ATLANTA — For much of the past two years, affordable housing transactions in the Southeast moved at a measured pace, slowed by severe cost burdens on both renters and prospective buyers and widening supply deficits. But inside this year’s InterFace Affordable Housing Southeast show, a networking and information conference held at The Westin Buckhead Atlanta on May 12, the tone has shifted. Phones are ringing again, deals are re-entering the pipeline and investors are showing a renewed willingness to chase affordable housing opportunities across the region.
Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.
Rachel Chapman, national account executive of Stewart Title Guaranty Co., moderated the discussion, entitled “Brokers, Buyers and Capital.” The investment sales panel notably reverted to a subject and question that’s shaping much of today’s affordable housing market: with elevated borrowing costs and general economic uncertainty, why is transaction activity accelerating?
Necessitating that question for developers and brokers are the thorns still present in the industry, such as the lengthy process of securing and pricing loans, interest rate volatility and capital markets shifts. Even with these headwinds, it seems that affordable housing is finally rounding the corner.
Doug Childers, senior managing director and affordable housing leader of JLL Capital Markets, said the market peaked in 2021, which totaled roughly $12 billion in investment sales volume nationally, while the last three years have averaged $6 billion.
“That’s a tremendous drop-off,” said Childers. “However, the interesting point is when we tracked transactional volume in the first quarter of this year, we were at $1.7 billion in transactions, whereas last year, it was about $1 billion — so we’re seeing a 70 percent increase in volume.”
Cory Sams, executive managing director and co-head of affordable housing at Global Real Estate Advisors (GREA), a full-service commercial real estate brokerage and advisory firm that specializes in multifamily investments, also noted the uptick in transaction volume compared to the past three years.
“The main shift is that [owners] are now feeling the pressure. We have been in an environment where rents are stable or declining and operational expenses are skyrocketing, but now they don’t have the ease of just extending their loans,” said Sams.
John O’Donoghue, senior associate of investment sales at Greysteel, a national commercial real estate investment banking and advisory firm, mentioned that in the first five months, his firm has reached 90 percent of what its total sales volume last year was, with projections demonstrating that this growth will not slow down.
A New Normal
What emerged from the overall panel discussion was a broader understanding that the affordable housing sector is proving more resilient than many anticipated. Strong renter demand, persistent housing shortages and improving capital markets conditions are driving investors back to the market.
“What’s starting to change things is that money is being impatient,” said Kyle Shoemaker, managing director at MMG Affordable Housing. “There are several developers and owners who either have plenty of their own money or have raised money and really want to put it to work.”
After holding back funds for the past few years, investors and developers are now less willing to sit on cash that isn’t generating returns and are looking to aggressively invest, with more deals closing because of this renewed urgency.
The affordable housing industry is accepting this “new normal” as owners and developers realize that they can no longer rely on bailouts or easy refinancing to get out of underperforming properties or bad debt, on top of interest rates sitting significantly higher than both 2021 levels and pre-pandemic-era lows.
“Over the last 15 years, there’s been an increasing awareness of the fact that there’s a crisis in providing housing and a crisis that you can make an excellent business out of working to provide some kind of solution,” said Shoemaker. “It feels like a bit of an evolution in the buyer profile — while they aren’t necessarily brand new to the space, they’re increasing their capacity to do more work.”
The ‘Pressure Point’
Affordable housing owners are finding it increasingly difficult to sell legacy assets, and sellers are being pressured by the high costs of rehabilitating aging properties, strict requirements within Low Income Housing Tax Credit (LIHTC) and Section 8 programs and shifting buyer preferences that favor modern developments.
“Many of the [companies] we’re seeing sell are long-term affordable owners that are noticing a big change in the market,” said Sams. “It’s hard to re-syndicate a deal right now, it’s hard to keep it in the program — it’s hard to do anything.”
Sams shared an anecdote that while early 2000s LIHTC properties are penciling out well, her firm currently has a 1,000-unit portfolio of 1970s acquisition-rehab (acq-rehab) properties that “desperately need capital.” Many rehab properties suffer from functional obsolescence and deferred maintenance that must be addressed.
The panelists said that although early 2000s LIHTC product is viewed as the “hottest commodity” right now with a stronger buyer pool, the industry is expected to see turnover volume from many of the former acq-rehab properties that are in distress, as many will likely be sold or converted.
“There’s not a good solution for those [properties] right now because there’s not a lot of appetite for these older products,” continued Sams. “They’re the ones that need the most love and attention to keep going, so what do we do with them? The older, affordable products have hit a pressure point.”
Shannon Huffer, vice president of multifamily and investment sales at global brokerage firm Colliers, added that preserving the median of 1970s-era communities would not only be “substantially less” than building ground-up today, but it would also be “faster and easier to do.”
The divide in today’s affordable housing market is perhaps most visible in the performance of different generations of assets, and the market’s changing priorities are reshaping which of those products get left behind and which are sold. Huffer voiced that she’s seeing more interest in larger, institutional-grade portfolios in urban areas, rather than anything that’s smaller or rural.
“Some are finally coming to the realization that we’re not going back to 2021 pricing, and unfortunately, I don’t see us getting back to that anytime soon,” said Huffer.
Shoemaker of Chicago-based MMG stated that assets are generally performing well in his market, “with the caveat of more consistent looming financial distress.”
Shoemaker continued with an anecdote, noting that while a receiver might have taken on four or five receivership assignments in an entire month last year, they are now receiving four or five new assignments each week.
Looking to the Future
Panelists said the recent increase in transaction activity could signal the beginning of a broader recovering for the affordable housing market across the Southeast, particularly as buyers and lenders grow more comfortable with today’s interest rate environment.
“We are assessing deals, and people are talking to us about potential deals — so we’re doing more of that than we have in a long time,” said Shoemaker. “But predicting interest rates is harder than predicting anything else, and I can’t come up with a scenario where they go any lower. I think that we’re now in an environment where they’re at baseline.”
Childers of JLL emphasized that the affordable housing industry “got hit pretty hard” after the COVID-19 pandemic, but the past 18 months has brought slow-building confidence back to the market with a steady uptick in activity.
“We haven’t had any liquidity issues at all in terms of the past three or four years — we’ve just had pricing issues,” stated Childers. “We’re very bullish on the next 12 to 24 months, and right now, our pipeline is exploding.”
Sams agreed with Childers as he acknowledged the industry’s pricing dilemmas and how it has impacted both sellers and investors.
“The goal is getting sellers to let go of the pricing that they were quoted in 2021 and early 2022 and to come down to where the market actually is,” said Sams. “We’re seeing bad debt that has really ticked up, and if we can get fresh legs, new operators, fix the deferred maintenance and lower rents, we can charge the rent that the market can afford and still be successful. We’re going to see that come through in the transactional volume next year.”
— Abby Cox