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Many hard-working Americans who are doing the jobs that propel communities – including teachers, firefighters, nurses and small business employees – have fallen into a housing blind spot. The multifamily housing that sits between affordable housing and luxury rentals – known as “workforce housing” – has been scarce, at times forcing working- and middle-class Americans out of the communities they serve or into too-expensive apartments.

But current market fundamentals are flipping this script. Record low unemployment, stagnant-to-middling wage growth, and an influx of new upscale housing has compelled investors, developers and lenders alike to seek out new strategies that focus on this previously underserved workforce housing market.

Investor confidence remains bullish towards the apartments sector despite robust supply levels, climbing construction costs and natural cycle maturation.1 But these headwinds are not going unnoticed. High levels of capital available are having the ill effect of raising prices and compressing returns for most current deals, particularly those catering to the luxury segment of the market.

Industry veterans believe current conditions will worsen as the growth stage of the cycle creeps toward a decline, making it imperative for industry leaders to get in front of the problem and deliver housing options that benefit all stakeholders involved. For investors willing to take a look at Class B and Class C assets, opportunity awaits as demand shows no sign of abating.

Why Workforce Housing Now?

Workforce housing has historically been ignored because it falls in a no-man’s land between government subsidized affordable housing on one end of the spectrum and amenity-driven luxury residential units at the other extreme. Amenities in modest-priced apartment communities don’t project ‘rent growth’ like luxury complexes, nor are they supported by subsidized sources of capital, so investors have many times gravitated away from these deals when they have more attractive options.

According to research from Freddie Mac, multifamily originations are expected to set another record in 2019, up 8% to $336 billion, due to strong fundamentals, continued demand for multifamily investments and low interest rates.2 Yet even with new supply, the market struggles to meet the demand from American workers. The National Low Income Housing Coalition in its 2019 report that found that: “In only 10% of U.S. counties can a full-time worker earning the average renter’s wage afford a modest two-bedroom rental home at fair market rent, working a standard 40-hour work week.”3

This disconnect between the new supply being brought to market and market demand has needed strategic attention for years, but the financial incentive for investors is just now catching up to the unrelenting need. Realizing returns on Class A developments is being squeezed by overabundance of supply, slowed rent growth and rising interest rates. Therefore, investors have become motivated, pivoting towards more value-add opportunities that require less up-front capital and offer more stable cash flows.

How to Pursue Workforce Housing

Savvy investors understand in a market rife with supply, abundant capital and soaring property valuations, identifying undervalued existing assets is essential. This is particularly true when attempting to deliver solutions that address both the budget constraints and lifestyle needs of America’s working class – while being financially viable. Although investors and developers have previously favored Class A projects, driving up rental rates to counteract rising construction costs, the path to value in the current market lies in Class B and C properties. In these locations, value can be created through building and management improvements without driving rents beyond affordable levels for the units.

Bridge loan financing has become an attractive lending option as investors attempt to break into the market. Funds from bridge loans can be used to reposition assets through initial capital expenditures and value-adds such as new flooring, improved lighting, and updated appliances. In doing so, investors are able to change the desired tenant profile and boost rents, ultimately leading to sustained increases in revenue. This strategy requires a very small capital injection up front and holds little risk for lenders who are hesitant to finance projects with interest rates fluctuating.

Bridge loans offer an avenue to refinancing or repositioning, ultimately with the end-goal of either holding or selling a property. Lenders help structure the loans so that they align with the client’s business plan, forecasting models, and competitor offerings, often offering to help with the initial capital expenditures to help prepare the new owners for a rapid transition from bridge capital to an agency (Fannie or Freddie) permanent loan.

Key Challenges for Owners and Investors

Developers must be wary of being overly ambitious or too conservative when crafting their business plans for workforce housing investments. Lenders suggest spending between $8,000 – $15,000 per unit in order to effectively drive up rents and attract desirable tenants. Spending in this price range ensures that the space is not overly leveraged and is a minor refresh, but still provides enough of a value-add to bolster revenues and change tenant perception. Renovations that don’t adequately improve the space and tenant profiles – or ones that happen too soon after a previous revamp – can prove disastrous to a project and derail the entire plan. Forecasting is also incredibly important in securing a loan with the best possible terms. Viable projects should aim for a return on investment of 15 – 20 percent, as lower projections may not be viewed as being worth the risk.

Looking Ahead

Even amidst mounting concerns about an economic slowdown, the American multifamily market is poised to continue to be a strong investment, especially in a lower-interest rate environment. At the same time, despite record-low unemployment, Americans are juggling wages that are stagnant or modestly increased, high levels of personal debt, and low supply of housing that is within their financial reach. By investing in workforce housing, investors have the opportunity to provide much-needed housing to American workers while taking advantage of attractive financing options to reap sustained returns.

At KeyBank, we believe the foundations of any successful partnership are rooted in common goals, knowledge and understanding. We understand the dynamics of multifamily and workforce housing, and work with clients to deliver solutions that meet business plans, including interim bridge loan financing, construction debt and a wide variety of permanent debt options. To learn more, or discuss your workforce housing project plan, we can be reached at and


Anderson, Bendix. “Apartment Sector Well-Positioned in Case of a Downturn.” National Real Estate Investor, February 18, 2019.


Source: Freddie Mac Multifamily 2019 Midyear Outlook, August 8 2019.


Source: “Out of Reach 2019.” National Low Income Housing Coalition Report,

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