One step forward, one step back could easily be the motto for affordable housing development this year. Experts are hopeful a more stable interest rate environment will bolster transaction activity in 2024. At the same time, rising insurance costs, supply-chain hiccups and property staffing issues are forcing developers and investors to proceed with caution in the affordable housing sector.
The one-step-forward theme also applies to the legislative arena. The Tax Relief for American Families and Workers Act of 2024 contained Low-Income Housing Tax Credit (LIHTC) provisions that would have incentivized developers to build more housing for extremely low-income renters.
The act passed the U.S. House of Representatives in late January and is headed to the Senate, though the National Low Income Housing Coalition (NLIHC) reports that the major reforms to LIHTC were left out of the bill.
These speedbumps aren’t mere bureaucratic headaches. Some experts say they stand in the way of keeping many Americans safe and secure.
According to NLIHC, the United States is short 7.3 million rental homes that are affordable and available to renters with extremely low incomes, which is defined as either the federal poverty guideline or 30 percent of their area median income (AMI), whichever is greater.
What’s more, NLIHC reports that 60 percent of Americans who are paid hourly cannot afford the average rent for a two-bedroom apartment.
With these topics in mind, Multifamily & Affordable Housing Business reached out to affordable housing finance leaders about what 2024 may bring and how the industry will rise to this multifaceted challenge.
The panel of experts included: Bryan Dickson, senior managing director, affordable originations with NewPoint Real Estate Capital; Karen Dubrosky, executive vice president, head of affordable production for Colliers Mortgage; Kamara Green, executive vice president and national director of affordable housing production with BWE; Marge Novak, senior vice president, capital markets, Berkadia Affordable Housing; and Sheri Thompson, executive vice president and head of affordable housing with Walker & Dunlop. Their edited responses follow.
Multifamily & Affordable Housing Business: Please give us a brief summary of the niche your company fills in the affordable housing finance space.
Dickson: NewPoint provides Fannie Mae, Freddie Mac, HUD/FHA and proprietary debt solutions for affordable housing developers nationwide. One of the fundamental principles of NewPoint is to offer creative products that solve typical and atypical issues that arise while working to finance a deal amid shifting market conditions.
A hurdle many developers face is a widening imbalance between the sources and uses of funds in a project, as we have seen insurance, material and debt costs increase significantly over the past two years.
Dubrosky: Colliers Mortgage Holdings provides a range of debt-financing options for affordable and workforce housing. Given our broad platform, we are able to offer owners and developers everything from short-term acquisition loans to equity bridge loans and permanent long-term loans.
Green: BWE provides a wide range of debt products for both LIHTC and non-LIHTC properties. BWE has the full stable of affordable permanent mortgages, including Freddie Mac, Fannie Mae, FHA, RHS and direct bond placement. In addition, BWE offers acquisition and bridge financing. We closed about $1 billion in affordable loans in 2023. This amount is similar to 2022’s volume.
Novak: Berkadia Affordable Housing is a fully integrated affordable housing finance platform. Our unique business model, comprising mortgage banking, investment sales and tax credit syndication, allows us to deliver comprehensive investment solutions to our clients.
Thompson: We provide affordable capital advisory services and debt and equity (LIHTC and non-LIHTC) financing. We also raise capital to acquire and invest in properties in order to preserve their affordability. We built our affordable platform with the goal of being able to support the financing needs of affordable developers and to provide investment opportunities for Community Reinvestment Act-motivated investors and economic and impact-driven investors.
More specifically, we support affordable development by providing debt financing through Fannie Mae, Freddie Mac, FHA/HUD and other capital sources and by providing LIHTC equity financing through our syndication business. We also provide specialized capital advisory services to help affordable developers bridge the equity gap when needed.
In addition to providing financing, our affordable preservation business invests in existing affordable properties, alongside capital partners, with the specific intention of maintaining or extending the affordability of the properties. As an owner/operator, one of our biggest priorities is to make improvements to the physical assets and provide critical services to residents.
Another smaller and lesser-known part of our business is our joint ventures with emerging affordable developers, in which we support their businesses beyond just the financing. In this capacity, we have a direct impact on increasing the supply of affordable housing in the market.
Lastly, we engage in advocacy for the expansion of existing, and proposal of new, affordable programs at both the federal and state level.
MAHB: How acute is the affordable housing shortage in the geographic area in which your firm operates?
Dickson: Unaffordability is at an all-time high based on the number of renters who are moderately or severely cost-burdened, as the affordable housing shortage is extremely acute on a national basis. The latest figures from Harvard’s Joint Center for Housing Studies 2024 edition of America’s Rental Housing report are alarming, to say the least.
