Like many industries, the U.S. affordable housing sector has undergone a sea change stemming from the COVID-19 pandemic. Processes and protocols have changed for affordable housing professionals, some perhaps permanently. Closings are conducted virtually and some of the front-end work such as appraisals and subsidy applications look completely different than a year ago.
The “new normal” that industry professionals are navigating has had a few stops and starts since March, but the sector is now in a place of relative comfort, and that’s led to investment sales picking up, according to Kevin Morris, senior director of Colliers International’s Affordable Housing Services team.
“By trial and error, we’ve had to figure out systems and programs to do business,” said Morris, who is based in Fort Lauderdale, Florida. “We’ve gone through these couple of stages, and now we’re at a point where we can implement and have implemented systems and programs that will take us through this particular pandemic. We’re transacting now, and so in that regard it is kind of back to normal.”
Morris was one of six panelists that comprised the broker and lender panel at Affordable Housing Southeast, a webinar hosted by Southeast Real Estate Business magazine. Kyle Shoemaker, managing director of Glen Ellyn, Illinois-based Affordable Housing Investment Brokerage Inc., moderated the discussion held on Thursday, Nov. 12.
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Eric Taylor, managing director of Greystone Real Estate Advisors, said that the level of investor demand is at an all-time high for affordable housing properties that his firm has marketed the past few months. Taylor’s team has offered 17 or 18 deals in the third and early fourth quarters, and he said the competition has been “unprecedented.”
“We definitely have had exceptionally competitive situations on every offering that we have brought to the market,” said Taylor. “Overall, we’ve seen some compression in cap rates, primarily driven by record-low 10-year Treasury yields, which has directly correlated to record-low interest rates.”
The 10-year Treasury yield closed at 0.91 percent on Nov. 16, down from 1.88 percent on Jan.1.
Sheri Davis, senior vice president of originations at Highland Commercial Mortgage, said that the low interest rate environment has encouraged affordable housing owners to refinance or recapitalize their mortgages. Davis said the Birmingham, Alabama-based lender now has a significant volume of refinancings in its portfolio.
Derek DeHay, director of Newmark’s Affordable Housing Group, said that bridge lenders are now re-entering the space after retreating to the sidelines back in the second quarter, and that has been a catalyst for investment activity picking back up. DeHay, who is based in Austin, Texas, described the national affordable housing sector as a seller’s market.
Morris concurred and said that the increased level of competition is also partly due to a deeper buyer pool for affordable housing assets. He said buyers are seeking the reliability of affordable housing compared with volatile sectors such as retail and lodging.
“The [buyers] entering into the affordable space has just been incredible. I field calls daily from New York, Washington, D.C., California and Chicago where people are looking to invest in the affordable space, and from what I’ve seen it’s mostly new players,” said Morris. “The traditional guys are still there too. The secret is out, and [sellers] know that they are now the belles of the ball and have adjusted their price expectations accordingly.”
Additionally, Jeff Rodman, senior managing director of M&T Realty Capital Corp., said that rent collections have outperformed expectations for the affordable housing sector, which has helped draw interest from investors. Rodman, who oversees the firm’s affordable housing division, said that the surprising rent collection totals he’s seen at M&T are a direct result of determined onsite property managers and the stimulus funds from the CARES Act.
“The best way that I can characterize the long-run collection is ‘so far, so good,’” said Rodman.
MRI Software, a property management technology outfit based in Solon, Ohio, reported that rent collections in the U.S. affordable housing space improved in October and dropped slightly for public housing. The company analyzes data from 1.5 million affordable and public housing units throughout the United States to create its monthly report.
MRI defines affordable housing as properties that have subsidy programs such as HUD, Low-Income Housing Tax Credits (LIHTC) and U.S. Department of Agriculture (USDA), as well as state and local programs. Public housing refers to properties that are owned outright by the government for low-income households and/or those with disabilities.
MRI Software found that rent payments rose to 82 percent of its year-over-year amount in October 2019 for the affordable housing sector. This is the first month since June that the rates exceeded 80 percent year-over-year for affordable housing. The report noted that the improved rent collections by affordable housing landlords are tied to the 17 percent decline in year-over-year move-outs. Less households moving out of their apartments has helped keep the affordable housing sector’s occupancy rate stable.
For public housing, MRI found that rent payments reached 94 percent of those made in October 2019, which is a decline from September when payments were 98 percent of those from September 2019.
Panelists participating in the Affordable Housing Southeast webinar said they expect rent collections to continue improving if another stimulus package is passed in Congress. The hopes of getting a second stimulus check to renters before the U.S. presidential election didn’t come to fruition, and Rodman said that all eyes are on Washington, D.C., for more relief.
“To some degree, there’s a high expectation for it, and there will have to be some major adjustments if it doesn’t come through,” said Rodman.
— John Nelson
To register to view the complimentary Affordable Housing Southeast webinar, click here.
The webinar opened with a developer and owner panel. Marc Padgett of Summit Contracting Group moderated the hour-long discussion. Other panelists included Ray Kuniansky, chief development officer at Columbia Residential; Granvel Tate, regional vice president of The Michaels Organization; Nick Andersen, vice president and project partner at Dominium; and Max Cruz, executive vice president of development at Housing Trust Group.