August 2021 Edition - Pandemic Intensifies the Affordable Housing Crisis
The U.S. has had an affordable housing shortage for years and now the pandemic has made it worse. Add to the pandemic increasing construction costs, lost jobs and lower incomes inhibiting people’s ability to pay rent and you have an affordable housing crisis that has taken on a new urgency. The vast majority of low-income households are rent-burdened and more people than ever have a need for a safe stable place to live. Demand for units that low-income people can afford vastly outstrips the number of units available to them. Government assistance has helped to blunt the worst of the shock so far; but, questions remain about the challenges going forward to meet the increasing demand in an uncertain market.
Since March of 2020, approximately 53 percent of all households earning $25,000 to $49,999 have reported lost income, according to a recent report by the Joint Center for Housing Studies of Harvard University. Although the U.S. economy has improved since bottoming out in the second quarter of this year, it is still hampered by the effects of the pandemic. Approximately 11.1 million Americans were unemployed in November 2020 compared to 5.8 million in October 2019, according to the U.S. Bureau of Labor Statistics. Thankfully, this trend has now stabilized and is showing signs of improvement but has a long way to go.
To exacerbate the affordability problem even further, one of the legacies of the receding pandemic looks to be a nationwide spike in apartment rents. Apartment rents have taken off like a rocket. Year-over-year multifamily rent growth was up by double digits in 9 of 30 U.S. markets examined by commercial real estate data company Yardi Matrix. Asking rents for non-leased apartments grew 6.3% from June 2020 to June 2021, the highest annual increase since Yardi Matrix began tracking the data in February 2001. The national average apartment rent in June was $1,482 – a record according to Yardi. Metro areas that posted the largest year-over-year are all, not unsurprisingly, Sunbelt metros across the country that are seeing the largest population growth. Because so many people are moving out of gateway cities to the Southeast and Southwest, price increases in those more affordable areas don’t necessarily affect those coming in from other markets says Mark Vitner, Managing Director and Senior Economist at Wells Fargo & Co. “Whether they’re buying or renting, they can afford to pay more,” he says.
A report by Apartment List finds, the drop in rents in early 2020 has been erased. Apartment List’s national index spent last year around 4% below its projected level, but now, more than six months into 2021, the national median rent is 2% higher than it would have been had 2020 been a typical year.
The long-term answer to the shortage of affordable housing is really simple – “Supply and demand” says Mark Vitner. When any commodity is in short supply prices go up. To reduce prices, supply must be increased. Easy to say and to understand but not so easy to accomplish. Investors and developers are, however, recognizing this need and are responding. According to David Leopold, Senior Vice President and Head of Affordable Housing at Berkadia, investors are recognizing the need and have a consistent appetite for buying affordable housing. But affordable housing has never been an easy asset class to develop. With rent restrictions inherently built into the business plan, these deals can be difficult to pencil alongside soaring construction costs and land prices. Then there is also acceptance by the community. Some past experiences with affordable housing have given the product a negative connotation which must be overcome. Despite the challenges, there is record demand for affordable housing, and more and more developers are meeting the challenge.
Local, regional, state and federal assistance along with new lender financing programs are helping developers and investors overcome the hurdles and get more affordable projects off the ground. In today’s affordable housing development world, cities across the country are routinely pledging or receiving funds to support new development. Local land use ordnances, land use restrictions and zoning issues are being modified to assist with much needed projects.
The Federal government is also doing its part. A few weeks before Thanksgiving last year, the Federal Housing Finance Agency (FHFA) made sweeping changes to Fannie Mae and Freddie Mac’s multifamily business pursuits for 2021. The FHFA revised the previous structure that capped loan production at $200 billion combined for both government sponsored enterprises (GSEs). For 2021 the FHFA has charged the GSEs with producing $140 billion in multifamily loans ($70 billion per agency). The agencies have been directed to make 50% of their loans in the category of affordable housing. This is up from 37.5% in previous years. Also, President Biden’s pending $2 trillion American Jobs Plan calls for an additional investment of $55 billion in tax credits to expand the low-income housing tax credit (LIHTC) program plus $94 billion in other affordable housing initiatives.
Since its inception in 1986, the LIHTC program has financed the development of more than 3.3 million apartments, providing affordable housing to approximately 8 million needy families, according to the ACTION campaign, a coalition of affordable housing organizations. Year-end results from Fannie Mae underscore the strength of this niche sector. Fannie Mae provided $7.8 billion in financing to support the affordable housing sector in 2020 compared to $7.2 billion in 2019, an increase of nearly 9.0 percent.
LIHTC continues to be a key part of the solution of financing both renovations and new development projects. LIHTC is the foremost weapon we have in combatting America’s housing shortage. In December 2020 within the $900 billion federal relief package passed by Congress and signed into law by former President Trump were reforms to the most commonly used element of the LIHTC Program. Instead of being tied to a floating borrowing rate set by the Treasury Department, the credit will have a fixed floor of 4.0%. As a result, the credits will be worth more, and potentially become more attractive to corporate investors, who buy into the program to receive a 10 year tax credit on the federal income taxes based on the rate. “Establishing the 4.0% floor on LIHTC projects will encourage investment in affordable housing during economic downturns and increase production by making more developments financially feasible,” says Jolie Milstein president and CEO of the New York state Association for Affordable Housing. Brent Barringer, managing director of low-income housing at Monarch Private Capital in Atlanta agrees: “4.0% fix creates a whole new avenue of deals. The Southeast could see an uptick in development” as a result.
Lenders are also stepping up to help with loans for affordable housing projects. The Mortgage Banks Association (MBA) predicts a 7.0% increase in multifamily lending volume in 2021 and an additional increase in 2022. “There is a very strong demand among lenders to make multifamily loans. It is one of the property types that people feel most comfortable about, and there’s a long track record of multifamily lenders across different capital sources,” says Jamie Woodwell, MBA’s Vice President of Commercial Real Estate research. “Across the board – whether it be banks, the GSEs, life insurance companies, CMBS or investor-driven lenders – every sector is interested in doing multifamily lending right now.”
Lenders tend to agree that from a geographic standpoint, the Southeast will be a significant beneficiary of multifamily development projects in 2021 and beyond. The outbound migration of businesses, jobs and people from the Northeast to the Southeast post COVID-19 are already being acknowledged. The urban centers of these markets are experiencing a significant affordable housing shortage, and as these markets continue to grow, the shortage will only become more acute according to Frank Lutz, Executive Vice President and Chief Production Officer for agency lending at Arbor Realty Trust.
Affordable housing opportunities for investors and developers are here and the time is now. Please let me know if I can help you.
“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners. It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given). Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience. I can be a valuable resource to you without adding expense to your budget. I look forward to speaking with you and having an opportunity to meet with you. I am always at your disposal to assist you with your multifamily business. If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com.
Respectfully
Rick
G.F. Rick Baker, CCIM
Multifamily Specialist/Investment Advisor
www.RickBakerMultifamily.com
2504 Tinderbox Ln.
Greensboro, NC 27455
Cell: 336.549.6083
Email: rickbakermultifamily@gmail.com
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