FEATURE ARTICLE, OCTOBER 2006

A NEW MEANING FOR WORKFORCE HOUSING
New Urbanism mindset creates demand for live-work proximity and luxury rental apartments.
Wiley Prothero

Perkins Rowe in Baton Rouge, Louisiana

During the 1990’s tech boom, the issues with housing availability in Silicon Valley highlighted the growing geographic gap between housing affordability and office locations. However, the trend was quietly emerging in cities throughout the Southeast, as well. Originally, concerns about workforce housing arose with the spread of urban populations into suburban developments, which was then followed by corporate offices attracted to suburban real estate that was less expensive than downtown locations. Ironically, housing for the senior executive workforce has driven some of these suburban corporate relocation decisions — after all, CEOs like to work near home too.

Historically, however, workforce housing has referred to housing for government employees, such as firefighters, law enforcement professionals, teachers and service workers who cannot afford to live in the communities in which they serve. Having housing closer to work would reduce long commutes and improve these workers’ quality of life, but most cannot afford to live in the same community as senior management.

For firefighters and CFOs alike, sprawl has become a fact of life in many Southeastern cities. Nashville, Tennessee, was once a 15-minute city. Today, its commutes have doubled, becoming a 30-minute city. Nashville, Atlanta and Orlando are among the Southeastern cities that lack natural geographic barriers, such as a lake, ocean or mountain range, to keep exurbs (communities that fall just beyond traditional suburban boundaries) from becoming suburbs. Once-distant communities in these markets are becoming surrounded by new suburban development.

While public policy experts and municipal planners continue to grapple with workforce housing issues for the less well-off, real estate developers have discovered that professionals and executives, whether rising or established, seek different kinds of housing solutions today than in the past — and have the ability to pay for it. Contemporary needs include the desire for market-rate and luxury rental apartments driven by the young affluent and middle class professionals of all ages.

In fact, this year, the demand for luxury rental apartments has shown a marked upswing. According to the National Association of Homebuilders/Fannie Mae’s Multifamily Market indices, demand for luxury rental apartments has risen to a record 73.2 percent in the rental index, up from 62.5 a year ago. While this index includes vacation apartments in resort areas as well as every-day residences, a significant portion of the demand is arising from workforce needs.

What is driving this demand? Not surprisingly, concerns about slackening home prices amidst recent interest rate increases have led to a corresponding increase in leasing rather than buying, and multifamily developers are responding accordingly. Yet, beyond today’s concerns, long-term changes in consumer preferences also are influencing the need for luxury rental apartments.

Where the traditional pattern was for young professionals to marry and buy a house in the suburbs with a big yard and good schools nearby, not all affluent workers are following that pattern today. Today’s Echo Boomers have shown a proclivity for marrying later, buying homes later and having children later — and seeking high-quality rental apartments to live in along the way. Miami’s Aventura and Atlanta’s Buckhead neighborhood are two high profile areas where today’s affluent and freedom-loving renters are flocking, where they can live, work and play without wasting time traveling far.

Also significant, the New York City notion of owning a house in the suburbs and renting or owning an apartment in the city has spread to other markets nationwide. Some consumers are happy to simply own a home in the suburbs, while those with the means might also want a luxury apartment downtown for late work nights and weekend leisure.

Others — especially unmarried professionals — prefer to live in urban downtowns or suburban downtowns, near their jobs, friends, restaurants and entertainment. Some road warriors need the flexibility of renting because of frequent job-related relocations, and can afford a high-end rental apartment with plentiful amenities. Another group seeking luxury rental apartments consists of older, affluent mobile adults who are frustrated with homeownership and seek the freedom of renting.

New luxury apartment demand also has been spurred by the emergence of New Urbanism, a planning concept in which homes, workplaces and shopping are designed in proximity to reduce commutes and create dynamic neighborhoods in suburban and urban settings. New Urbanism, and its offshoot, transit-oriented development, has led to the revitalization of city centers and suburban communities in markets nationwide, some with more success than others. New Urbanist-style developments generally include residential and retail components, as well as office or even light industrial space. Many, although not all, offer luxury apartments in the context of an upscale development.

Perkins Rowe, a large mixed-used project under development by JTS in Baton Rouge, Louisiana, illustrates on a large scale how New Urbanist concepts can include a luxury apartment component. KeyBank Real Estate Capital recently provided a $170 million construction loan facility for the first phase of Perkins Rowe, a 25-acre retail, office and multifamily community. Perkins Rowe is intended to serve the more upscale needs of the affluent Southeast portion of Baton Rouge. One of the demands that has driven this project is the need for live-work-play workforce housing development.

To create the environment today’s professional workforce is seeking, the developer is planning the project in phases. The first phase includes 317 luxury apartment units, 373,018 square feet of retail space, 137,766 square feet of office space and parking for more than 2,000 cars. The project is designed to be a true lifestyle community with an open-air design. The office component is expected to meet the exceptionally strong demand, which has resulted from businesses relocating from the New Orleans area after Hurricane Katrina in August 2005. Similarly, the multifamily component is expected to serve the demand, which has been exacerbated by the influx of population from New Orleans.

KeyBank Real Estate Capital also was involved with Downtown Dadeland, a smart growth project located near Dadeland Mall in Miami. The project includes 125,000 square feet of retail and restaurant space on the ground level of seven different buildings, with residential condominiums on floors two through seven. One building includes a recreation center, complete with a swimming pool and exercise center. This project is also a transit-oriented project, given its location next to the Metro Rail station.

While the residential units will be sold as condominiums, owners are allowed to lease their units if desired. Owners can rent their units out twice per year, with a lease term of no less than 6 months — terms that would appeal to a wandering Echo Boomer or road warrior.

Today’s affluent consumers, or aspiring-to-affluence consumers, have come to expect luxury finishes, such as granite countertops and maple flooring, at nearly every rental price point. Multifamily developers are finding that consumers respond favorably to luxury touches, whether renting an apartment or buying a condominium. The return on investment for upgraded materials is usually higher because consumers prefer high quality, whether renting or buying.

Developers also are finding that rental apartment properties tend to lease up more quickly when higher-quality materials are used, especially when the developer is renovating an older building or creating an adaptive reuse of a commercial building. Furthermore, upgraded materials help developers secure higher rents, something that their lenders like to see, of course.

While economic cycles that influence buying versus renting may fluctuate, long-term consumer trends suggest that the demand for upscale housing in close proximity to work places is here to stay. Given consumers’ interest in live-work-play environments and concerns about climbing gas prices, the need for workforce housing — at all price points — will undoubtedly continue to grow.

Wiley Prothero is a vice president with the Atlanta office of KeyBank Real Estate Capital.

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