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An affordable housing crisis has been swelling in the US for years, but the road to new supply is challenging. Generally, affordable housing rents don’t support ground-up real estate development due to high land and construction costs. Affordable housing developments just don’t pencil out - but that is changing. The pandemic has amplified demand for affordable units and has depleted already low affordable housing supply. Now, the sector is taking the spotlight with both government and industry support. This convergence is generating a meaningful change in the affordable housing crisis and new opportunity for investment.
Demand of Plenty
The affordable housing crisis refers to the growing number of rent-burdened tenants in apartments and other rental housing that pay more than 30% of their income on rent. Research from the Lincoln Institute found that the number of rent-burdened tenants in the US has increased steadily over the last 50 years. In 1960, only a quarter of the US population paid more than 30% of their income on rent; today, that number has increased to 50%. The cost-burden is also increasing. Today, 26% of renters are classified as severely rent burdened because they pay more than 50% of their income on rent.
Rising rental rates are largely responsible. In the last 50 years, the median income has increased by only 11% while median gross rents have increased by 80%. Much of the income-rent disparity has happened only in the last few years. Research from Fannie Mae shows a 47% increase in housing costs since 2012 with wages growing only 16% during the same period.
As demand for affordable units has skyrocketed, there has been little new supply added to the market. The National Low-Income Housing Coalition estimates a shortage of 7 million affordable units in the US with only 36 available affordable units for every 100 extremely low-income renter households.
Major gateway markets like New York and San Francisco usually bear the blame, but the truth is that the affordability crisis plagues all types of markets across the country. The National Low-Income Housing Coalition reports that no state has an adequate supply of affordable housing, while the Lincoln Institute pegs Miami-Fort Lauderdale as the market with the highest share of rent-burdened renters, followed by the Greater Los Angeles metro and then the Riverside-San Bernardino market.
Developers are well aware of the reasons to invest in this sector. First, excessive cost burden drags on economic growth, fueling homelessness, derailing childhood education and increasing the costs of healthcare. But, in an industry driven by supply-demand fundamentals, developers couldn’t ask for a deeper pool of renters. Affordable buildings reach stabilization quickly, and renters in affordable properties tend to stick around, meaning better long-term attrition, even during periods of economic dislocation. Through the pandemic, many affordable owners have also reported strong rent collections due to the lower burden on renters to make monthly payments.
“Housing should be a right, not a privilege,” President Joe Biden said during his election campaign. Since taking office, he has stuck to that philosophy, looking to overhaul US housing policy in a number of ways. In addition to rent relief and the expansion of the Section 8 voucher program, Biden has proposed a $640 billion investment in housing over the course of the next decade, including a $100 billion Affordable Housing Fund to construct and upgrade low-cost housing. The fund would allocate $65 billion to state and local housing authorities, targeting areas with the most severe shortages of housing supply, and it would increase funding for the Housing Fund Trust, a grant program to construct and preserve affordable housing, by $20 billion. The investment also includes expanding the Low-Income Housing Tax Credit program with a $10 billion investment and expanding funding for the Community Development Block Grant by $10 billion. All of these efforts will provide financial incentives and support to develop new or redevelop existing affordable housing stock.
Biden’s plans don’t stop at increased funding. He has also proposed the elimination of state and local government regulation that prohibits or inhibits the construction of affordable housing. This would help open doors for developers and fast track the construction of new projects.
Biden’s administration is not alone in responding to the crisis. In November, the Federal Housing Finance Agency required that Fannie Mae and Freddie Mac allocate 50% of loan originations in 2021 to affordable housing, up significantly from the 37.5% mandate in 2020. As a result, half of all multifamily loans from both agencies must be used for affordable housing investment. The combination shows a renewed interest at the federal level to partner with the private sector to aggressively combat the affordable housing crisis.
Technology Takes a Seat at the Table
If cost is the underlying challenge to developing affordable housing, CRE technology has a natural role to play. Technology adoption has been proven to increase efficiency and drive down construction costs for developers focused on the multifamily space. Developers have been able to shave 30% off development schedules and reduce development costs by as much as 8% over the lifetime of a project by leveraging data analytics, proactive intelligence and automation with Northspyre. This alone can help improve the efficacy of affordable housing development, but other technology companies are also emerging to support affordable housing construction by providing a range of different solutions, from prefabricated and modular housing design to digital supply networks that help manage the supply of construction materials.
Leveraging the right combination of technology can be crucial to an asset class like affordable housing that can come with slim margins. The 2021 Engineering and Construction report from Deloitte estimates that construction technology can reduce a developer’s time investment by 10% to 30%, construction costs by up to 10% and operating costs by up to 20%. These tremendous benefits are driving increased construction technology adoption with 76% of polled construction companies telling Deloitte that they plan to invest in at least one technology this year.
Capital Marches In
Increasing demand, federal support and technological advancements mean one thing for investment capital: opportunity. While it’s still early to say exactly how much capital is flooding into the affordable housing space, the number is nearing record-breaking heights. The most recent funding announcements speak for themselves. The National Equity Fund, a national nonprofit focused on low income housing tax credits, announced that it completed $1.5 billion in affordable housing investments last year; Morgan Stanley issued a $1 billion social bond to finance affordable housing projects; and JPMorgan Chase committed $30 billion to provide equity loans and direct funding for the expansion and preservation of affordable housing in underserved communities. Private funds are also seeing strong investor interest. Avanath Capital Management, for example, closed its fourth affordable housing fund this year with $760 million in equity commitments, exceeding the fund’s initial target by $200 million.
Even Amazon is getting involved. The ecommerce giant launched the Housing Equity Fund, committing $2 billion to provide below-market loans and grants to housing partners for the development of more than 20,000 affordable housing units in Washington State; Arlington, Virginia; and Nashville, markets where the company’s expansion has put pressure on the local housing market.
This capital is largely responding to the deep well of demand and positive social impact of affordable housing, but yield-driven investors are also seeing a reason to enter this market. Pre-pandemic, affordable housing yields averaged 5% nationally. By the end of the year, the average yields jumped to 6%, according to Leigh Ann Merchant, senior credit manager at Ally Financial during a conversation on affordable housing financing hosted by KeyBank. Low interest rates are partially responsible for the increased yields, along with reduced asset pricing. The combination has helped to support the financing of ground-up affordable housing projects across the country.
The road to solving the affordability crisis will be long, but the factors at play here tell a new story, one that the industry hasn’t heard in the past, one that will support private investment in affordable housing projects and make affordable developments feasible. Real estate developers looking to enter this niche space can start by adopting a purpose-built intelligence platform like Northspyre.
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