Increasing demand and rising costs pose challenges in this specialized sector.
Sandstone, a multifamily affordable-housing property in Fresno, Calif., was developed by AMCAL Multi-Housing, which has developed more than 2,200 affordable rental units throughout California.
Todd Clarke, CCIM, chief executive officer of NM Apartment Advisors in Albuquerque, N.M., says one of his clients summed up the benefits of being involved in affordable housing best when he said: “Even if the economy goes to hell in a hand basket, people will always need a place to live.”
As populations and housing costs continue to increase, many Americans are struggling to find affordable places to live. Federal minimum wage earners cannot afford one-bedroom homes anywhere in the country, according to the National Low Income Housing Coalition. While the federal minimum wage stands at $5.85, the national two-bedroom housing wage — the hourly dollar amount a worker must earn to afford a two-bedroom household — rose from $15.78 last year to $16.31 this year.
Many of the available affordable-housing units in the U.S. are old and in disrepair. Much of the affordable-housing stock was developed through U.S. Department of Housing and Urban Development or U.S. Department of Agriculture Rural Development programs more than 30 years ago and is deteriorating, says Robert Di Pietrae, CCIM, associate partner at Hendricks & Partners in Seattle. “They are operating under federal programs that were developed to be in place no more than 20 to 40 years,” he says.
New Demand and Lack of Land
To complicate matters, housing prices have risen so drastically in the past few years that more individuals are seeking rental housing. Demographic groups that traditionally have not been apartment dwellers increasingly are renting, according to the National Multi Housing Council. The number of renter households should increase by 1.8 million by 2015, according to Harvard University’s State of the Nation’s Housing 2006 report. Baby boomers and echo boomers are the fastest-growing age groups and the most likely to rent apartments, according to the NMHC.
The course of the affordable-housing market is closely tied to the traditional housing market — as housing prices increase, so do rents. “Increased demand for housing stimulates a rise in values and puts pressure on inventory. This in turn puts pressure on existing affordable-housing stock to convert to conventional housing, which creates an even greater demand for affordable housing,” Di Pietrae says.
Developers are scrambling to meet demand for affluent housing, buying up land in new areas and subsequently contributing to an increase in land values. “The price of land in desirable areas has gone up substantially. The price that developers have to pay for land has made it hard to find sites that are feasible for affordable projects,” says Herb Tousley, CCIM, president of Ultegra Realty Solutions in St. Paul, Minn.
Residential land increased in value nearly everywhere in the last decade, according to a Federal Reserve study. In the 46 largest U.S. housing markets, the proportion of land value figured into home prices increased from 32 percent in 1984 to 51 percent in 2004. “With residential land having appreciated so significantly over the past 20 years around the country, the future course of land prices is expected to play an even more important role in governing home prices in the next two decades,” the study says.
Private funding and development are the best affordable-housing solutions, according to several housing experts. “The federal government will always play a major role in providing funding solutions [for affordable housing],” Di Pietrae says. “However, it’s the private sector — the affordable-housing developer and tax credit investor — that will continue to take the initiative to find solutions to doing more with less in this highly specialized housing industry.”
As the federal government has cut back on affordable-housing funding programs, private money has been the key to getting these projects out of the ground. “Many of the sources of soft money that developers have traditionally relied on to close the funding gap are government-funded programs that have been severely reduced or eliminated,” Tousley says.
The federal government provides only 76 percent of the funding necessary to operate public housing, making this the fifth year that public housing has been underfunded, according to Affordable Housing Finance magazine. If these conditions continue, some public housing authorities will be forced to sell assets, reduce services, or shut down operations, says Sunia Zaterman, executive director of the Council of Large Public Housing Authorities in Washington, D.C.
Private investors have the incentive to get involved, primarily in the form of HUD’s low-income housing tax credit program. Despite “the roadblocks placed in the path of real progress by Washington, the shining light has been and hopefully will continue to be the LIHTC program,” Di Pietrae says. “It provides the necessary equity for developers to create and preserve affordable housing where needed.”
The LIHTC program has helped developers build more than 1 million square feet of affordable housing since it was enacted by Congress in 1986. Developers sell the tax credits to investors in exchange for capital to finance their projects. They incur less debt because they can avoid borrowing funds for the developments.
While LIHTC offers developers an effective way to raise capital, it hasn’t always proved to be enough relief. In 1992, HUD established the HOME Investment Partnerships Program, which can be used in conjunction with LIHTC to further reduce private affordable-housing developers’ costs. More than 59,000 affordable-housing developments have been built using both programs, utilizing $1.34 billion in HOME funds and $3.82 billion in LIHTC funds.
