One of the brightest spots in New York City’s real estate market has been the increasingly high interest in affordable housing investment from a range of market players. Particularly now in a more risk-averse market, affordable housing presents a great deal of stability and security for owners, and more housing stock is on the way to meet rising demand. According to Mayor Bill de Blasio, 2020 marked the second-highest one-year total for the creation of affordable units in the city.
“While affordable housing may not have the prospect of outsized returns that unregulated market rate housing can sometimes provide, they offer more stability in times of great market volatility,” said Victor Sozio, Executive Vice President of Investment Sales with Ariel Property Advisors. “Experienced and qualified operators can also leverage tax subsidies and voucher-based payments to enhance a project’s profitability.”
This decreased market exposure and rising demand has many investors increasingly looking at this asset class, particularly with U.S. cities, such as New York, making a concerted effort to increase affordable housing stock. For example, Avanath, a West Coast-based real estate investment firm focusing on a national portfolio of affordable and workforce housing, just closed on a discretionary fund in which it was targeting $550 million to invest over the next few years. The fund closed with $760 million in commitments.
“During the pandemic, owners in the market-rate space had trouble with collections, which dipped five to 10 percent, and even worse in much of New York City. In affordable housing we didn’t see a dropoff,” said Scott Alter, Co-Founder and Principal of Standard Communities. “We have a housing crisis across the country. Certainly here in New York City it is a major crisis. There is an opportunity here.”
“The affordable housing asset provides capital sources a conservative option to underwrite and make their assumptions,” said Sozio. “There is still a great amount of liquidity in the market so this makes it an enticing destination for equity and debt, especially after the turmoil in the market.”
Mission-Driven Capital Flow
In the diverse ecosystem of affordable housing, non-profit developers and owner-operators are being joined by mission-driven capital, private equity, family offices and high net worth individuals. In the past few years, private equity firms like CIM and Invesco entered the space and were followed by a range of others.
However, mission-driven capital from firms such as Avanath or New York-based Nuveen and Standard Communities is now poised to lead many affordable housing transactions in the near future. The goal of these investors is both profitability and social good through the ownership and development of high-quality affordable buildings.
Pamela West of Nuveen has been one of the leading investors and a major driver of social sustainability in the real estate market.
“We have been investing in this space since the early 90s,” said West at a recent Ariel panel event. “More recently we started scaling our direct portfolio, which has grown to $1.5 billion.”
As these new affordable housing platforms have evolved recently, some prominent developers have also entered the scene. Tishman Speyer, for instance, has hired Gary Rodney—previously the Chairman of CREA, a national syndicator of low-income housing tax credits—as Managing Director for Affordable Housing Acquisitions & Development in New York City. In 2021, don’t be surprised to see more major real estate players establish affordable housing platforms similar to the one Tishman Speyer created.
“There is real alignment between the government, capital and operators,” said Sozio. “They are working together to provide communities with affordable housing, services, increased sustainability, and even infrastructure in some cases. There is always room for improvement, but for now it seems that many financial and social interests are gearing up to create the right product that can help serve an overall social utility.”
Affordable housing fundamentals revolve around three pillars: certainty of collections, property taxes and the cost of debt.
“During the pandemic, vacancies and collections were some of the main concerns for owners as people were out of work or furloughed and many tenants moved out of urban markets,” said Sozio. “It makes sense then that low vacancy and typically strong collections are the top reasons investors enter the affordable market, especially if the government is directly paying the landlord for the lion’s share of the rent.”
Project-based Section 8 housing brings more increased security for owners. The Section 8 Project-Based Rental Assistance (PBRA) program essentially offers affordable apartments subsidized by the government but owned by private landlords. These landlords collect rental subsidies even when tenants may pay as little as 0% of their monthly income or as much as 30%.
In addition to the pressing demand for affordable housing and the certainty of collections driving the affordable market, the sector offers more favorable financing through the Department of Housing and Urban Development (HUD). Instead of the standard 30-year loans for market-rate housing, HUD financing typically has 35- to 40-year financing.
Meanwhile, property taxes are either abated or have a clear growth path that could be capped under certain scenarios. This leads to greater profitability for owners to make up for the lower rents.
Ultimately, while affordable housing can present slight upside potential through gradually increased rents, the value today is the consistent cash flow of this asset class. Investors deploying capital into affordable housing transactions can expect to receive a better yield currently than investments in other property types. In fact, mitigating the curbed upside-potential of affordable units, the yield is usually higher than that of similar free-market buildings in metro areas.
What mission-driven operators bring to the affordable equation is the focus on quality. With incentivization, private developers and operators will continue to be interested in building, owning and operating homes that are not purely affordable but attractive to renters as well. Expect more large operators to enter this arena.