Real Estate

Investors turn their eyes to affordable housing opportunities

Community leaders look to elevate its case


The COVID-19 pandemic redefined “home” for many Americans and underscored the bedrock necessity of affordable housing for seniors, families and essential workers. As the pandemic shifts from crisis to chronic, investors, community leaders and housing advocates say they intend to make the most of the chance to permanently elevate the case for affordable housing even as economic metrics are starting to shift. 

The public and policymakers appear to be unflagging in their understanding and support for workforce housing, especially for essential workers, recognizing its pivotal role in community operations, said Brian Coffee, senior director for community investment capital for Synovus Bank in Birmingham, Alabama. 

“We’re seeing statistics from our developers across the country that their portfolios are holding up well,” he said. “There’s a growing sense that affordable housing is a stable investment class for banks and insurance companies; even in the 2008 – 2009 recession, it held up well.”

A recession precipitated by a pandemic is new territory and traditional patterns likely will face unanticipated factors, especially as states and municipalities enter an excruciating budget cycle said Coffee. For instance, it’s possible that housing tax credits and other supports for affordable housing could be sacrificed or functionally negated by property tax increases. 

State and local officials concur: the unusual confluence of public health, faltering businesses of all sizes and dramatically different use of  public services, such as transportation, will almost surely force creative strategies for expanding affordable housing. 

Entering the fourth quarter of a chaotic year, consumers appeared to be managing their finances with common sense, as much as they could.  The influx of cash to consumers early in the pandemic kept rent payments flowing, all agree. Overall consumer debt edged down by 1% in the second quarter, according to the Experian Consumer Sentiment Index.

A poll conducted in August by the Associated Press/NORC Center for Public Affairs Research found that two-thirds of Americans are spending “less than usual;” 45% are saving “more than usual;” and 26% have been paying down debt faster than they usually do. 

For many, sheltering in place meant staying put, which dampened demand-driven rent increases. CoreLogic reported in mid-August that rent prices for single-family houses increased only 1.4% in June, compared to a 2.9% rise in June 2019 over the prior 12 months. 

Single-family rentals account for half of the rental housing stock, according to CoreLogic.

Builders of multifamily housing, including affordable housing, remained glum in the middle of 2020, according to a survey by the National Association of Home Builders, based in Washington, D.C., based on both flaccid production and slightly rising vacancies. 

Evolving risk, emerging response 

Affordable housing developments are a long-term play, usually affected little by short-term economic travails. But as pandemic economic stress fractures start to crack, investors, developers and governmental officials will adjust accordingly, say affordable housing finance experts. 

Even as pandemic realities heighten the urgency for workforce housing, developers, investors and finance companies are puzzling through the resources to respond as rapidly as possible, said Beth Mullen, who heads the affordable housing industry practice for New York-based CPA firm CohnReznick. 

 “The good thing is that the folks who build this housing, they always have a large pipeline of deals they want to do, but it takes time to ramp up,” she said. “The real bottleneck is that federal resources are limited. The low-income tax credit program can only build so many units. States and cities are repurposing dollars to housing, but the challenge is that many of those dollars are going to emergency shelter.” 

 As the economic toll of the pandemic-induced recession continues to mount, the effects of unemployment and the collapse of small businesses will start to ripple through developments’ cash flow, Mullen predicted.

Though renters typically try as hard as they can to stay put, say advocates and experts, paying rent above other bills, the widespread economic pain could undermine even the most determined families. If family income declines, investors and operators will have to reconsider the benchmarks for what families are expected to pay, potentially entertaining the concept of dollar thresholds rather than percentages of income, Mullen said.

Investors examining deals through August were “more diligent about stress-testing,” said Mullen. “What happens if vacancies are 10%? What happens if operating expenses go up by X percent? What happens if we can’t raise rents for several years?”

Bearing in mind returns reliably in the range of 4.75% to 5.25%, investors are both more interested and more skeptical of projects framed by tax credits, said Bill Shanahan, co-president of Evernorth, a nonprofit fund that serves Vermont, New Hampshire and Maine. Investors are fine-tuning their must-have lists, seeking greater liquidity and “cleaner” deals, he explained. 

“If they can get a 9% tax credit deal on new construction, that’s what they want,” Shanahan said. “They don’t want an acquisition with tenants in place and worrying about COVID affecting tenants and construction delays…We’re seeing a much deeper dive into the stresses that deals are put through, as we bring those to market.” 

As long-term implications of short-term shocks start to emerge, investors will, of course, align budgets accordingly, said Thomas Stagg, a partner with Novogradac & Co., a San Francisco-based CPA firm with a large affordable housing practice. 

“Now that we’re looking forward to a few years of potentially decreasing or flat income limits, how will that impact projects’ abilities to remain solvent?” he asked.  

