At first impression, the affordable and low-income/workforce housing markets in the US seem to be struggling. On the one hand, ordinary housing prices across the country have risen drastically (10.4 percent in 2020 and 19 percent in 2021, according to the S&P CoreLogic Case-Shiller US National Home Price Index), drawing attention away from the less sexy “affordable” alternatives. On the other hand, no state in the US has enough affordable housing units for its population, with some only meeting 18 percent of need, according to the National Low Income Housing Coalition’s Gap Report.
On the investment side of the market, things don’t appear that much better in terms of equity. There are only four commingled funds dedicated to affordable housing in the market, and only one closed in the last year: TruAmerica Family’s debut fund, with $575 million raised.
At this point, some are calling the affordable housing shortage a crisis, with the National Low Income Housing Coalition citing a gap of 6.8 million affordable housing units – and that is only in the extremely low-income families sector.
However, Angela Kelcher, senior managing director at JLL, says that this cursory picture of the market does not indicate investor disinterest in the sector. In reality, she explains, investors are chomping at the bit to get into the affordable housing space; they just aren’t making big headlines because the deals tend to be smaller in nature.
The fundamentals for the affordable housing market remain very good, Kelcher explains. Rent growth has outpaced wage growth for many years, driving more people to seek more affordable rent; the pandemic’s economic crisis has only exacerbated that trend. The subsidies and leverage coming from the public sector have also been increasing. Fannie Mae and Freddie Mac must still dedicate at least half of their budgets specifically to affordable housing products, and states like California are also dedicating funds to the sector.
The long-term outlook for affordable housing has always been good, as demand for it has never wavered. Over the next few years, even decades, experts expect demand to increase.
“We’re seeing the financial bottom line being pursued because the long-term outlook for this segment, the need, is unlimited,” Kelcher says. “There is such an undersupply relative to the demand of affordable housing, and those fundamentals aren’t going to change for some time.”
Of course, returns may not be as high as some of the more traditional sectors, but Kelcher sees many investors quite happy to take a 20 percent reduction in their financial bottom line in exchange for the stability the sector offers. Furthermore, these investors often want a “double bottom line,” using their capital to further their corporate responsibility aspirations or ESG goals.
“Historically, low-income and affordable housing are very low-risk sectors,” agrees Jim Mullin, founder and chief executive of Arizona-based developer American Resort Communities. “People need housing; it’s a fact of life.”
“The long-term outlook for this segment, the need, is unlimited”
More than money
Mullin has also been impressed by the generous terms a few select sellers and investors will offer to developers, because they believe so strongly in giving back to the community tangibly. “I think what we do strikes a soft spot in their hearts,” he says.
In the end, the disconnect between the need and investor capital is not a lack of interest or a liquidity, Kelcher explains, but rather a lack of supply.
“There is a massive lack of product for affordable housing, while developers and investors are facing other headwinds like increased construction costs,” she explains. While there is supply coming online in affordable housing, it is not getting completed fast enough to meet demand. Redevelopment is also difficult, both Kelcher and Mullin add, as landlords often want to hold out for a higher price.
“The lack of housing and deals isn’t necessarily holding developers and investors back from raising capital, but maybe it’s holding them back from deploying it,” Kelcher says. Investors have capital that they want to commit to affordable housing, but deals are harder to come by and smaller in nature, often clinched on a case-by-case basis rather than compiled into in a single large fund.
“When landlords get excited about higher prices, it pushes developers farther out from the main cities, and restricts dealflow,” Mullin confirms.
That being said, the affordable housing and workforce housing markets are far from stagnant. The capital stack is just more varied.
According to data from JLL Research, the 2021 affordable debt market was $44 billion. When expanded to include workforce housing, that roughly doubles to $98 billion. Although equity is harder to track across deals without commingled funds, the Low-Income Housing Tax Credit is one of the equity drivers, and placed roughly $22.5 billion of equity in the market.
Affordable housing has historically been considered a niche market, given the tight restrictions and requirements placed on it by government regulations. Tenants have to meet certain criteria, and developers have to meet many requirements to get their assets approved for subsidies.
“You have to be sure that companies understand the risks and complexities that come with affordable housing,” Kelcher explains. “They either understand this segment or they don’t.”
However, with need rising, affordable and workforce housing are becoming more mainstream – more investors are coming to understand this segment. Kelcher notes that a decade ago, she would never have expected as much interest in the sector, with investors like Blackstone forming affordable housing-dedicated branches like April Housing. Yet large players like Amazon are doing just that.
With increased interest, Kelcher says she is excited to see creative innovations in investment and development models coming through the pipeline. “In this space, the challenges do present the opportunities.”
Developers like Mullin are already banking on innovation being the solution to the affordable housing crisis. His firm, American Resort Communities, has come up with a model where homeowners buy the house, but not the land – instead leasing the land from investors. This provides a steady stream of income to investors beyond the initial sale of a home and allows them to add extra amenities to the neighborhood that can make the assets appreciate in value.
“There are so many investors on the sidelines wanting this kind of asset-backed investment and returns, and so many people on the sidelines who want to own a home,” Mullin says. “And I think the key to cracking the code of the affordable housing and attainable living gridlock is to separate the house from the land.”
Mullin’s model is in fact so effective that they do not even need the government subsidies to turn a profit for investors, he says. Kelcher adds that she is seeing more and more innovations like this, successful and profitable even outside the government pipeline.
“Innovation and creativity have become a necessity, and I’m looking forward to seeing how we can meet these challenges head-on,” Kelcher says.