How Well Can You Do by Doing Good?
Multifamily impact investing's accelerating as private capital shoulders more of the affordability burden.
Impact investing, especially capital targeted for affordable housing, is an expanding avenue for private capital as more investors discover “doing well by doing good.” That’s good news for housing affordability since the current Federal budget bill would slash rental assistance by 40 percent.
“When you overlay the economic conditions brought on by the rapid runup in interest rates in recent years and broader market uncertainty, we believe that investors are seeking safer and more stable investments and view affordable housing debt as an ideal spot to invest and navigate in these complex times,” said Jeff Brenner, CEO of IMPACT Community Capital.
“We believe that investors are seeking safer and more stable investments and view affordable housing debt as an ideal spot to invest and navigate in these complex times”
IMPACT is an investment manager with a 25-year track record in affordable housing. To date, the company has invested $2.8 billion in this asset class, creating 60,000 units across 43 states.
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Targeting high-need populations like veterans, formerly homeless, seniors and those with mental and physical disabilities, IMPACT’s strategy involves determining the gap between rents charged at a property and market rents in the community. “This gap highlights the amount of money saved by each tenant that can be spent on necessities other than rent,” Brenner said.
This same metric determines the credit profile of a property as properties with larger gaps between its rents and market rents are more competitive and perform better in the long run, he noted.
Why private investors are turning to affordable housing
Nuveen has been investing in affordable housing for more than 30 years, and in turn has seen both solid investment returns and social impact. Focusing on capital A affordable projects that target residents earning 80 percent of AMI or below, the company has plans to scale its platform from $8 billion currently to $15 billion by 2028, according to Nadir Settles, global head of impact investing for the company.
“Investors have realized that there is a real opportunity in finding return on investment and doing good for a community, especially if you are investing in affordable housing, which has very durable and stable income returns and both tangible and intangible social impact,” Settles said.
The real estate market is witnessing a shift towards impact investing as traditional core and core-plus capital makes a comeback, said Doug Childers, JLL senior managing director & group leader for Affordable Housing.
That’s because, while affordable housing projects generally experience minimal year-over-year NOI growth, they compensate with high occupancy and reliable cash flows, Childers noted. Investors in this sector typically target annual leveraged cash-on-cash yields of 5 percent to 6 percent with expected returns calculated using a 12 percent to 14 percent discount rate over the investment’s lifespan, he said.
What’s sparking private investment in affordable housing
But few private investors were interested in this sector until fairly recently. The pivot point for private capital investment in distressed communities was the George Floyd tragedy, suggested Deborah La Franchi, founder & CEO of fund manager SDS Capital Group. That’s when corporations and other institutional investors started asking how they could make a difference in low-income communities.
About this same time, many of the earliest impact platforms focused on delivering risk-adjusted, market rates of return now had track records demonstrating that the approach can work “with the right team,” La Franchi continued.
Then a few years ago, public pension funds became interested in impact investing, and SDS’ capital partner American South Capital Partners, an affordable housing fund based in the U.S South, along with Vintage Realty Co., landed five of them. “This migration of pensions into the space illustrates how some impact funds are now breaking through to very untraditional investors due to performance,” said La Franchi.
ASCP, which has enabled SDS Capital sponsors to do bigger deals, has funded more than 5,000 affordable units for renters making 80 percent AIM or less across 10 southern states.
Catalyst Opportunity Funds invests at the intersection of competitive, risk-adjusted financial returns and meaningful community impact, according to Nina Tschinkel, vice president of investor relations for Catalyst, an institutional asset management firm.
“All of our investments are impact investments, and we don’t see that changing moving forward,” Tschinkel said. “In fact, we are strategically accelerating our investments to meet the unmet demand for quality affordable and workforce housing in communities of need across the U.S.”
Appealing to private investors
Catalyst’s investment strategy, Tschinkel said, appeals to a range of institutional investors—from large, national banks to multinational health-care institutions and well-known foundations. “Most of these groups are looking for market-rate returns alongside community impact,” she said. “However, some groups are willing to trade off a portion of their financial returns for increased affordability across our portfolio.” The firm’s latest fund provides an opportunity to tailor yield and impact sensitivities to investor mandates.
Catalyst employs a mixed-income strategy that combines low-income (less than 60 percent AMI), workforce (60 to 80 percent AMI) and market-rate housing. The mix, Tschinkel said, benefits the project’s financial success by broadening the rental pool. Offering units affordable to those making 50 to 80 percent AMI includes an additional 16 percent or more of households and leads to shorter lease-ups and higher occupancy than market-rate units. Including the workforce demographic also forms a “sticky renter base,” she said, since workforce housing turnover is 5 to 10 percent less than for market-rate units. The end result is more vibrant communities and stronger investment potential.
