New York’s housing czar: ‘Super-opportunistic investors should not be in affordable housing’

Commonly called New York’s housing czar, Alicia Glen has worn several hats throughout her career, including a couple big postings. She led investment bank Goldman Sachs’ Urban Investment Group, a domestic, multi-asset class investing and lending business, before becoming New York City’s deputy mayor for housing and economic development. The latter role saw her close one of the biggest private real estate deals in the affordable housing space: Blackstone’s $5.3 billion purchase of Manhattan’s Stuyvesant Town-Peter Cooper Village in 2015. While in the role, she also oversaw the city’s ambitious mandatory inclusionary housing program.

Glen talked to PERE about the private sector’s role in affordable housing and if rent regulations might deter participation. Since the interview, Glen has officially launched her new firm MSquared, a nationwide real estate development and investment platform aimed at creating mixed-use, mixed-income projects in the US.

Can public-private collaborations play a role in affordable housing?

AG: The notion that only non-profits should own affordable housing is just not practical. There is a role for private developers, government and non-profits to be significant players in the affordable housing space. I think you can have all three of those players. But the private sector piece is, in many respects, the most important piece because of the scale at which we need to do this work.

How did you make the math work to ensure the Mandatory Inclusionary Housing program is a financially viable proposition for developers?

AG: At the end of the day, it must make sense for the investor and the developer. They need to get a deal done in a way that either makes them a little bit more money or de-risks the project. That is always a line you are going to walk, but having affordable housing in your building can also provide you with a little bit of cushion. You know that those units are going to be rented and you will get favorable tax treatment. It also must be designed in a way that the government and the public are getting something. The investor understands that they think they might be giving up some operating income, but actually they are better off because of the totality of the package. I think we did a pretty good job in New York in threading that needle.

What happened with the New York City rent regulations is that they went too far.

Will rent regulations dent affordable housing’s appeal to private equity?

AG: What happened with the New York City rent regulations is that they went too far. There were significant abuses and things that needed to be tightened up. But I think the political momentum swung too far the other way. On the other hand, the kinds of returns investors were getting and what they were expecting were also out of whack. So it’s not entirely clear to me that we know exactly the results of the changes yet.

I did the Stuyvesant Town deal with Blackstone, the biggest private equity deal in the affordable housing space. They are really smart and really good at what they do. They underwrote – as good private investors do – a base case. They also stressed it for political change and market change. I think they priced that deal – internally, at least – correctly.

But it also depends on the kind of investor. Investors who are super-opportunistic and into making 25-30 percent returns should not be in the affordable housing space. So I think it is unclear over the long run whether the changes are going to really deter private equity firms from going into affordable housing. I do not think they will because, if structured appropriately, you can make decent risk adjusted returns, but you’re not going to make 25-30 percent. That is just not what the asset class is.

I don’t know if I invented it, but I think I am the godmother of the following statement: you really need to treat housing in the urban regions and these growing metro regions like you would any other infrastructure investment.

What, then, is the right investment approach for affordable housing?

AG: I don’t know if I invented it, but I think I am the godmother of the following statement: you really need to treat housing in the urban regions and these growing metro regions like you would any other infrastructure investment. The risk profile is not that different from classic infrastructure. That is part of the work I am doing starting my new firm. If people start thinking about housing in that way, we can attract more patient capital, build better projects, maintain income diversity in projects, and still deliver good returns for institutional investors. 

What investment approach will you take with your new firm?

In New York, there is such an anti-growth backlash, anti-development, anti-everything here.

AG: We are really at a point where we need to be thinking more expansively about how we build housing with mixed incomes, which creates better results for people as well as investors. Think about the whole model of how this has been done so far. There is affordable housing on one side of the equation and market-rate housing on the other side; you must be able to blend those two disciplines and talk to investors about why that blended return makes sense in the long run. It’s about building great buildings that have something in it for the community so that people don’t become haters.

In New York, there is such an anti-growth backlash, anti-development, anti-everything here. Everybody hates everything. To change that, so that not just New York City, but all the cities in the United States remain growth the engines of our economy, we need to change the narrative.