Imagine an investment that satisfies all your criteria: market viability, solid returns with managed risk, and a commitment to ESG principles. Such an investment isn’t wishful thinking; it’s sustainable workforce housing. The question is not why investing in a sustainable future is essential; instead, it is how could you not invest in such a strategy?
In an era when the demand for attainable housing continues to outpace supply, sustainable workforce housing is a necessary and prudent investment decision based on three key market trends. Primarily, the demand for attainable housing is growing. Workforce rental housing is increasingly sought after, particularly given dwindling affordability and growing barriers to home ownership. Last but not least, generational demand contributes to the rise of sustainable multifamily housing.
Demand dynamics for workforce housing
The growing demand for attainable rental housing is undeniable. The “missing middle” refers to the shortage of medium-density residential options that are affordable for middle-income families within the housing market. Millennials and Generation Z constitute a significant rental market segment, demonstrating a strong preference for social and environmental sustainability. Sustainable approaches can be implemented to drive greater returns by enhancing marketability, increasing resident retention, and reducing operating expenses. Delving more deeply into each of these areas provides a comprehensive understanding of the trends shaping the future of rental housing. Unfortunately, economic trends that include wage stagnation relative to the cost of living and rising interest rates have left homeownership out of reach for many working people. According to Brookings, workforce housing is defined as targeting households with incomes between 80 percent and 120 percent of the area median income.
Beginning in 2022, homeownership costs soared, effectively pricing out 2.4 million renters. According to Harvard’s Joint Center for Housing Studies (JCHS), the estimated monthly housing payments required to purchase a median-priced home in the United States—including mortgage, insurance, and property tax—reached $3,000 by March 2023. This sharp cost increase resulted in millions of renters needing help to transition to homeownership, compared to the previous year.
Decline in first-time homebuyers
Furthermore, workforce housing is particularly resilient to economic fluctuations, making it a compelling investment opportunity. The socioeconomic stratum served by this segment is a constant in society; as individuals progress from lower-income levels, they move to the middle tier, amid hopes of reaching higher income levels or of sustaining the position they have attained.
Conversely, suppose individuals in the upper-income bracket experience a decrease in income. In that case, they may move to the middle tier, where they can stabilize; move back up; or potentially fall into lower income levels. Such dynamic movement within the middle-income bracket underscores the enduring demand for workforce housing and solidifies its position as a stable and valuable investment.
Generational demand and preferences
Significant demographic shifts, such as the increasing desire for sustainable and attainable living among younger generations, contribute to the need for workforce housing. This market trend also amounts to a societal shift, making workforce housing not only a noble cause but also a solid investment.
The Joint Center for Housing Studies’ America’s Rental Housing 2024 report notes that, over the past decade, the majority of growth in renter households has been driven by younger generations. We are beginning to see a shift, however. Although millennials are likely to continue to be a significant source of rental demand in coming years, Generation Z is now propelling this demand. This development further supports a market shift to sustainable living environments.
New rental demand has shifted from Millennials to Gen Z
Driven by their values and lifestyle choices, millennials and Gen Z prefer sustainable housing. As reported in a study by First Insight Inc., approximately 73 percent of Gen Z and most millennials are willing to pay up to 10 percent more for sustainable housing practices. Developers and real estate professionals who prioritize sustainability can attract these demographics, who are poised to become the largest consumer base in the housing market.
The concept of sustainable, rentable workforce housing also acknowledges that place-making and community amenities are more desirable, achievable, and socially impactful now than in the days of single-family detached homes and the urban high-rise apartments, which peaked in the 1970s. This approach provides a well-designed community with various product types, enhancing the overall living experience with resident amenities. This holistic design strategy often leads to a higher premium average of up to 24 percent, according to John Burns Research & Consulting. Moreover, incorporating value-added components such as improved infrastructure, energy efficiency upgrades, and community-focused spaces increases the attractiveness and functionality of workforce housing, further driving demand and investment in these developments.
Efficiency of operations
Sustainable workforce housing isn’t just about doing good; it’s about doing well. Implementing such sustainable technologies as solar panels, EV charging stations, and advanced energy management systems enhances the environmental footprint of these assets and provides tangible financial benefits. Lower vacancy rates, decreased operational costs, higher tenant attraction, and a positive impact on NOI are only the beginning.
The operational impacts of sustainability in the attainable rental market come down to the NOI. A more efficient product type, increased preventive maintenance knowledge, lower renter household expenditures, and higher resident satisfaction all create an ideal operating scenario that is attractive to both the renter and the operator. As the NOI increases, the ROI and the valuation of the asset inevitably follow.
With the workforce demographic’s decreased income after housing costs, consumer awareness of other expenses is rising. The decreased funds available to a renter after making lease payments have created an environment wherein millions of renters are now identified as “energy insecure,” according to the Joint Center for Housing Studies’ America’s Rental Housing 2024 report. This development means that renters have had to keep their homes at unhealthy temperatures to keep energy bills low.
Millions of renters are energy insecure
With additional user information available for such items as utility consumption, residents are more interested in seeing how a property can provide lower utilities—electricity through sustainability efforts, for example—and make a positive environmental impact, even if the rental rate is at a premium.
The stability offered by reduced unit turnover is complemented by the potential for long-term appreciation and resilience during economic downturns, which amplifies its appeal to investors seeking sustainable growth. Moreover, properties that prioritize green initiatives enjoy more favorable insurance terms than do their nonsustainable counterparts, with some brown properties facing challenges in securing insurance. This “green advantage” highlights how the market perceives green properties as investments with reduced risk.
Additionally, green properties exhibit a high degree of liquidity, making them more attractive in the real estate market. Committing to investing in green technologies introduces a multilayer of returns for investors that encompasses additional revenue streams, reduced expenses, and more favorable lending terms. These factors contribute to lower cap rates, thus signaling higher property values and investment potential.
Consequently, green properties are easier to sell, and they command higher prices, furthering the market’s preference for sustainability. This shift toward green investment underlines a profound change in the real estate landscape, where sustainability is not purely an ethical choice but also a strategic, financially sound decision.
Proving the investment strategy
Forming strategic partnerships with such companies as Conservice provides leverage to scale Stoneweg US’s investments, broaden their impact across communities, and enhance investor returns. The data captured from these types of strategic partnerships creates a benchmark reporting framework to inform investors and measure the impacts and benefits of sustainable initiatives. Such data is also used to measure compliance and to test and automate building performance. Data collection is critical to our investment strategy, providing intelligence on every decision.
Investment in attainable housing addresses the desire for sustainable rental property options and the need for more rental choices for multiple generations. Such investment also brings additional home production at a time when it can be executed fast and offers an investment opportunity with high levels of operator efficiency, resident satisfaction, NOI, and ROI.
The 2024 Terwilliger Center Home Attainability Index Report, provided by ULI and RCLCO, underscores that production continues to fall behind demand, which decreases the availability of affordable rental housing in the basic supply-and-demand equation.
Impact investing in sustainable workforce housing goes beyond financial returns; it has a profound social and environmental impact—the true heart of the matter. Investing in this growing market segment is a powerful way to make tangible differences in financial and social ways. Providing attainable and sustainable housing that prioritizes environmental sustainability in an overlooked segment addresses urgent climate concerns. Finally, such investments align with corporate social responsibility goals and enhance the appeal of these investments to a broader audience.
