Affordable Housing: Challenges, Adaptations and Opportunities
In the latest MHN Voices webinar, developers share strategies for meeting the sector’s biggest challenges.
Challenges to affordable housing development multiplied in 2024. A combination of longstanding macroeconomic, supply-chain and sector-specific operational challenges persisted for developers, operators and investors, occurring simultaneously with a larger number of households spending greater portions of their paychecks on rent.
Panelists speaking at a webinar moderated by Multi-Housing News editorial director Suzann Silverman discussed these struggles in-depth and detailed how they have pivoted their strategies to continue to deliver affordable housing at scale. Additionally, they identified pockets of opportunity that industry stakeholders of all shapes and sizes would do well to consider.
Fundamentals: good news and bad news
The current fundamentals around affordable housing don’t bode well for a growing population of renters by necessity, but there are some bright spots. According to data from Yardi Matrix, the nation’s renter by necessity population has the highest rent-to-income ratio, with some populations in the South and Northeast spending more than 40 percent of their income on rent.
“Rents are rising faster than incomes, which means that a greater share of renters have become cost burdened in recent years,” said Paul Fiorilla, director of research, Yardi Matrix.
Things don’t look too great on the development front either. While a peak of 70,500 affordable units are expected to come online next year, that number is likely to drop sharply through 2029, nearly halving to 38,572, according to the same source.
Developers have high interest rates and financing costs, alongside expensive yet increasingly material and labor to thank, Fiorilla noted. For their part, building material costs have increased 38 percent since the start of the pandemic, while a spike in the price of lumber has added $30,000 to the average construction costs of an individual unit, according to data from the National Association of Home Builders.
One bright spot for stakeholders has been in year-over-year income growth for affordable properties exceeding expenses for the first time in four years. Affordable revenues inched upwards by 9.9 percent year-over-year.
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But to keep their communities going, some operators have had to charge higher rents, especially as wages and insurance costs have increased by an average of 130 percent over the last 5 years, according to Fiorilla. It shouldn’t bear too much on the average renter, a population that that has seen wages increase by 4 percent, year-over-year. But some corners may still have to be cut.
“Those kind of rent increases are not going to be allowed for inflation, and taking charge to reduce expenses and operate more efficiently is going to be a big part of affordable ownership going forward,” Fiorilla said.
Developers dial-in
So, how are developers adapting? Tim Henkel, president of Pennrose, characterized his firm’s post-COVID strategy as being more “forward-looking,” focusing “more on executing what we have than building.” In practice, this means closing on a development deal two or three years in advance, in anticipation of both delays and a more favorable macroeconomic environment in the near future.
“The pace of our throughput in the affordable housing business has slowed, and I don’t see that changing anytime soon,” Henkel said.
Others like to operate on more condensed timelines, closing existing deals in the near-term, while toughing out the volatility in every stage of the development cycle. For Matt Sullivan, chief operating officer at The Michaels Organization, this translates to an increased focus on deals financed through Low Income Housing Tax Credits, as well as collaborations with private enterprise and the healthcare industry.
“Time is not our friend,” Sullivan said.
The Woda Cooper Cos. occupy a middle ground, evaluating the viability of an affordable development not through economics, but through the regulatory landscapes and renter demographics of the states where they are active.
Top-of-mind are soft funds, state tax credits and eviction regulations, according to Jeffrey Woda, the company’s founder. On the dealmaking front, Woda is content to be patient.
“Quite frankly, if the program no longer makes sense for us, and we can’t figure out a way to make the deal work, we will out a cycle or two in those states, and not just do a deal for the sake of doing a deal,” Woda said.
On the tenant front, the firm has also gone to better scrutinize eviction regulations, as well as tenants’ credit history. “For this first time in our history, that has become a major factor on the management side,” he continued.
Adapting and overcoming
Despite these solutions, developers still must contend with a difficult financing environment and supply chain slowdowns, both of which have trickled down to delays in the permitting and certification processes.
“We still have several projects right now that we can’t get finished, because we’re missing a piece or a part that’s vital to getting a certificate of occupancy,” Woda said.
Given the relationship-centric nature of affordable housing development, it’s crucial for operators to strengthen existing relationships, from their renters to their insurers, according to Sullivan. On the insurance front, The Michael’s Organization saw an 18 percent reduction in insurance premiums this year, in part due to longstanding relationships with companies that can attest to the firm’s risk mitigation practices.
Similarly, a vertically integrated approach to affordable housing construction allows the company to surmount struggles around building material procurement and shipping, while providing social services to residents ensure that they can reliably pay their rent, according to Sullivan.
Governments get more involved
Despite the discouraging development and finance landscape, the panelists remained optimistic about city and state level interest in developing affordable housing, which often alleviate the construction and financing struggles.
States including Ohio Arizona, Indiana and South Carolina have all implemented new tax credit programs while New Jersey has seen a number of housing trust funds pop up, Sullivan said during the MHN Voices Webinar. And municipalities nationwide are making every effort to expedite zoning approvals for more affordable housing, and some are even reducing land costs, Woda noted. Here, developers can further leverage sales tax exemptions and more local funds, which help supplement shortages of traditional lending for developments.
“It seems like every elected politician says they want more affordable housing units, which is great as long as those words lead to action,” Woda said.