In recent years, LIHTC and HOME credits haven’t gone as far as they have in the past. “Tax credit pricing has decreased significantly since we started working on an ongoing affordable-housing project last summer,” Tousley says. And while federal government incentives for affordable-housing development have been cut back, the cost of maintaining and operating affordable-housing properties is on the rise.
“Asset and property management is becoming more and more expensive,” says William M. McKie, CCIM, vice president of investor financial services at SunAmerica Affordable Housing Partners in Los Angeles. “Property taxes and insurance rates are increasing. Developers have been getting over a dollar per credit, which has made underwriting acquisitions more difficult.”
In fact, operations costs have gone up so much in certain markets that some experts feel the entire affordable-housing industry could be in jeopardy. While mainstream apartment rents continue to rise, affordable-housing apartment rents have remained stagnant for the last five years, according to Paul Emrath, assistant staff president for housing policy research at the National Association of Home Builders. During the same time period, utility costs have risen 27 percent. This has created a gap between how much it costs to operate a facility and how much it earns in rent and tax credits.
HUD uses a formula to determine yearly median income for low-income families in each county and then sets the affordable-housing rent limit for that county accordingly. For HUD to raise rent limits, at least 1,748 counties would need to see a $1,000 increase in low-income families’ earnings and 48 counties would need to see a $6,000 increase, according to NAHB. “Because some LIHTC projects lack the resources to deal with the problem of flat rents for an extended period, these projects could be lost from the stock of low-income housing,” Emrath says.
In some areas, local and state governments are coming up with alternatives. “We are working with the city [of St. Paul] to see if we can close the funding gap on projects [using other resources],” Tousley says. “We have a tax increment financing agreement with the city for 15 years and we are now starting to talk with them about extending the TIF to 20 or 25 years to generate additional funds to help close the gap.”
TIFs can be a powerful incentive for affordable-housing developers. “I serve on the Lincoln, Neb., city council and have become acquainted with a couple of developers who appear before us frequently on affordable-housing developments. … Every dollar makes a difference to them — if there are city incentives such as TIFs in neighboring towns, they are usually aware of it and let us know,” says Robin S. Eschliman, CCIM, president of Eschliman Commercial Real Estate in Lincoln.
In Chicago, more than 25 TIF projects have included 1,832 units of affordable housing. While there are no rules requiring residential developments built in TIF districts to include affordable housing, the city encourages developers to reserve 20 percent for affordable housing, according to the Neighborhood Capital Budget Group, a coalition of 200 Chicago community and economic groups.
It sometimes is to a city’s advantage to offer tax-related incentives for affordable-housing development because it can boost the tax base by drawing other businesses and services. “One very important thing to note is how many cities are offering affordable housing as an economic development tool,” Clarke says. “For example, cities can go to corporations and say, ‘Locate here. We will train our population to build your product and we will guarantee a certain percentage of affordable housing for your workers.’”
But to make affordable housing a more attractive — or equally attractive — investment when compared with luxury or market-rate housing, developers must make the most of per-unit land costs or increase density. “One thing working in favor of affordable-housing developers is the present trend of density that city planners around the nation are encouraging. To save money on the infrastructure, the city leaders are allowing and even advocating smaller lots,” Eschliman says.
In Columbia, Md., local affordable-housing advocates say that density is a necessity and have proposed adding 5,500 affordable units downtown mixed in with market-rate housing, according to a Baltimore Sun report. “There’s more and more support and evidence that mixed-income communities provide more viable economics in the long run. Warehousing people in buildings and isolating them because they have less income is not good for them and it’s not good for the rest of society,” says Kelly Cartales, senior vice president of Enterprise Community Partners, a national nonprofit organization that is working with a developer on the project.
While high-density affordable-housing developments often are met with local opposition, “in many cases people in surrounding areas don’t know what affordable means,” Tousley says. “They tend to assume the worst about the project and the tenants that will live there. A developer needs to educate the community as to what [affordable housing] really means in terms of the people who would qualify to live there.”
As the housing market shifts over the next few years, there will be an increasing need for below-market-rate housing. “These trends will keep affordable housing a good investment choice as long as there are programs such as the Section 42 program, tax credit programs, TIFs, and other soft-money resources that will make these projects feasible,” Tousley says.