Seizing the Moment: Developers' Opportunity in Affordable Housing

Housing shortages have sent mortgage rates and rents soaring across the United States, and in 2022, the median rent-to-income ratio reached 30% for the first time in over 20 years. The lack of affordable housing development in high-demand, job-rich areas is having a ripple effect across communities, causing an increase in rates of homelessness and taxing public services as essential workers such as teachers are priced out. Developers can play a role in increasing housing affordability, and though affordable housing development comes with its unique challenges, the deficit also presents a unique market opportunity to seize.

Here is a closer look at how the lack of affordable housing development could be a threat to the quality of life and public services in communities across the country and the role developers can play in bridging the housing gap. 

Case Study: Affordable Housing Shortages Threaten Public Education in Collier County, Florida 

Collier County, Florida offers the second-highest starting salary for teachers in the state and provided teachers with three bonuses last year. Even so, the district has 170 vacancies, and 40% of its teacher workforce commutes from another county. High housing costs are contributing to the vacancies, and as the lack of affordable housing persists, more positions are expected to go unfilled. Teachers already on the job, such as lifelong Collier resident and elementary school teacher Tiffany Johnson, are unable to afford housing even while pursuing supplementary stipends by taking on club sponsor or department chair positions. Last year, Johnson opted to move back in with her parents when she couldn’t find a unit in her budget. “I’m team lead, so I get a stipend for that. I’m the math coach, so I get a stipend for that. I taught Saturday school and summer school just to try to help make ends meet,” Johnson told Gulfshore Business. “I can’t afford $2,000 for rent by myself, it’s astronomical.” 

Collier County Public Schools’ human resources department makes efforts to connect teachers with housing but is increasingly seeing candidates turn down offers due to high living costs in the area. In the future, teacher shortages could impact the quality of education. District officials, who have already had to collapse and split a third-grade class into existing classrooms, see a lack of staffing contributing to large class sizes and overcrowded environments where students can’t get the individual attention necessary to learn. In addition, it could lead to cutting of enrichment programs, such as arts programming or sports. 

The teacher shortage in Collier County demonstrates how the housing crisis will persist as both an economic and quality-of-life issue in communities. Developers have an opportunity to build much-needed units that contribute positively to school districts, but also the chance to partner with local planning boards and school districts on private-public partnerships and take advantage of government incentives.

The Developer’s Role: Challenges and Opportunities in Affordable Housing Development 

The Opportunity 

The Collier County school district’s affordable housing struggles and its impacts on public services is not a unique case. Similar scenarios are playing out in communities across the United States. Housing shortages and the urgent need for affordable housing development pose both an opportunity and a challenge for your team. In many cases, state and local zoning or regulatory codes are being rewritten to cut red tape and allow for more affordable housing production, and specific programs designed to address priced-out public service workers are also on the rise. 

Investors usually include affordable housing units in their portfolio because of associated government tax credits. Developers receive tax credits if they use a percentage of their property as affordable housing. By evaluating the costs of purchasing, renovating, or maintaining affordable housing units, you can determine whether it’s a viable investment opportunity. As with any other project, appropriate market research and due diligence to ensure the property is in a good area with strong demand will help ensure profitability. 

Private-public partnerships are likely to be the center of your funding strategy for an affordable housing opportunity. Banks are making an effort to recognize the high demand for affordable housing and issue applicable loans even as high interest rates complicate the process. Building relationships with local chambers of commerce, local planning boards, and economic development agencies will help you pitch projects as a win-win solution that benefits the whole community. 

State and local governments are likely to continue to expand these housing production initiatives in the next year or so, with a particular emphasis on getting affordable housing to market. In light of teaching shortages and other public services, many districts are eager to create affordable housing specifically designed for teachers that allows educators to live in the community alongside the people they serve. 

The Challenges 

Supply and labor costs are a major obstacle to affordable housing development, especially with labor shortages, supply-chain delays, and economic uncertainty currently impacting the market. High interest rates are also complicating affordable housing developments that rely on traditional sources of financing, such as federal-low income tax credits (LIHTCs). Timelines can also be extended if a project is dependent on approval or funding from a specific government agency or program, which can further increase costs and cause further delays. 

