Frequently Asked Questions
Workforce Housing & Inflation
There is no standard definition of workforce housing, how you would define it?
Workforce housing arguably best defined by what it is not as it varies greatly across the country.
First, we have to differentiate it from “affordable” housing, i.e. fully or significantly government supported rentals. That has a relatively clear definition.
When we exclude affordable, given the cost of construction, workforce housing really is not anything new as (without Low Income Housing Tax Credits ("LIHTC") support or some other governmental support) we are yet to see a location where it is feasibly to develop multifamily housing anywhere in the USA where the cost per unit makes rents of below approximately $1500 per month, economically feasible.
From there workforce housing it typically defined as housing that is attainable (ideally less than 30-35% of gross household income) for residents earning approximately 80% of AMI (annual median income) for a given area of observation (e.g. city or county).
Therefore workforce housing in our Southeastern small- to medium-sized city markets, is typically pre-2000, older vintage properties where the rents are sub $1500 per month, where the resident base are not government supported, but have gross household incomes of between below approximately $60k per annum. Naturally, that income upper bound is also based on the specific city, as $60k per annum may be above 80% of AMI in some cities but not others.
First, we have to differentiate it from “affordable” housing, i.e. fully or significantly government supported rentals. That has a relatively clear definition.
When we exclude affordable, given the cost of construction, workforce housing really is not anything new as (without Low Income Housing Tax Credits ("LIHTC") support or some other governmental support) we are yet to see a location where it is feasibly to develop multifamily housing anywhere in the USA where the cost per unit makes rents of below approximately $1500 per month, economically feasible.
From there workforce housing it typically defined as housing that is attainable (ideally less than 30-35% of gross household income) for residents earning approximately 80% of AMI (annual median income) for a given area of observation (e.g. city or county).
Therefore workforce housing in our Southeastern small- to medium-sized city markets, is typically pre-2000, older vintage properties where the rents are sub $1500 per month, where the resident base are not government supported, but have gross household incomes of between below approximately $60k per annum. Naturally, that income upper bound is also based on the specific city, as $60k per annum may be above 80% of AMI in some cities but not others.
What are the three things we can do to add to our stock of workforce housing while we are waiting for jobs to recover?
- Improve the quality of existing stock by get existing stock into the hands or more professional operators.
- additional support for development of new housing stock, whether that is zoning (stopping LIHTC "not in my back yard" approach). As an aside, pre-covid Ballast Rock looked trying to develop a LIHTC project near Charleston, SC and it was clear that the mindset of the local community was not supportive of additional housing for low- to moderate-income families.
- Architecturally and construction technology improvements will be the game changer, allowing for more affordable construction.
we are currently experiencing the biggest inflation surge in the past 30 years, with CPI up over 6% compared to last year, vs. a 5% increase in wages. Do you expect this to affect the ability of working families to pay rent?
The Southeast has historically had both lower wages and a lower cost of living compared to the NE or West Coast, however, the rate of wage growth in the SE has been more rapid over the past 10yrs than other areas in the country (starting from a lower base). Wage growth is what allows for rental increases as there is an effective cap on sustainably rents as a proportion of household income (typically viewed as 30-35%).
When rent and goods inflation significantly outstrips wage inflation for a sustained period, then yes, housing affordability can become much more challenging for working families.
When rent and goods inflation significantly outstrips wage inflation for a sustained period, then yes, housing affordability can become much more challenging for working families.
Effects of COVID-19
The multifamily market fared much better than people expected it would at the beginning of the pandemic when Agency lenders was offering forbearance. Where are we now?
Housing moved from being a basic need to becoming a critical healthcare necessity, with both the Federal and states supporting landlords to enable them to protect the public from the pandemic by keeping them at home.
In our core region of investment (small- to medium-sized cities across the Southeast) we saw continued demand throughout the pandemic thus far, which manifested in continued high occupancy and increasing rents.
