Middle-Income Workforce Housing
Middle-Income Workforce Housing
Within the traditional commercial real estate sectors, Multifamily is historically the most resilient sector, Middle-Income Workforce Housing (“WFH”) is the most resilient segment within Multifamily while also providing outsized rental rate growth. The reasons are simple:
- The Middle-Income workforce, primarily grey collar workers, represents the largest segment of the 44 million renters in the U.S.
- Workforce Housing tenants are also the fastest growing segment of U.S. renters
- Because many workforce housing renters are essential workers, they have more stable employment
- Barriers to entry are high for delivering new supply to this middle-income segment due to increasing construction, land and entitlement costs for the last several decades in the U.S. relative to median income wage growth
As such, WFH is the most resilient of all residential segments given the durability of its tenant base, growing demand, lack of new supply and institutional demand for the asset class. This can include multifamily in lower cost settings, infill locations with a meaningful construction cost advantage, or certain public-private-partnership opportunities.
It can also include larger floorplan Build-to-Rent (“BTR” or “BFR”) communities targeting families or other renters desirous of more space or a lower density setting, which can range from horizontal apartments to townhomes or free standing single family rentals as part of a cohesive community with attractive onsite amenities and institutional quality management.
Healthcare
Healthcare
Healthcare demand is only growing in the United States for a host of reasons, particularly due to the “greying of America.” With 10,000 Baby Boomers turning 65 every day combined with extended life expectancy, the senior population (65+) is projected to reach 24% of the U.S. population by 2060. This is meaningful as people 65+ spend 5x more on healthcare compared to under 45 households. Additionally, Millennials are starting to form families, which doubles healthcare costs relative to younger cohorts.
Although home healthcare and certain new technologies around virtual healthcare delivery will improve access and affordability, the substantial increase in healthcare demand combined with limited new supply will still require in-person healthcare services that will be complemented by virtual healthcare tools.
Virtus generally targets four categories of Healthcare Infrastructure:
- Medical Outpatient Buildings (“MOBs”), or what’s referred to in the industry as “Outpatient Facilities,” is where physician and related practices are located and the vast majority of day-to-day healthcare is delivered in the U.S. This can be in an “on-campus” hospital setting, immediately across but pedestrian to a major hospital, or off-campus typically in a more convenient location for patients and their healthcare providers. These buildings are typically purpose-built with specific mechanical infrastructure needs, larger floorplates, high parking ratios for patients and highly-specialized build-out within each suite. Due to the very resilient nature of the tenants, high switching costs for tenants to depart an existing space, and structural barriers to entry limiting new supply, Virtus generally considers Outpatient Facilities to be the most resilient of all commercial real estate sectors.
- Life Sciences refer to biopharma, biotech, and related industries, and properties comprise everything from lab space and manufacturing to corporate offices and distribution space for bioscience tenants. Despite the transformational potential of biosciences and research during the next century, this space is highly complex, and responsible investment requires awareness of regulatory, macroeconomic, and scientific forces bearing on the sector. Life sciences real estate tends to be clustered around major research universities, which form the start of the biotech pipeline. Tenant credit quality varies highly, from early stage startups to household biopharma names.
- Specialty Healthcare generally refers to properties whereby healthcare delivery is taking place, but is generally distinct from typical MOBs or Outpatient Facilities. This may include but is not limited to behavioral health and Inpatient Rehab Facilities (“IRF”). These burgeoning segments demonstrate strong growth potential due to the rise in awareness and needs around mental health and the push for more cost-effective settings in which to heal, such as in IRFs.
- Senior Living properties can include the entire care continuum from age-restricted apartments for lifestyle-oriented seniors to high acuity skilled nursing and hospice care. This array includes myriad different risks, tenant demand, and operational profiles. The most investable segments are age-restricted apartments (“Active Adult”) and private pay needs-based properties, specifically Independent Living, Assisted Living and Memory Care, typically with all three levels of care available in the same setting. All are joined by the immense demand wave the Baby Boomer generation poses. While conventional MOBs are already serving elevated care demands as Baby Boomers age over 65, the higher typical ages-of-entry for needs-based senior living mean the space is only now beginning to approach its prime years. However, the needs-based sectors require special attention and diligence, due to rising labor costs and disrupted leasing patterns from the Covid pandemic.
Education
Education
Education real estate supports the entire life cycle of the student, from pre-kindergarten through doctorate-level learning. Virtus focuses primarily on University or Student Housing, School Infrastructure, and niches like Early Education. As such, this sector serves a variety of demographic cohorts but is unified by the need to maintain excellence in an increasingly competitive economy. For example, student housing is the most institutional segment of this category, and while Covid and evolving job patterns disrupted demand for certain university experiences, what Virtus refers to as High Return On Investment Universities (see the Virtus whitepaper, Student Housing in a Post-COVID World) continue to experience record freshmen applications, strong enrollment growth and falling acceptance rates for prospective students.
Much like healthcare, education is a needs-based sector, and it has often displayed countercyclical behavior, as university enrollment surges during downturns when job markets are challenging. Similarly, early education facilities provide everything from “daycare” to pre-kinder enrichment, enabling both single-parent and dual income households to thrive.
Storage
Storage
There are several categories of storage, but the most investable is Self-Storage primarily, and Cold Storage secondarily. Self-Storage properties hold whatever their household or small business tenants cannot fit onsite—from personal keepsakes to excess inventory. Storage demand thrives on change, and performance can be equally strong in both upturns and downturns, when household consolidation makes space rental financially preferable. In dense urban areas with higher barriers to new development, self-storage gives vital flexibility to space-constrained residents and businesses. The wide range of uses and frequent price rebalancing allow adaptation to every economic climate.
Despite the consolidation of Self-Storage facilities since Virtus began investing in the space in 2008, the industry remains highly fragmented with players of different profiles, sizing and levels of sophistication. This fragmentation combined with wide ranges of operational expertise and potentially less favorable capital structures creates an interesting ecosystem for outsized return potential, albeit at smaller bite sizes.
Cold Storage is typically a large warehouse that is temperature and humidity controlled whereby perishable items, primarily food stock, can be stored to prolong shelf life and make them available for distribution eventually to grocery stores, restaurants and other consumer oriented food settings. This social infrastructure segment generally has perennial demand and also benefits from higher barriers to entry than typical industrial space, but much of the space is directly owned by users rather than private investors, and it requires specialty fit-out and operational oversight.