Making the Case for Market-Rate Affordable Rental Housing, an Essential Part of Healthy Communities

by Jeff Shaw

By R. Michael Goman, Goman+York

In recent years, much of our work has focused on helping our client communities encourage the development of new market-rate affordable housing units. For our purposes, we define market-rate affordable rental housing as housing that is available at rental rates equivalent to 80 percent to 100 percent of 30 percent of the area median income (AMI).

It also means that after paying rent, residents still have enough money for food, transportation, health care and similar needs. Rental rates below 80 percent of 30 percent of AMI typically indicate residents who require financial assistance, which falls into a different category.

Our advice to communities typically revolves around a few key issues: location, market and financial feasibility, economic impact, and local land-use issues. These are factors that a potential developer will review when considering a possible development opportunity. Our goal is to help the community put together the best possible story that addresses each of these issues in a real-world, quantitative way.

The Right Site

As with many real estate projects, location is key to success. Optimal sites for new market-rate affordable rental projects are those located near concentrations of employment. The available jobs don’t have to be highly skilled or highly paid, but they must offer reasonable wages, stability and career potential.

For example, the location may be near concentrations of large retailers, logistics centers, warehouses, materials handling facilities, low-tech industries and many similar employers. Ideally, they’re also proximate to public transit.

We use a variety of methods to analyze market and financial feasibility. A critical component is the assessment of supply and demand, essentially a “gap analysis” that will show whether our client community’s site represents a clear market opportunity.

Additionally, local construction costs, unit sizes, competitive amenities, achievable rental rates, and lease-up cycles are essential components of a supportable market and financial feasibility story.

An accurate assessment of a potential project’s economic impact on the community is also essential. Our client community must be satisfied that the public costs created by a new rental residential project will be more than offset by the property tax revenue and ancillary economic activity created by it.

This analysis includes estimating the impact on schools, emergency and other public services. Our experience has shown that market-rate affordable rental housing has a significant net positive economic impact, but that case must be analyzed and made to local residents.

Girding Economic Growth

Developers know that obtaining land-use permits for market-rate affordable rental housing projects can be a challenge. Typical objections center around a belief that the new residents will not commit to the community or will not be a good “fit,” and a concern that hundreds of new apartment units will result in hundreds of new children who will overburden local schools.

The impact on schools is a quantitative question, and our data repeatedly shows that the number of public school-age children is typically so low as to be inconsequential. The concern over residents fitting into the community is a qualitative issue and is a little more challenging to address.

Our work shows that market-rate affordable rental housing appeals to two important demographic groups that are essential parts of creating a complete community. The first group is younger workers, often those who are just starting out but who are on a career path in an industry offering advancement.

Many will eventually marry and start families, save for a down payment and finally move out of their rental housing and buy their first home. If their community experience has been a good one, they will likely buy their first home within that community. Affordable market-rate rental housing is, therefore, transitional housing that attracts and welcomes new residents who will eventually make a permanent home within the community.

The second important group is “empty nesters,” those who have been residents of the community but who need to reduce their housing as they move toward or into retirement. They are often desirous of staying in the community where they’ve lived for many years, and they will move into a rental project within their community if it’s available and within their budget.

A Clear Path To Build

A related issue is the time, complexity and certainty of the local land-use approval process. Remember that investment capital is like water or electricity: it follows the path of least resistance. We advise communities to make their land-use process swift, simple and certain.

Investment capital will not engage in projects that will take a long time to obtain approvals or where there’s significant uncertainty in the process. The community will likely never hear about the interest as the investor will simply move on to a “friendlier” community.

A final concern we hear is that market-rate affordable housing will be unattractive and that the level of maintenance will be substandard, often reflecting a community’s experience with projects that were built decades ago. That experience is often the result of absentee ownership, or owners having low liquidity who can’t — or won’t — continually reinvest in their properties and maintain them at a high level.

In contrast, today’s rental housing is often owned by institutional owners with substantial liquidity. These investors understand the need to keep their projects in good condition to protect their value and occupancy levels. They are professional owners of long-term assets, and they manage their investments accordingly.

Our experience shows that market-rate affordable housing creates a continuum of residency that builds resiliency and commitment within communities. Among many benefits, this housing encourages and supports residents who join local service organizations, boards, and committees and who actively participate in community activities.

When people talk about the character of their community, they are describing this commitment. Providing market-rate affordable rental housing is an essential part of developing that commitment and creating a diverse, inclusive and healthy community.

Attracting developers to build new market-rate affordable rental housing in your community is best accomplished by responding to the fundamental issues of location, financial feasibility, and the land-use process.

Market-rate affordable housing helps fulfill many civic goals and should be embraced as an essential part of a healthy community. We expect this to be increasingly the case in the coming years.

Michael Goman is principal at Goman+York, a Hartford, Connecticut-based brokerage and advisory services firm he co-founded in 2011 with Tom York.

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