While institutional investors have historically invested in affordable housing, Brenner sees interest from other private investors in this sector, including retailers, high-net-worth individuals, family offices, consultants and funds. “These types of investors recognize the strong underlying market dynamics and are looking for ways to invest across the capital stack in affordable housing,” he noted.
“Affordable housing remains an area viewed as appealing from an investor perspective,” said Settles, noting that there is a housing shortage of 7 million units for renters earning 60 percent AIM or below. “Because of this, we not only see an investment opportunity, but an ability to improve communities as we invest in them as well.”
The workforce and affordable housing sectors, Childers said, are currently benefiting from a miscalculation by investors who anticipated a surge in distressed real estate assets in 2024 and earmarked $229 billion, or 71 percent in closed-ended funds, for value-add or opportunistic investments. “But that anticipated flood in such assets didn’t fully materialize,” he added. The resulting yield compression caused investors to redirect their capital into alternative investment strategies, including opportunities that align with their financial and social goals.
Bob Simpson, president of the Multifamily Impact Council, noted that three elements are required for impact investing to be successful: It must improve the lives of tenants, support community growth and make money for investors. His organization offers a complimentary Multifamily Impact Framework™ that standardizes impact investing principles and reporting guidelines for U.S. multifamily properties.
According to Simpson, affordable housing produces higher returns than market-rate housing over the long term. “I think it’s really simple,” he said. “Investors, especially institutional investors, are increasingly recognizing that multifamily properties that are affordable and sustainable are demonstrating that they’re strong and resilient.”
High occupancy translates to steady cashflow
While market-rate housing provides returns of about 8 percent, compared to 5 – 6 percent for affordable housing, affordable and workforce housing have lower operating costs, higher occupancy with minimal turnover, limiting make-ready costs and other costs associated with tenant turnover, like downtime and marketing, Simpson noted.
Meanwhile, social services and building sustainability make a big difference in a project’s financial success by improving operational efficiencies and resident retention, both of which equate to strong cash flow and asset appreciation, Settles said.
Nuveen, for example, has partnered with Ounce of Care, which provides resident services, like benefits enrollment, workforce development support, health and well-being programs, and community-building events. Ounce also has helped many Nuveen residents secure rental assistance, which supports housing stability and reduces legal costs.
Nuveen properties have solar infrastructure in partnership with Lumen Energy, which utilizes local solar incentives to receive development fee returns and cost savings by reducing property reliance on non-renewable energy sources. In addition, this infrastructure improves the property value and provides energy savings for residents, freeing up income for other necessities, Settles noted.
“I think the investment in energy and water savings tends to deliver pretty significant savings over time on utility costs,” Simpson said. “So, it’s really all about maximizing your effective growth income and property in a way that reduces bad debt costs and vacancy-related and utility costs. It also improves the efficiency around lease-up and compliance monitoring.”
The trouble with housing incentives
Affordable housing is eligible for the LIHTC program, but, with no federal funding, workforce housing is more difficult to build. State and local governments do provide financial incentives for both affordable and workforce housing, such as tax abatement, subsidies, discounted planning fees, free land, pilot programs, tax exemptions, and low-cost debt.
But when these incentives are cobbled together, especially for middle-income housing, Simpson said, the cost to build projects increases due to longer timelines associated with bureaucracy and approvals. In California, for example, it costs one-and one-half times more to build moderate-income housing than a luxury high-rise. And $500,000 per unit is the limit for making projects pencil.
La Franchi, which manages a Supportive Housing fund in California, noted that projects in the state typically tap five to 10 funding sources and can take five to seven years or longer to complete.
He noted that local government policies can also help to lower the cost of construction. Los Angeles, for instance, expedites permits for affordable projects, and San Diego has eliminated city planning fees for affordable housing.
As a result, developers are finding ways to make moderate-income projects work without government assistance. For instance, Simpson noted, Southern California developer Sola Impact makes projects work without government assistance by utilizing a standard design and modular construction. This keeps the per unit cost to $250,000 to $300,000—about half the cost of a typical publicly funded project.
These developers, however, are increasingly pursuing tax exemptions as a strategy to balance the financial equation of development costs and revenue sources, according to Childers. Florida’s Live Local Act has emerged as a potential model, offering a blueprint that other states may consider adopting to address similar housing challenges. This program provides tax exemptions for developing low- and middle-income housing while offering businesses tax credits for contributing to a state-operated fund that finances such housing products.
