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Real estate’s ‘ugly stepchild’ returns to the spotlight

US subsidized housing is back in focus with Blackstone’s $5.1bn acquisition from the American International Group.

Blackstone became one of the biggest owners of US subsidized housing through a $5.1 billion acquisition from the American International Group earlier this summer.

The New York-based firm agreed to an all-cash deal that will add 700 communities consisting of 83,000 apartments to its open-end BREIT platform, PERE has learned. The transaction also nets it partnerships with more than 100 affordable housing sponsors and operators throughout the country.

“We’re hopeful that by coming into this transaction with such a large network of partners, we’ll be able to find ways to support building more affordable housing,” Blackstone’s co-head of real estate Kathleen McCarthy told PERE.

McCarthy: the AIG portfolio could open more doors for affordable housing investment

In a press release, AIG chief executive Peter Zaffino said the assets in the portfolio remained attractive but were “no longer core to AIG’s long-term investing strategy.” The firm did not respond to requests for comment.

McCarthy said Blackstone emerged victorious after a long, competitive bidding process for the portfolio, which spans more than 40 states, with high concentrations in California, Texas, Northern Virginia and Washington, DC.

All the properties in the AIG portfolio were financed through the low-income housing tax credit, a federal program that gives credits to groups that develop or renovate affordable homes. Sponsors can then syndicate those credits to investors in exchange for equity for their projects, thus bringing down upfront costs and enabling owners to offer lower rents.

Typically, developers agree to rent only to individuals who make less than 60 percent of the area median income and charge rents that are no more than 18 percent of AMI, according to the US Department of Housing and Urban Development. This level of affordability must be maintained for at least 30 years.

The assets within the AIG portfolio are within their compliance periods, McCarthy said, adding that Blackstone intends to keep them affordable even once these provisions expire.

“Our intention as owners is to maintain affordability for these communities,” she said. “We do not intend to convert any of them to market rate; we want to keep them affordable.”

A system that works

Unlike other schemes, LIHTC – also known as Section 42, a reference to its classification in the US tax code – does not rely on government funding. Rather, it is a discount provided to investors. Still, the program accounts for more than $10 billion of activity annually and is considered one of the most effective affordable housing programs in the US, McCarthy said, having facilitated the creation of more than three million low-cost units.

Because the program dictates rents and requires owners to maintain their properties to a high standard, returns for LIHTC-backed properties are less than market rate multifamily, which delivered a total return of 7 percent over the past year, according to the NCREIF Property Index.

Nevertheless, McCarthy said the fact that rent increases are tied to inflation makes the sector attractive as an inflationary hedge, and the national shortage of affordable housing means occupancy rates tend to hover around 100 percent. As a result, she said, returns are enough to satisfy the core-plus expectations of BREIT. Most months, the vehicle achieves a total return of less than 1 percent for its Class I shares, according to its online disclosure, though it registered a 12 percent return through the first half of 2021.

Belle of the ball

Heidi Burkhart, president and owner of Dane Global, a New York-based affordable housing consultant and brokerage, said the transaction between Blackstone and AIG stands out in a market in which anything more than $100 million is noteworthy.

“We’re always considered the ugly stepchild, we’re never looked at like the Cinderella of the ball, even though we are”

Heidi Burkhart
Dane Global

The next closest transaction, she noted, was Boston Financial Investment Management’s acquisition of Boston Capital’s LIHTC portfolio last year. The terms of the deal were not disclosed, but the firms said the transaction roughly doubled Boston Financial’s $7.7 billion portfolio. Also, last fall, Starwood Capital Group acquired a pair of affordable portfolios comprised of 4,618 units located in 32 communities, bringing its holdings to 34,000 homes across the country.

Burkhart said Blackstone’s large commitment to affordable housing brings positive attention to a sector that is often overlooked or misunderstood.

“We’re always considered the ugly stepchild, we’re never looked at like the Cinderella of the ball, even though we are,” she said. “Affordable housing is a very stable, very solid asset class to diversify in.”

A different approach

Blackstone’s last major investment in the affordable housing sector came in 2015, when it partnered with the Canadian pension investor Ivanhoe Cambridge to acquire the 11,200 apartments in Manhattan’s Stuyvesant Town and Peter Cooper Village for $5.3 billion.

Unlike the AIG portfolio, perpetual affordability was not part of Blackstone’s plan for Stuy Town. The firm agreed to keep 5,000 units affordable for 20 years and gradually raise rents elsewhere in the complex. But in the years since, the property has been a hotbed for controversy. Last year, tenants sued Blackstone in anticipation of rent hikes. But the underlying program used to secure affordability of the project was the city’s J-51 tax break, which has been rife with conflict between renters and owners as their provisions expire.

More recently, Blackstone has invested in non-subsidized affordable housing. Earlier this year, it paid $1 billion to acquire 5,800 apartments in San Diego from a local foundation. The firm agreed to preserve affordability at the market rate properties by partnering with local non-profits.

Multifamily – including market rate apartments, student housing and manufactured homes – comprises 41 percent of BREIT’s $50 billion of assets under management. Its transaction with AIG is expected to close during the fourth quarter.