Sustainability, affordable housing and the ‘rent versus own’ equation
By Renee Greenman, Centennial Mortgage Inc.
The multifamily sector has experienced substantial growth over the past few years, outperforming its sister commercial sectors—office, industrial and retail. With multiple factors at play, the general consensus regarding the strength of the apartment market includes the lack of (or challenges to finding) financing for home purchases, lackluster employment growth, and the economic downturn in general, which has made demand for rental housing more significant.
While much chatter across the industry speculates as to a current or future bubble, economic indicators show that the sector continues to show strength and that a bubble is not imminent. Investors and developers are active, and demand for units remains steady.
Yet there are noteworthy trends occurring in the sector, specifically in regard to finance, sustainability, and affordable housing. The U.S. Department of Housing and Urban Development (HUD) sits at the crux of all three, as the agency finances multifamily projects in both the sustainable and affordable housing categories.
Sustainability is a core mission of HUD. Controlling energy and operating cost needs can help lower the agency’s budget and hence assist in HUD’s mission to preserve affordable housing. The agency broadly defines sustainable projects as those which are built from sustainable materials, boast energy efficiency benefits, and/or are transit-oriented developments providing residents with direct access to mass transportation options. HUD’s sustainability mission is still a work in progress as the agency looks at different ways to incentivize borrowers with environmentally friendly projects. HUD has implemented one program in partnership with the Department of Energy for the financing of retrofit multifamily properties with energy efficiency benefits. Started in January 2013, this program is designed to get 2,500 retrofit properties financed, and may be a signal for additional programs aimed at prioritizing finance for sustainable projects of this and other types.
Affordable housing is another core mission of HUD, and the agency has a long history of demonstrating its commitment to it. Because of this, apartment projects that qualify as affordable are typically given priority and hence fast tracked through the HUD finance process. HUD considers an apartment project affordable with the presence of Low Income Housing Tax Credits (LIHTC) or rental subsidy restricted rents, or when acceptable tenants earn only a percentage of area median income (usually 50-60 percent).
Rising interest rates mean there is not as much of a gap between existing apartment financing rates and current interest rates. Owners could have already taken advantage of record low rates over the past couple of years. However, as rental rates climb and equity grows, owners look to tap into that equity by refinancing.
Additional refinancing demand is also anticipated from the recapitalization of the nation’s affordable housing stock. HUD’s public housing portfolio and some older HUD multifamily properties can now, under the Rental Assistance Demonstration (RAD) initiative, seek capital to refinance. Additionally, LIHTC affordable properties which are rolling out of their initial compliance period will seek not only to lower initial interest rates, but to access equity to pay off investors who no longer have a tax benefit by remaining in the project ownership structure.
In addition to green and affordable housing projects, the finance of multifamily is being influenced greatly by the “rent versus own” equation. There is no doubt that many Americans—for various reasons—are choosing the rental living option. And as more and more have made this choice, especially in urban markets, capital (i.e. REITs, life insurance companies, etc.) has followed and become more accessible to owners and investors in the multifamily sector. That said, HUD’s FHA programs offer long-term, fixed-rate, financing that is non-recourse, a highly desired borrower preference that many other lenders simply aren’t offering at present.
Renee Greenman is managing director of Centennial Mortgage Inc. (CMI), one of the nation’s leading mortgage banks providing capital through U.S. Department of Housing and Urban Development (HUD) and U.S. Department of Agriculture (USDA) insured loan programs.
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