While projects are continuing, the industry has its fingers crossed that Congress will lock in a 4% floor for credits, “which hard-wires a minimum credit percentage that would result in more tax credits per project, which would be a tremendous benefit to projects facing increased construction pricing and longer construction cycles, due to worker social distancing,” Stagg said. 

New uses, new designs for affordable housing

Mandated telecommuting, homeschooling and curtailed activities add up to different demands for developments.  Developers and officials are plotting ways development design can support objectives for providing safe, functional housing for working households. 

“We have to pay attention to how tenants are supported. We have to help them transition through the pandemic so they can be or remain valued tenants,” said Flynann Janisse, executive director of Rainbow Housing Assistance Corp., and president of the Equality Community Housing Corp, based in Phoenix. “The preservation of affordable housing depends on investors creating viable environments that foster growth, and that includes a livable wage. The returns to owners come from stabilization of the tenant base. Certainly, the financial impact is a factor impacting owners and investors. These are long-term investments that require stabilization.”  

Janisse already sees closer collaboration of operators and work skills training and job placement programs, as swaths of displaced workers gravitate to rapidly growing sectors of the economy. Some Rainbow-affiliated programs took training virtual to help clients find a new way forward in the midst of layoffs and economic turmoil. Tenants’ focus on staying employed must be matched by operators’ delivery of reliable broadband, precisely to support clients’ access to training and employers. 

“Any excess funds that a low-income person had is generally invested in cell phones, transportation, food and emergency needs, and wants versus needs in some cases.” Janisse said. 

“Much of the tax-credit-related housing being built these days has a service component to it,” Mullen said. “If it’s for seniors, there’s a service coordinator who helps keep the residents healthy. In developments for families, it’s after-school programs, or, depending on the tenant population, it might be classes for English as a second language.”

The amount of space allotted to families might have to change as a matter of public health, according to analysis by the Harvard Joint Center on Housing. Workers whose jobs entail sustained close contact with others – such as health care and retail – are more likely to be minorities, often living in moderate-income, multi-generational families. That means, the analysis indicated, that allowing space for self-isolation (as required when exposed to COVID-19) directly frames workers’ ability to quell the spread of disease to both the public and to vulnerable family members.  

Investors’ classic assumptions about where to best locate affordable housing might change, too, as commuting habits reset. Academics at Rensselaer Polytechnic Institute studied consumers’ daily habits during the height of the pandemic lockdown and documented a 60% drop in monthly trips related to work and, that consumers anticipate that their work-related travel will permanently drop by 8.2%. Similarly, the academics found that consumers predict that grocery delivery will permanently rise by 63.8%. 

In Maine, the pandemic sharpened the state’s escalating goal of collaborating with municipalities to carve affordable housing from an aged and, often, obsolete housing stock. Persuading independent municipalities to get on board is much more carrot than stick.

“We’ve always had a great relationship with housing developers, but we haven’t much explored relationships with municipal leaders,” said Daniel Brennan, director of MaineHousing, the Pine Tree state’s housing finance agency and administrator of several federal housing programs. 

The agency has had some success incentivizing private, single family developers to include a few modestly priced ($200,000 to $250,000) houses in each subdivision. MaineHousing expanded the concept to offer grants of up to $500,000 to municipalities to craft their own incentive programs, reflecting local redevelopment and economic development priorities – an approach that dovetails with the state’s acute need for workforce housing. 

“We don’t tell people what to do,” said Brennan, referencing independent-minded local officials. “But we say, ‘we have significant resources and expertise…if you have a vision, we’d like to help you get there.’” 

One early success story is playing out in Biddeford, in the Portland metro. Traditionally one of the few cities with affordable, if unattractive, housing, the city zeroed in on a program that helps new homeowners buy small multifamily units and improve them, both building family equity and the affordable housing stock in the process. 

And last year, the Maine legislature approved a new funding structure for the agency, a new state tax credit for low-income housing. 

“Investors look to Maine and see that there’s lots of demand,” Brennan said. “We’re oversubscribed on the tax credit program.” 

Even small municipalities like Oxford, Mississippi, population 25,000, are realizing they must quickly ramp up workforce housing in some way.

Mayor Robyn Tannehill said that the city is too small to afford direct assistance, such as rent subsidies for households hit hard by layoffs in two of the sectors most important to Oxford’s economy – academia and tourism.   

But every downturn has an upside, said Tannehill: “Perhaps our biggest potential for the next few years is an overabundance of purpose-built student rental housing. How do we translate that into some type of rental at prices that are lower, and putting those units into a workforce housing pool?

“As a city leader, I feel it’s our duty to provide a healthy and safe place to live for everyone in our community,” Tannehill said. “The ROI metric I would use is, have we enacted sustainable policies that create a healthy and safe place to live?”

To read the full October/November issue of HousingWire Magazine, click here.

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