Why California Workforce Housing is the Right Investment Right Now

July 26, 2022

Lessons from the Pandemic

In the two years during the pandemic, we learned so much.

Previously unimaginable, the beginning of the pandemic came unexpectedly and created a title wave of unemployment that hit our work force resident community particularly hard. For many who were working, their homes—and often, their dining room tables--became their new place of work. For them, the return to in-person work just started trickling back again this year. During the pandemic, 30 percent of workforce renters were unable to pay rent.

Upheaval in the urban apartment market was unprecedented, especially in already expensive cities like San Francisco, Oakland and Los Angeles where there is a high concentration of STEM workers and work force families that were either disappearing or going fully remote during COVID.  Many of the apartment buildings in the city centers are dense mid-rise properties with elevators and smaller sized apartments that became less appealing to renters when people were in them 24/7.  Additionally, as amenities became unavailable while cities were locked down, urban centers and young workers were unable to network or entertain themselves – rounding out the case to move out of cities such as San Francisco.

Some renters who didn’t leave used the decreasing rents as an opportunity to trade up into bigger apartments in better neighborhoods.

Meanwhile, we doubled down on cleaning, maintenance, and resident support. Maintenance workers and property managers, among others, became front-line workers during the pandemic. We were close to our residents and had a clear idea of what was going on in the buildings and even with individual residents during the pandemic. Mosser saw it as a time for care and dedication, making certain residents were safe, comfortable and had what they needed. Mosser kept every one of its essential employees fully scheduled, busy tending to maintenance needs, property improvements, and more.

Now that San Francisco is recovering, and renters are finding their way back into urban centers, it is making many investors question—is now the time to invest in urban workforce housing in California or continue to invest elsewhere?  Based on the lessons we have learned over the last two years, we believe timing is exactly right to re-invest in the gateway markets of California.


Things the Pandemic Taught Us

Geographic Diversification at the Right Times Can Be Beneficial
As we witnessed people moving out of the city center during the pandemic, we began to expand into surrounding locations, so we could serve those in the urban centers and those who wished to live a bit outside of them. We learned how to adapt with the changing economic and investment climate and to follow the trends of our clients.  This allows us to attract new residents, give current Mosser residents a place to move into as their needs change, and continue to serve those who wish to remain close to the urban employment and transportation centers, which is core to our long-term investment thesis.   Mosser is monitoring the continued development and growth of cities such as Seattle, Portland, Denver, Salt Lake City, and Austin as areas for potential expansion.  While we believe California is the best investment opportunity today, we are monitoring these markets where valuations may normalize, and fundamentals remain strong.

In the past, Mosser focused more on acquiring smaller units, however, because of the changing needs during the pandemic, studios and small places were in less demand than larger apartments that allowed residents the space to work and spend more time at home. Some residents moved between Mosser buildings from smaller to larger units. So, with acquisitions, Mosser has also adapted its strategy to include a greater mix of large and small apartments as well as extended our focus to even smaller multifamily properties in more residential neighborhoods that don’t require elevators.   The small multifamily property market is the last bastion of unsaturated residential investment strategies that Mosser expects will gain more momentum coming out of COVID and with advances in operational technologies that can support investment in this product at scale.

With nine-percent rent growth projected in San Francisco in 2022. Mosser is also looking to the future of how we will best serve GenZ, as they will be graduating from universities and moving out of their parents houses to become the largest percentage of new urban renters over the next 15 years and they want to live in cities, where we have high quality affordable apartments for them.

There is Significant Value to Having Deep Community Roots and Decades of Experience 
We learned that having deep community roots as a multifamily investor and operator makes a significant difference to our business and our stakeholders. Our 65+ years in the San Francisco Bay Area and the connections Mosser has throughout the community enabled us to get residents items (like toilet paper, medical supplies, and homemade hand sanitizers) that were in short supply, very difficult to get, but in high demand.

Our long-term prediction is that cities like San Francisco, Oakland, and Los Angeles are making the swing back and adapting to how people are choosing to live and work. There are simply some fundamentals of workforce housing that make investment—especially in the post-COVID era in California—a really good choice:

Attractive Investment Capitalization Rates
While the rest of the multifamily sector outside of urban centers in California enjoyed historic declines in cap rates, the gateway markets of California that Mosser is focused on experienced cap rate expansion.   Today you can invest in a high-quality multifamily property in San Francisco at over a 4.5 percent cap rate which is historically on the higher side compared to the prior 10 years. Whereas in other areas of the country particularly in the Sun Belt, cap rates have been trending down from historical levels during the past decade between five and six percent to the high two percent and low three percent over the past couple of years during COVID.

Stable Renter Demand
In California, 63.5 percent of households under the age of 35 are renters, and nearly 73 percent of retirement-age households have an annual income of less than $75,000, according to Berkeley’s Rosen Consulting Group. This signifies a continued—and significant—need for moderately-priced workforce rental housing. There is sustainable long-term demand for high quality affordable apartments.

Limited Supply of Workforce Housing 
The pandemic dealt a severe economic blow to low- and mid-income individuals who face a worsening struggle (see: Affordable housing is becoming harder to come by). According to the National Low Income Housing Coalition (NLIHC), there was already a shortage of nearly seven million affordable and available rental homes in the U.S. for renters with incomes at or below the poverty line prior to COVID-19. There are also threats to NOAH—a particularly important segment of affordable housing—that could make the crisis even worse. There is a significant amount of entry level housing that is being acquired by institutions making the jump to homeownership farther out of reach for middle income earners.

High Occupancy Rates and Limited Turnover Compared to Market Rate Housing
A large supply-demand imbalance exists in naturally occurring affordable housing (NOAH) such as the rent-regulated subsector of the multifamily market. In rent-regulated housing in California there is significantly reduced turnover, creating stable effective rents, and limiting the need for rental concessions even in a downturn compared to market rate and Class A apartments.

Future In Affordable Housing 
Our role in creating high quality affordable places for people in California is to preserve affordable rent regulated apartments and expand more into the true affordable, government agency financial structures, community ownership programs, and other for-profit partnerships with non-profit models.

Sustainable Property Returns Over the Long Term
Being socially responsible is core to Mosser’s investment and operating strategy, and this focus has propelled long term success in the naturally occurring affordable areas that Mosser focuses on. Mosser makes a significant social impact to all of its residents and each apartment, property, and neighborhood it invests in. Mosser incorporates energy efficiency plans into all our operating budget goals on an annual basis and has done so for decades. With every new acquisition, we analyze whether a project can financially support the replacement of toilets and other high flow water fixtures, higher E rated heating systems, or the installation of solar. Mosser reduces waste in its unit rehabilitation process compared to its peers and implements composting and recycling programs at all of its properties.  Mosser continues to add tangible value to buildings and to invest with the responsibility that we must give back to our communities and support all our residents – which it has been successfully doing now for over 65 years.