Government Is Turning Up Its Focus on Supply Challenges

As the commercial real estate industry faces structural imbalances in the housing market, the preservation and creation of affordable housing have become critical imperatives. The current landscape demands a closer examination of market conditions and an exploration of the actions taken by federal, state and local governments to address this challenge. By understanding the supply constraints and leveraging strategic initiatives, the industry can foster affordable housing and contribute to a sustainable future.

Multi-housing and single-family markets deficits

Renter households across the country are burdened by significant housing costs, with affordability deteriorating by 40 percent over the past decade, according to the Housing Opportunity Index. Prior to the Federal Reserve’s intervention to curb inflation through monetary policy by increasing interest rates, the multi-housing market was poised to experience substantial supply growth. The peak in housing starts occurred in November 2022, indicating that the highest number of deliveries would be expected 18-24 months later, in the second half of 2024. However, from the second half of 2024 onward and, likely until at least 2027, construction completions will steadily decline. As a result, the slowdown in multi-housing starts will create conditions in which rent growth is substantial after the market absorbs the existing supply and enters a period of limited inventory coming online. 

Supply constraints are impacting the affordable housing segment, as well. This sector is generally defined by recorded rent and/or income restrictions at the property level. According to the ACTION Campaign, the LIHTC program has created or preserved more than 3.85 million homes from its inception in 1986 through 2022. 

“Despite this success, rising development costs and high interest rates in 2023 made many deals infeasible, causing sponsors to return their allocations to states and putting further stress on future affordable housing deliveries forecasted for 2025 and beyond,” said Doug Childers, JLL Capital Markets’ lead of affordable housing investment sales advisory. Furthermore, according to a report issued by the National Low-Income Housing Coalition, between 2020 and 2029, nearly 500,000 units are “at-risk” of leaving affordability as properties approach Year 30 and the end of their regulatory agreements governing affordability.

The prevailing imbalance between supply and demand in the single-family market has contributed to challenges for both renters and homeowners. Record-low inventory levels, driven by homeowners’ preference to retain their properties due to historically low mortgage rates, have constrained supply. Additionally, lenders have moved cautiously in the face of volatility in the market, rising construction costs and high interest rates, limiting new construction starts. The high cost of homeownership has contributed to an extended period of rentership nationally.

Each of these factors have intensified the need for affordable housing and underscore the urgency of strategic interventions.

Federal, state and local actions

Recognizing the need to bridge the housing supply gap, the Biden Administration has introduced the Housing Supply Action Plan. This comprehensive plan encompasses legislative and administrative actions aimed at boosting the supply of quality housing and addressing the shortage of affordable units. Key components of the plan include incentivizing land-use reform through federal grant processes, deploying new financing mechanisms for manufactured housing and smaller multi-housing buildings, and expanding and improving existing federal financing programs like the Low-Income Housing Tax Credit and the HOME Investment Partnerships Program.

Further federal legislative action may positively impact affordable housing development and preservation. The proposed Tax Relief for American Families and Workers Act of 2024 seeks to expand the LIHTC by restoring the 9 percent LIHTC ceiling, allowing states to allocate more credits for affordable housing projects. Additionally, the bill lowers the 50 percent bond test threshold to 30 percent for 4 percent LIHTC bond projects. These provisions would incentivize investment in affordable housing and help address the supply shortage, creating an estimated 200,000 additional affordable homes, according to Novogradac. 

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has implemented directives and policy revisions to promote affordable housing. The increase in LIHTC investment caps for Fannie Mae and Freddie Mac from $850 million to $1 billion annually for each agency supports the mission-related transactions. The FHFA also introduced a new policy to target LIHTC investments to properties that waive the right to a qualified contract, ensuring long-term affordability. By prioritizing affordable housing preservation, the FHFA aims to address the shortage and create stability in the affordable housing market.

At the state and local levels, numerous programs are being launched to incentivize the creation and preservation of affordable housing. Tax abatements, density bonuses, land contributions, and subordinate financing are among the strategies employed to support this initiative. By aligning with federal efforts and tailoring incentives to local needs, governments aim to address supply challenges and empower affordable housing developers.

The affordable housing crisis persists, requiring concerted efforts from various stakeholders. Federal, state, and local governments are taking incremental actions to confront the structural imbalances and incentivize the creation and preservation of affordable housing.   

“Through legislation, financing programs, and strategic initiatives, the industry is making headway in bridging the housing supply gap,” said C.W. Early, JLL Capital Markets’ co-lead of affordable housing debt and equity placement.  “While challenges remain, the collaborative approach taken by all levels of government and the commitment of commercial real estate professionals provide a path towards a more equitable and sustainable housing future.”

Angela Kelcher is a senior managing director in the Dallas office of JLL Capital Markets, Americas, focusing on affordable multi-housing. Prior to JLL, Angela was with Fannie Mae for 17 years where most recently she served as senior director of Affordable Housing and led the team to successive record-breaking production volumes.