Before the coronavirus pandemic, commercial real estate investors were pumping money into workforce and affordable housing. The pandemic-fueled recession has dramatically elevated the sector’s status among investors.
“I think COVID has accelerated the flight of capital coming into the affordable and workforce housing space,” says Scott Everett, founder and CEO of S2 Capital, a Dallas-based private equity firm that targets value-add multifamily properties. “The thesis that affordable and workforce housing would be more resilient in a downturn has definitely proven to be true.”
In early October, two prominent Black-owned commercial real estate investment firms filed paperwork with the U.S. Securities and Exchange Commission (SEC) to create the first publicly-held REIT specializing in workforce and affordable housing. The proposed REIT, Aspire Real Estate Investors, is carving out an acquisition pipeline of $1.1 billion.
Aspire Real Estate Investors’ entry into affordable and workforce housing promises to shine a spotlight on an already favored sector of real estate. In the SEC filing, the company proposes raising $100 million through its IPO, although that’s almost certainly a placeholder figure.
Aspire was formed earlier this year by Avanath Capital Management (led by Daryl Carter) and MacFarlane Partners (led by Victor MacFarlane), two of the country’s largest Black-owned real estate companies. Its primary goal is to buy multifamily affordable and workforce housing properties within Opportunity Zones in fast-growing metro areas. Its initial portfolio will comprise nine multifamily projects, six of which are located in Opportunity Zones, that will be purchased for $260.4 million in cash.
Aspire would be the first publicly-traded REIT listed on a national securities exchange to qualify as an Opportunity Zone fund and the first publicly-traded REIT specializing in workforce and affordable housing.
In the SEC filing, Aspire makes the case for investing in workforce and affordable housing. It highlights the current supply and demand imbalance, along with faster lease-ups and longer-term leases than other multifamily properties.
Data included in the filing indicates there’s a shortage of 7.5 million affordable housing rental units for U.S. households whose income is at or below 50 percent of their area’s median income. For households with income at or below the 30 percent level, the shortage is 7 million units.
“We … believe that the size and fragmented nature of the affordable and workforce housing sectors will provide significant opportunities for us to acquire, develop and redevelop additional properties and grow our portfolio over time,” Aspire executives note in the SEC filing.
The company is certainly not alone in its confidence in the performance of affordable and workforce housing. In October, a non-traded REIT, Starwood Real Estate Income Trust, spent $531.3 million on a 28-property, 3,600-unit portfolio of affordable multifamily communities in the Mid-Atlantic region. And in a separate deal last month, Starwood paid $113.5 million for a four-property, 958-unit portfolio of affordable multifamily communities.
Meanwhile, two commercial real estate investment firms whose portfolios include workforce and affordable housing tell NREI they’re poised to pour hundreds of millions more dollars into that sector. Executives at both firms indicate institutional investors and family offices have intensified their interest in workforce and affordable housing.
Terrell Gates, founder and CEO of Virtus Real Estate Capital, says his Austin, Texas-based real estate investment firm has an estimated $650 million pipeline for acquisitions in workforce housing. Virtus has more than $1 billion in assets under management in several asset classes.
“The fundamentals are extraordinarily compelling within workforce housing. They’re going to continue to be for a while,” Gates says. “Our chief concern is valuations. It’s become a heated market, and in many cases, valuations may have outrun the fundamentals of some of the underlying assets. Much of the market today is willing to pay pricing that is in line with and arguably even higher than pre-COVID.”
Institutional investors contribute about three-fourths of Virtus’ capital, and registered investment advisors representing multi-family offices contribute the rest, Gates says. Major public pension funds, in particular, are looking for more exposure to workforce housing, he notes.
Everett says his firm plans to complete $700 million to $800 million in workforce housing acquisitions in 2021. So far this year, S2 Capital has wrapped up workforce housing purchases totaling more than $500 million, with that sum being offset by about $450 million worth of property sales. Since its founding in 2012, S2 Capital has acquired more than $3 billion in class-B and class-C multifamily assets.
By the end of 2020, S2 Capital will have tallied about $800 million in Freddie Mac loan volume for acquisition and refinancing deals, Everett says. U.S. and international family offices have chipped in for the bulk of the firm’s equity for deals this year.
“There’s a lot of positives about workforce housing without a lot of the negatives that plague some of the other asset classes,” Everett says.
As for capital currently flowing into the affordable and workforce housing sector as a whole, Everett says some of it is coming from institutional investors and family offices that are new players in the sector. Some institutional investors are turning to workforce and affordable housing as they seek to quickly invest cash that they’ve been sitting on for much of 2020, he notes.
“It’s been crazy to watch how many people who have never invested in a space are now allocating 100 to 150 million bucks for next year to put into that sector,” Everett says.
Workforce and affordable housing are especially attractive to family offices thanks to the tax benefits, appealing appreciation and inflation protection, according to Everett, as well as 4.5 percent to 5.0 percent cap rates that are 350 to 400 basis points over the 10-year Treasury yield.
“When you look at the rest of the world trying to figure out where they can get yield from, I think everyone realizes that workforce housing is one of the best places to find it,” Everett says. “Pricing is definitely going to continue to compress, and there’s just going to be a flood of more capital into space next year, assuming we get COVID behind us and we get back on track.”
Gates says acquisition activity in workforce and affordable housing has been buoyed by favorable financing from Fannie Mae and Freddie Mac, as well as from lenders that are matching Fannie Mae’s and Freddie Mac’s terms.
Virtus remains in “active acquisition mode” in workforce housing, Gates says. Thus far in 2020, Virtus has purchased just three workforce housing properties, but the firm plans to be more active in 2021 and beyond. Its multifamily portfolio comprises about 5,000 units with a gross asset value of about $650 million.
Although the terms “affordable housing” and “workforce housing” sometimes are used interchangeably, they’re not the same. Affordable housing is geared toward households that spend less than 30 percent of their annual income on housing. Workforce housing refers to housing designed for people earning anywhere from 60 percent to 120 percent of their area’s median income. Oftentimes, affordable housing and workforce housing units are in older class-B and class-C properties, although some workforce housing properties fall into the class-A category.
