One of the nation’s fastest-growing metros, Texas’ capital has seen a consistent flux of businesses and people relocating here, especially from California, drawn by the area’s relatively affordable cost of living, deep talent pool, high quality of life, lower taxes and simpler regulation. A strong demographic expansion has been occurring at a rapid pace, and if on the one hand, it translates into job growth across the board, on the other it places the metro’s core workforce into a deepening affordability crisis.
Affordable Central Texas President & CEO David Steinwedell and Dallas-based Carleton Residential Properties Founder, Managing Partner & CEO Printice Gary discussed with Multi-Housing News the affordable crisis threatening Austin, to what extent the federal Opportunity Zone investment program can help ease the issue, as well as approaches to address housing affordability in general.
How would you describe Austin’s multifamily market? How serious is the affordable housing crisis in Austin?
Steinwedell: Austin’s multifamily market is robust, dynamic and meeting the needs of the upper end of the market, and that is the challenge the city is facing. Job and population growth have been dramatic in the metro and the multifamily market has been significantly impacted by that growth as demonstrated by strong rental rate increases and new development activity. The unintended consequence of that growth is that the affordability challenge, previously felt at low- and very low-income levels, has now come to impact moderate-income families and individuals, Austin’s workforce. Teachers, medical workers, first responders and even entry-level professionals like real estate analysts, are all finding it difficult to find reasonably priced multifamily housing that is close to jobs, transit, schools and grocery stores.
These properties are the most susceptible to redevelopment as they can easily be updated with new appliances and finishes, and then released at much higher rental rates, above what those in the workforce can afford. More than 5,000 units per year are being removed from the workforce affordable housing stock by this redevelopment activity. It is not economically viable to build new properties to meet the needs of workforce renters, so the decline in available units is severely squeezing the supply of available rental units.
Steinwedell: Affordable housing needs encompass a wide spectrum—from serving the homeless to the low- and very low-income levels and into the workforce. Government programs exist to address some of the needs of the homeless and low- and very low-income segments, but no public programs exist to meet the needs of those in the workforce sector. Moreover, the existing programs for the homeless and low- and very low-income levels are complex, expensive and difficult to access. While they do provide some modest, yet insufficient relief, they require significant expense to access legal expertise and extensive layers of management to successfully administer on the long term.
The Austin Housing Conservancy Fund targets a variety of private investment channels to build its comingled asset pool. The Fund was launched with the support of 35 individual investors and is reaching $10 million in invested and committed assets. A significant individual investor has yet to be identified to lead more substantial growth in the Fund, though efforts continue to find that visionary lead. In the meantime, to meet their Community Reinvestment Act requirements, the Fund is working with banks, foundations, social impact funds and other institutional investors who are drawn to the low-risk profile of the Fund.
How does the federal Opportunity Zone investment program help ease the affordability crisis? What amendments would you apply to make it more efficient?
Gary: Opportunity Zone legislation was born from existing low-income census tract designations and unlike the Low-Income Housing Tax Credit Program, it was not designed specifically to attract private capital for affordable housing development. OZ funds can make equity investments in any asset class located in the OZ. As for the creation of affordable housing in OZs, due to the high cost of new construction, it is unlikely that prevailing rents in the submarket could support the cost basis without subsidies. Regarding preservation, a core requirement is that OZ investments in real estate double the basis of the property within 30 months—substantial rehabilitation indeed.
While OZ fund opportunities could help attract a new class of investors (high net-worth individuals and family offices) to community development, it is not clear that affordable housing will be the primary and direct beneficiary. I have heard that numerous Wall Street and private equity firms have already raised billion-dollar funds (commitments) for investments in OZ assets. It will be interesting to watch whether they can fill and how much will be invested in affordable housing real estate.
Opportunity Zone fund legislation is brand new and untested. It took Treasury a long time to get the current rules in place and I think it is probably premature to suggest amendments to somewhat of a moving target. Real estate is only one element in the mix and affordable housing has not been targeted.
What are your thoughts on rent control as an approach to address the affordability issue?
Gary: I have never considered rent control as an appropriate means to help cure the affordable housing crisis. The dynamics of the open marketplace tend to be pretty good and efficient indicators of the dimensions of the affordability gap in housing and while not enough, subsidy programs like LIHTC are in place to help mitigate this problem. But LIHTC does not address the affordable housing need beyond the 60 percent AMI threshold and that is exactly what the AHC Fund is designed to address.
I would rather see expansion of the existing subsidy programs in place that are working, as well as the creation of new market-driven programs. LIHTC has been the most successful public-private partnership to produce affordable housing in recent history. Consider expanding the LIHTC program to include up to 80 or 100 percent AMI, which would include workforce housing. Additionally, the program is consistently oversubscribed in most markets and perhaps an increase in per capita allocation from the Treasury would be appropriate in order to increase the stock of affordable housing around the country.
What do you think about the City’s latest program—Affordability Unlocked?
Steinwedell: The City Council in Austin has taken some compelling steps to address aspects of the affordability challenge facing the city. The recent approval of the general obligation bonds by the citizens of Austin, coupled with the Affordability Unlocked provisions, will provide the opportunity and capital to address many needs of those earning 50 percent and below of the area’s median income. These programs are a strong and needed step in the right direction for these income segments. We believe that similar steps are required to meet the needs of Austin’s workforce, if additional progress is to be made in the city.
How do you see the affordable housing market evolve in the next five years?
Gary: On the demand side, I see the Central Texas economy continuing to grow at a rate faster than most regions in the country and attracting the workforce segment to help fuel this growth. A significant portion of this workforce will require affordable housing at income levels in the 60-120 percent AMI range, to include workforce housing. When you combine this trend line with the existing pent-up demand for affordable housing at all income levels (less than 120 percent AMI) it does not bode well for expectations that the affordability gap will be diminished in the future. I would anticipate that the affordable housing market in the Austin area will look a lot more like the market in and around Palo Alto, Calif., over the next five years and experience a lot of the same challenges.
What is your investment strategy for 2019?
Steinwedell: We launched the Fund in 2018 with three investments totaling 792 units with more than 1,200 residents. These investments were made in conjunction with excellent partners including the Austin Affordable Housing Corporation, Community Development Trust and Enterprise Partners. Completing transactions with established partners leveraged our initial equity to allow for greater impact. In 2019, we seek to at least double the number of units in the portfolio and gain greater geographic diversity across the City of Austin. The Fund has three properties in various stages of acquisition with the hopes of identifying more prior to year-end. Our hope is to achieve a portfolio of 5,000 units in five years.