Affordable Housing and the Institutional Investor: Q&A

John Williams, president & CIO of Avanath Capital Management, on opportunities in the sector and what 2021 has in store.

John Williams, President & CIO, Avanath Capital Management. Image courtesy of Avanath Capital Management

While COVID-19 rocked the boat for many commercial real estate sectors,  affordable housing is holding steady. As we move further into 2021, the sector continues to shine brightly and offer significant risk-adjusted investment opportunities for institutional investors.

John Williams, president & CIO of Avanath Capital Management, chatted with Multi-Housing News about why the affordable sector appeals to institutional capital, how the industry has fared since the onset of the pandemic and where he sees the future of this asset class as we begin to emerge from this crisis.

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What makes affordable housing attractive to institutional capital?

Williams: The affordable sector has long been one of the most stable investment categories in commercial real estate. It is an asset class that continues to perform in times of economic growth, as well as in times of economic uncertainty. There is growing demand and limited, often diminishing supply. Turnover is also favorable compared to market-rate housing, as residents tend to occupy affordable units longer than those in market-rate units.

Many of our properties have waiting lists, and reduced turnover can have a significant impact on NOI in the costs for turning a unit and the lost revenue for the time a unit remains vacant. These factors are the main ones that position affordable housing for favorable risk-adjusted returns for the long term.

Avanath Capital Management has closed its fourth discretionary housing fund amid the pandemic. How did Avanath alleviate possible concerns?

Williams: The pandemic certainly caused a lot of uncertainty for investors. That said, affordable housing is one way that investors can diversify their portfolios and provide downside protection in times of economic uncertainty. This was appealing to investors when determining where to place their capital allocations as they saw the tremendous potential for steady returns even during this health and economic crisis. We received significant interest from foreign investors. In fact, more than 50 percent of the capital in the fund is from European and U.K. investors, and more than 40 percent of the fund was raised throughout the pandemic. We also had quite a few investors perform their entire due diligence and closing process completely virtually.

It was evident to investors that the need and demand for affordable housing will only continue to increase as a result of the pandemic and was a durable investment in the current environment. Avanath also has a long track record as a successful operator whose mission is deeply ingrained in delivering social impact programs to residents. This was another aspect that was attractive to investors.

People always need a place to live, regardless of what is happening with the economy. Affordable housing provides the best possible living conditions for most people at budget-friendly rental rates, and the need for this type of housing only increases in recessionary times.

Since we already have a shortage of affordable units in this country, upward pressure on demand and rising interest in affordable investment from stakeholders of all stripes create an ideal scenario for strong ROI in this sector for the foreseeable future.

Why is there opportunity for institutional investors to increase market share in this space?

Williams: Affordable housing developers are continually seeking new ways to provide these properties to communities in a way that is economically viable and efficient. The industry is greatly underserved by institutional capital and opportunities for institutional investors to participate in these ventures have never been more prevalent than they are today. With increased interest in delivering these projects from federal, state and local government, as well as new partnerships between private and public entities to accomplish this in a way that benefits investors, the opportunity for institutional investors to get involved in affordable investment via private and public investment vehicles and increase market share is rising every day.

What U.S. markets is Avanath focused on? 

Williams: Avanath focuses on markets and specific locations that share strong demographic trends relative to job/population growth, are near employment and transportation centers and have barriers to developing new supply. We have properties in Northern and Southern California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, North Carolina, Texas, Virginia and Washington. This past year, we also entered the Boston market for the first time. In each of these markets, there is a demand for affordable housing that outstrips supply and is in need of institutional investment.

Regarding collections, how has Avanath’s affordable portfolio performed since the onset of the health crisis?

Williams: Collections for affordable assets, in general, have been strong during the pandemic. As affordable housing has historically outperformed other asset classes in both good and bad economic times, we were not surprised to see collections hold steady throughout our portfolio during the pandemic. Our occupancy has remained strong, property valuations have remained high and we have experienced minimal rent deferment in the face of this crisis. In fact, throughout the pandemic, our portfolio of 11,000 affordable units experienced over 800 new leases and 2,000 lease renewals, which we were able to complete all virtually. In addition, we have continued to acquire several excellent properties in markets that align with our investment strategy.

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What are your predictions for affordable housing investment?

Williams: We see increased interest in affordable housing investment from many different groups of investors. As sectors such as office, hospitality and retail try to regain their footing, investors are turning to multifamily in general and affordable housing in particular as a safe haven in the storm—one that tends to remain steady and even regardless of the economic climate.

We expect this trend to continue throughout 2021, even as other sectors stabilize and investment returns to pre-pandemic levels in those asset classes over the next few years. Affordable housing will continue to attract new groups of investors, and it will achieve rising popularity among institutional investors going forward.

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