NIMBYists are also a major challenge in the construction of affordable housing. Local planning board opposition can lead to a protracted zoning or regulatory process, legal battles, and derailed project timelines that, in turn increase costs. Community resistance also drives inhospitable zoning or building codes that make building multifamily developments with affordable units more difficult. 

Financing can also pose challenges for some affordable housing developments. Lenders may perceive certain projects as being riskier or be more unwilling to invest in communities that have been historically underfunded. Budgeting and market analysis that demonstrates the project’s ability to generate ROI, as well as your own successful track-record as a developer, can help offset investor concerns as a project 

Innovative Strategies Affordable Housing Developers Can Use 

Teacher-Specific Affordable Housing Incentives 

Districts across the United States are already experimenting with affordable housing to retain teachers. Daly City, California, a city south of San Francisco, set aside 122 apartments at an affordable rate for teachers and staff. In the town of Welch, West Virginia, the American Federation of Teachers helped open a building with apartments for teachers. The mixed-use development also featured retail shops, and local officials hope it will help revitalize the local economy. Housing complexes of this sort remain rare, but as costs continue to price essential workers out of high-demand areas, projects of this sort could become more common. Property can also offer rates or offers in existing buildings for teachers who are able to supply proof of employment, such as first or last month’s rent-free. 

Collaborative Projects with Local Governments

Monitor state and local housing initiatives designed to boost the production of affordable housing. For example, the California Housing Accelerator program is designed to help get shovel-ready affordable housing projects that couldn’t get funding from tax-exempt bond allocations or low-income taxing credits. Joint Powers Authority (JPA) models of funding are also being used to help developers close the gap between development costs and affordable rents. The new model allows developers to acquire and preserve units affordable to middle-income earners  - people earning between 80% and 120% of the area median income - and in exchange to receive tax benefits that eliminate the need for direct public funding. Housing shortages are likely to spur a wave of similar initiatives in communities across the United States. 

Exploring Adaptive Reuse Projects or Renovation 

The COVID-19 pandemic and the advent of remote work have made adaptive reuse or the renovation of old buildings a trend in trying to solve the affordable housing crisis. Office buildings unoccupied due to remote work may seem an obvious option for reuse, but numerous other structures remain underutilized, abandoned, or functionally obsolete. Common structures available for conversion into affordable housing include abandoned hotels or schools and brownfield sites such as old warehouses or factories. Planners and policymakers will need to eliminate regulatory obstacles to make these structures available to developers, but public enthusiasm for reuse projects could lead to relevant zoning reform in many markets. 

Moving Beyond Public Funding 

Developers in some communities are trying to circumvent zoning or regulatory policy through alternative strategies. The development firm SoLa Impact in Los Angeles works with private investors to build affordable housing at lower costs without public funding. By standardizing and simplifying the construction process, such as using the same size window in all buildings, allowing the features to be bought in bulk. Lowering vendor costs is primarily how the firm manages to build high-quality, affordable housing at nearly half the cost of what traditional development firms would expect. 

Affordable Housing Developers Can Bridge the Housing Gap 

The production of affordable housing benefits individuals and the community as a whole. Public services, including education, are increasingly dependent on affordable housing availability, and these buildings ultimately enrich the community as a whole. High costs, rising interest rates, and complex government policy can be obstacles developers face, but with proper planning, these properties can still be viable and profitable. 

Technology can play a major role in pursuing complex affordable housing development projects or developments that integrate affordable housing units. Modern real estate development software can ensure key milestones and project deadlines are met. Northspyre’s platform can facilitate early-project planning on complex affordable housing projects, allowing your team to leverage data and automation to bring projects to market faster. Real-time alerts can also help you mitigate risk, identifying when there’s a budget overrun or a contract overspend, allowing you to adjust your budget. 

Northspyre’s vendor directory is a powerful tool to help you keep construction costs down, allowing you to build at a lower cost-per-unit. The tool empowers transparent bidding, allowing you to see a vendor’s entire portfolio of work and see how they stack up to other vendors in the area for a fast bidding process. You can also write notes about your relationship with specific vendors, including how they are impacting specific budget lines, helping you build institutional knowledge that will continue to deliver value on future projects. 

Download our guide to Overcoming Real Estate Development’s Greatest Obstacles for more strategies to keep your projects coming in on time and under budget.