce housing ranged from $825 in cities like Memphis, Tennessee, $1022 in areas like Dallas-Fort Worth-Arlington, Texas, to $3113 in San Francisco. The picture that the data and a variety of reports paint is one of demand across a diversity of communities that outpaces both newly constructed and existing multifamily housing.
Quality affordable housing is a major concern across the country, and over the last decade has gotten more pressing for workers in many locations. That translates into an opportunity for investors because people who work always need a place to live.
Today’s demographics make the rental demand outlook favorable now and well into the future. Multifamily housing offers great options to people when owning a home is out of reach. And that is just the situation today and looking forward. In spite of an expanding economy—we’re in the 127th month and counting of an expansion—a little over 60 percent of Millennials, who make up an increasing percentage of the working population, say they can’t afford to buy a home.
Another 10 to 12 percent simply prefer to rent. Often a desire to protect the environment by having a smaller carbon footprint drives this preference. Millennials choose urban locations and renting because they can use public transportation and avoid owning a car.
At the other end of the age spectrum, baby boomers, who make up around 23 percent of the population, are downsizing, selling their homes, and moving to rental properties near their children and grandchildren. They no longer want the responsibility of maintaining a large house in the suburbs. In addition to living closer to family, when baby boomers rent in metropolitan areas, they have greater access to cultural events.
It’s impossible to say whether a recession is just around the corner. About 38 percent of economists are predicting recession today. Maybe they are right. Maybe they are wrong. The great equity investor Peter Lynch once said, “if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”
Regardless, if you buy it properly, have the proper reserves and cash flow model, and manage it properly, multifamily workforce housing real estate is a robust asset class for investment.
 Federal Reserve Economic Data (FRED), “Rent of Primary Residence in Selected U.S. Cities,” Economic Research, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/search?st=rent+of+primary+residence, accessed January 28, 2020.
 United States Census Bureau, “2014-2018 Median Household Income in the United States by County, Dec. 19, 2019,” https://www.census.gov/library/visualizations/interactive/2014-2018-median-household-income-by-county.html; NPR, “The Most Common Jobs for the Rich, Middle Class, and Poor.” Jobs (blog), Planet Money, October 16, 2014, https://www.npr.org/sections/money/2014/10/16/356176018/the-most-popular-jobs-for-the-rich-middle-class-and-poor.
 Gloria Guzman, “New Data Show Income Increased in 14 States and 10 of the Largest Metros,” Income and Poverty (blog), United States Census Bureau, September 26, 2019, https://www.census.gov/library/stories/2019/09/us-median-household-income-up-in-2018-from-2017.html; CBRE Research, “The Case for Workforce Housing,” National Council of State Housing Agencies, https://www.ncsha.org/wp-content/uploads/2018/12/US-Multifamily-The-Case-for-Workforce-Housing-%E2%80%93-Nov-20181.pdf, accessed January 20, 2020; Myelle Lanset, “How Much It Costs to Rent a 2-bedroom Apartment in the 25 Biggest US Cities Right Now, Ranked, Personal Finance (blog), Business Insider, October 20, 2018, https://www.businessinsider.com/cost-to-rent-2-bed-apartment-us-cities-2018-10#1-san-francisco-california-25; Courtney King, “Texas Housing Prices on the Rise: Major Metros See Much Higher Costs,” Fiscal Notes (blog), Comptroller Texas, March 2018, https://comptroller.texas.gov/economy/fiscal-notes/2018/march/housing.php
 Holly Hoffower, “Student-loan Debt and Skyrocketing Housing Prices Have Become So Bad That More Millennials Are Planning to Rent Forever,” Business Insider, https://www.businessinsider.com/more-millennials-planning-to-rent-forever-cant-afford-housing-2019-11.