The United States is facing an unprecedented housing crisis as the current housing market is 3.3 million homes short of what is needed to meet demand (source: The Linneman Letter, Winter 2022). Much of that shortfall is in the moderately priced rental housing segment. This gap in essential housing is caused by both a demand issue, resulting from a long-lasting shift in demographics, and a constraint in supply caused by the rapidly rising costs to build housing.
Multifamily housing historically has been an effective hedge against inflation compared with other commercial real estate asset classes. Lease terms are generally shorter and more favorable, which gives investors the opportunity to reprice rents as costs increase. But when inflation rises, so does the cost of living, pushing housing further out of reach for many hardworking citizens. Essential housing stands to benefit from accelerating demand as inflation pushes rents higher.
At Grubb Properties, we define essential housing as product for households earning more than 60% of an area’s median income (AMI), but less than 140% of that AMI. Essential housing helps serve about 41 million households in the United States, offering working professionals an accessible, quality housing option in urban markets.
Essential housing is not to be confused with workforce housing, which largely serves middle income working families through existing rental product. Workforce housing often has a greater number of configurations with 2-4 bedrooms and is typically located in suburban areas close to schools. While this is a critically important component of the U.S. housing stock, these unit configurations and locations largely do not fit the needs of young people entering the workforce today.
Essential housing is also not luxury housing, which targets those earning above 140% of the AMI, and which is currently saturating the market in most cities. The Wall Street Journal found that 80% of the 371,000 new rental apartments expected to be built in 2020 were luxury properties.
At Grubb Properties, we believe we have found a solution to the housing gap that serves all stakeholders: investors, potential residents, and our broader community. We enact it through our Link ApartmentsSM brand, which is focused on intelligent design and resident amenities to provide a lower cost, urban infill living opportunity.
In developing Link ApartmentsSM, we focus on two key differentiators: location and price point. We choose urban locations that are near community amenities, transit options, and major countercyclical employment anchors such as research universities and medical centers. We also target rents that are affordable to residents earning 60-140% of area median income.
By targeting the missing middle population, essential housing can reach a larger audience that is drastically underserved by most of the product being built today. This provides an opportunity for investors to participate in a resilient, risk-mitigated strategy, with little competing product in urban markets throughout the United States.
Essential housing is desperately needed in both gateway markets and high growth cities and can be an appealing product for investors looking to enter those markets. Gateway markets like Los Angeles, the Bay Area, and New York City have experienced decades of housing challenges, and the problem is worsening.
The growing need for essential housing, combined with Grubb Properties’ years of work and deep expertise in building out these creative methods, has us well positioned as we emerge from the current crisis. We believe that providing essential housing is not just a smart policy and a good investment strategy — it is also a moral imperative.
Want to learn more about how essential housing can provide resiliency in a time of scarcity? Download our essential housing paper and learn about Grubb Properties’ key differentiators in developing this important asset class.