There are currently 22.4 million moderately cost-burdened renter households (50 percent of all renter households) who spend more than 30 percent of their income on rent and utilities — that’s an all-time high and 2 million more households than pre-pandemic figures.
Even more worrisome is that 27 percent of all renters are now severely cost-burdened. That’s to say, spending more than half of household income on rent and utilities.
There are now 12.1 million severely cost-burdened renters, also an all-time high, and 1.5 million more households than before the pandemic.
When you look at these levels of cost-burdened households — and add in the fact that 32 percent of renters have household incomes below $30,000 and median cash savings of just $300 — you start to get a sense of how there is a tremendous portion of our nation in precarious situations facing a very real risk of housing instability.
Dubrosky: Nationally, the affordable housing crisis is worsening. The industry overall has found creative ways to develop affordable housing properties, but we need local, state and federal government to play a bigger role, or the crisis will continue. There are many inefficiencies that add to the development costs both in dollars and time. If we can find a way to minimize inefficiencies, the saved money can be used to fund additional units.
Green: Low-income-earning Americans bear the heaviest burden when it comes to being rent-constrained. Further, inflation has put additional strain on households at middle-income levels. We need to do better as a country.
Thompson: Through our firm’s national operations, we have seen that every location in the country has a challenge with affordable housing, from large cities to rural areas. Even communities historically identified as “affordable” are now challenged with finding solutions to homelessness and creating workforce housing opportunities.
NLIHC notes that, in March of 2021, only 37 affordable rental homes were available for every 100 extremely low-income (ELI) households nationwide. The data says the issue is most dire in the West, where Arizona has only 26 units per 100 ELI households, California has only 24 units, and Nevada has only 20.
MAHB: What impact did the steady rise in interest rates in 2022 and much of 2023 amid an inflationary environment have on the affordable housing sector? What’s the outlook for this sector in 2024?
Dickson: Inflation, the rise of interest rates and residual effects from COVID-19 created a huge impediment for getting affordable housing deals done — either built, rehabbed or sold — for the better part of two years. Rates clearly stalled the business and created all sorts of challenges from top to bottom.
In 2024, we are seeing rates moderate a bit. There are a few financings I am involved with that have been in the works since late 2022 and early 2023. I am happy to see that some of these transactions have become viable based on improving rates and overall macroeconomic conditions and will close this year.
We are seeing an uptick in new transactions at the beginning of this year. My hope is that if rates continue to moderate, macroeconomic conditions improve and we get inflation under control, we will see a steady increase in transactions and move toward a normal environment. Hopefully, then we can increase the production and preservation of affordable housing.
There are, however, headwinds. Insurance costs are going to weigh us down as storms are getting stronger and weather less predictable. Developers are also still facing supply chain issues. There is a switchgear shortage, for instance. I recently spoke with a developer who turned to eBay, Craigslist and other non-traditional sources in search of building components to avoid waiting the estimated eight months it would take to source power systems and other parts.
Additionally, there is still pressure on staffing at the management companies. Management companies indicate that it’s difficult to hire and train employees. So, while there is a lot of what I would consider warranted optimism, there are still reasons to take a tempered outlook.
Dubrosky: I expect our loan volume will increase in 2024, assuming the volatility in the market doesn’t return. Interest rates moved so quickly in 2023 that developers had to keep finding additional sources of funds. We were in a constant race to close deals in 2023 before an interest rate hike could derail a project. Stability in rates allows developers to focus on the deal aspects that are in their control.
Green: With smaller permanent debt amounts and rising construction costs, deal gaps got wider and wider. They required more credits and extra gap subsidies to get to the close of construction. Unfortunately, these two precious resources are limited, resulting in fewer projects and units being developed.
In 2024, there have not been increases in LIHTC or federal gap financing. While rates and inflation have stabilized, gaps remain tough to fill. Renters are more cost-burdened, providers of housing are challenged with ballooning expenses and the impacts of COVID-19 on multifamily economics are still present. Optimism grows for 2024, but reality says to be cautious.
Thompson: Rising interest rates have generally led LIHTC investors to seek increased yields as they track LIHTC against the U.S. 10-year Treasury yield and triple-B-rated bonds. Investor demand for greater yield reduces pricing to developers, which makes it harder for deals to pencil out and stresses the limited subsidy dollars available locally. In 2024, we are hopeful that steady/ reduced rates, along with anticipated congressional action, will provide the boost that the industry needs to counteract increased costs.
