Why Affordable Housing Production Lags Demand

At this week’s NAREE conference, JLL and Grubb Properties executives shared insights with MHN’s Suzann Silverman about affordable housing subsets and barriers to development.

Paul O’Shaughnessy, Grubb Properties; Doug Childers, JLL; Suzann Silverman, MHN

Housing aimed at people with low-to-moderate incomes is not being replaced at a fast enough pace to meet demand, panelists at the National Association of Real Estate Editors annual conference in Atlanta agreed yesterday.

Of the nation’s 43.5 million multifamily units, roughly 10 percent are considered affordable for those whose incomes are less than 80 percent of the area median income and 15 percent target the so-called “missing middle,” earning between 80 percent and 120 percent.

But neither group is being replenished “to any great degree,” Doug Childers, a senior managing director of JLL Capital Markets, said in a session moderated by MHN Editorial Director Suzann Silverman.

Paul O’Shaughnessy of Grubb Properties, a Charlotte-based developer that focuses on “essential housing,” agreed, noting that only 28,000 properties backed, at least in part, by low-income housing tax credits are coming online on an annual basis. At the height of building with the LIHTC program, the pace was more like 80,000 annually, he said.

Of the two affordable housing subsets, LIHTC properties are the more popular among investors, said Childers, largely because rents are very secure, so there’s little turnover and no risk that income restrictions will be removed. Even foreign investors—mostly Europeans—are focused on affordable housing, he told the audience of real estate journalists.

Investors also prefer financing backed by either Fannie Mae or Freddie Mac, Childers pointed out, adding that many JLL clients are tracking the GSEs’ affordable housing mandates.

Missing-middle gaps

Missing-middle housing is much more problematic, the two panelists agreed, with O’Shaughnessy pointing out that very little new construction is coming online. One reason is rising construction costs that all but require new projects to be more expensive Class A properties, he said. Another factor is regulatory barriers, especially in smaller markets where there are no clear rules when it comes to zoning issues.

The Grubb executive said his firm is constantly reassessing construction costs and can sometimes work around that issue. “Restrictive zoning today is tomorrow’s supply problem,” said O’Shaughnessy. “When you restrict production artificially, it just compounds the problem exponentially. … Some jurisdictions have good intentions, but if it they were better versed in the dynamics of affordable housing, they would get a lot better results.”

Childers said there a number or organizations that would like nothing more than to preserve affordable housing properties. “But the only way they can succeed is with some type of tax abatement or other incentive.”

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