In our core region of investment (small- to medium-sized cities across the Southeast) we saw continued demand throughout the pandemic thus far, which manifested in continued high occupancy and increasing rents.
What are the strengths and weaknesses that have been revealed?
Across our portfolio we saw a small increase in bad-debt prior to the lifting of the CDC moratorium on evictions. However, we saw a larger increase in revenue to more than offset that bad-debt increase, making 2020 actually a year of overall revenue growth. We have seen similar significant rent increases (with high occupancy) throughout 2021.
We track payments on a daily basis and were watching particularly closely throughout 2020. In reality, we saw one month (April 2020) where there was a slight delays in monthly payments by a couple of weeks, but by April month-end we were back to pre-pandemic payments. Every month thereafter the portfolio payments variance throughout 2020 was within our typical monthly/seasonal variance.
We actually saw people use their stimulus money to not do what it was designed for, rather it was used to prioritize rent payment over short-term stimulus purchases.
We track payments on a daily basis and were watching particularly closely throughout 2020. In reality, we saw one month (April 2020) where there was a slight delays in monthly payments by a couple of weeks, but by April month-end we were back to pre-pandemic payments. Every month thereafter the portfolio payments variance throughout 2020 was within our typical monthly/seasonal variance.
We actually saw people use their stimulus money to not do what it was designed for, rather it was used to prioritize rent payment over short-term stimulus purchases.
How has the pandemic affected the kinds of deals that workforce-focused multifamily investors might consider?
Given the success of the sector throughout the pandemic, and in a backdrop of substantial liquidity available at every level (from retail to institutional equity) and from lenders of every type, we’ve seen a significant increase in the number of investors in the space and therefore asset pricing. Simply put, there’s been a large rally.
That does mean that as an operator we have to be better than ever at identifying deals that have significant net operating income upside from our capacity to add value. Our value add comes both from capex deployment in improving assets and amenities, but also our in-house operating team (Sunbelt Properties) and the operational upside we can deliver. That is what best protects our investors from changes in interest rates and cap rates in a tight market.
That does mean that as an operator we have to be better than ever at identifying deals that have significant net operating income upside from our capacity to add value. Our value add comes both from capex deployment in improving assets and amenities, but also our in-house operating team (Sunbelt Properties) and the operational upside we can deliver. That is what best protects our investors from changes in interest rates and cap rates in a tight market.
What insights have you taken from the experience that you will be applying going forward?
We have to buy deals at tighter cap rates on the way in, that is where the market is in 2021/2022, but more experienced operators can best identify where we can push cap rates 150bps (1.5%) higher over 3-5yrs, therefore creating value and protecting investors against any potential future cap rate sell-off.
Certainly we have tweaked certain reserves at the asset level in our underwritings (best example being areas that have been hit by expense inflation such as repairs and maintainance ("R&M") and insurance) and changed our timing for certain capex deployment given the slowing of availability labor and materials in certain areas.
Certainly we have tweaked certain reserves at the asset level in our underwritings (best example being areas that have been hit by expense inflation such as repairs and maintainance ("R&M") and insurance) and changed our timing for certain capex deployment given the slowing of availability labor and materials in certain areas.
Resident Experience
Have the events of the last year impacted the way Ballast Rock is approaching amenities?
We are fortunate because our assets across the Southeast are generally in places with warmer climates for more of the year, so we focused making sure our outdoor spaces were highly usable. That includes our grill spaces, and making sure our pools were open in 2021, where many were not in 2020, as we simply didn’t have adequate health information the prior year.
- Pickle ball is all the craze now, so it is generally been out with old dilapidated tennis/basketball courts, and in with pickle ball courts.
- At a couple of assets we’ve build out dog parks (with different hoops and obstacles to run through.
- At one asset we are considering installing an outdoor gym spread across a path that runs through the property.
is the trend to working at home affecting your renters?
We have two assets where our operating team have looked to develop shared business centers to best allow residents to work from home. This has not been explicitly asked for by residents yet, but we believe will be a differentiating amenity.