On the debt side, given our affordable lender rankings with the government-sponsored enterprises (Walker & Dunlop was ranked the third largest producer by Fannie Mae and fourth largest producer by Freddie Mac in 2023), Walker & Dunlop gained market share.
We were able to do this by providing creative solutions to our clients as rates rose, whether that was helping clients pivot to short-term, fixed-rate products as an alternative to rapidly rising variable-rate loans, or ensuring clients were fully prepared to close as rates moved sporadically in 2023.
However, the dramatic increase in interest rates was a headwind felt acutely industrywide and caused significant funding gaps in many deals. The situation is compounded by the scarcity of affordable housing subsidy resources today. Unfortunately, we can say that across the industry fewer affordable projects closed in 2023 than in 2022, which only exacerbates the crisis, as fewer units will be delivered in future years as a result of these reduced closings.
MAHB: The LIHTC program is composed of two major credit types: the 4 percent tax credit (30 percent subsidy) is for the acquisition of existing buildings for rehabilitation and new construction financed by tax-exempt bonds; the 9 percent tax credit (70 percent subsidy) is generally for new construction and substantial rehabilitation with no federal subsidies. Which credit type is most often used today and why?
Dubrosky: The 9 percent credit is oversubscribed nationally. It provides the most equity and thus will always be in favor by developers. However, the 9 percent credit doesn’t go far enough to fund affordable housing in major cities.
Typically, 9 percent transactions are smaller in size and provide deeper rent discounts. While obviously very important, I don’t believe as a country we can solve the affordable housing crisis by developing only small projects. The 4 percent credit is oversubscribed in many states, but not all.
The 4 percent credit works great for developing larger projects. It is difficult to use the 4 percent credit in some states mainly due to the costs of financing a tax-exempt bond transaction. Many costs are flat, meaning they don’t vary based on loan or project size, so smaller transactions don’t pencil out.
If the federal government would allow unused tax-exempt funds from one state to be transferred to another state, it could help fund additional housing units where they are most needed.
Green: BWE sees a need for both credit types in every corner of America. While 9 percent deals may pencil out better in the heartland, the need for affordable units means larger 4 percent deals have to be financed, too.
For example, Ohio, BWE’s home state, is using its new state housing credit for new construction 4 percent deals in order to increase the supply of units.
Novak: While historically the 9 percent tax credits have been more sought-after, in more recent years the demand for 4 percent credits has risen dramatically, largely because of the fierce competition for the 9 percent credits.
Today, both the 4 percent and 9 percent tax credits are commonly used, and both are equally competitive. In terms of the overall LIHTC market, approximately 60 percent of the equity raised is for 4 percent deals and 40 percent for 9 percent deals, based on 2022 data.
Thompson: Many developers find the 4 percent credits to be a more predictable and practical financing source and thus are opting for 4 percent credits to fund larger deals in order to obtain scale in the project size. Nine percent credits tend to be more restrictive and are typically used to fund smaller deals. Nonetheless, there is certainly a need for both types of credits, and we can, and do, service both.
MAHB: Workforce housing is defined as housing for people making 60 to 120 percent of AMI, according to the Urban Land Institute. A household is considered low income if it makes below 80 percent of the area median individual income, according to HUD. Do these various definitions add to the complexity of identifying the affordable housing problem and possible solutions?
Dubrosky: Absolutely. The definitions matter. Debt underwriting requirements, availability of subsidies and tax abatements, density bonuses and so many other financing tools are based on the provider ’s definition of ‘affordable’ and ‘workforce’ housing. These inconsistencies add to the complexities of developing affordable housing and are an example of the inefficiency that, if solved, could streamline development and potentially increase overall housing supply.
Green: There is a hodgepodge of funding sources with varying AMI requirements. While complex, they do help get deals closed. The affordable industry is creative in leveraging AMIs such as when LIHTC regulations allowed income averaging.
This provided more flexibility and therefore more units to be developed. Interest rates have more than doubled in the past 24 months, resulting in the cost of owning a home less attainable across the country and increasing the need for middle income housing.
Thompson: Defining workforce housing is critical and can help investors, lenders and governments target their activities to the appropriate segment for which they are trying to make an impact.
There is no widely accepted or clear definition of workforce across the industry. The Mortgage Bankers Association is currently working with stakeholders on suggestions for HUD’s consideration on incentivizing workforce housing in multifamily.
— By Lynn Peisner. This article originally appeared in the Jan/Feb issues of Multifamily & Affordable Housing Business.