If You’re Not Investing in Affordable Housing, You Should Be

Angela Kelcher of JLL Capital Markets on why the industry's biggest investors are making major commitments to this sector.

Angela Kelcher

Affordable multi-housing is an essential element of a diversified real estate portfolio. Affordable multi-housing properties generally experience high occupancy levels and steady rent growth over time. During recessionary periods, demand for affordable housing increases and can serve as a buffer against volatility in a mixed portfolio.

The largest players in the multi-housing affordable market have recognized the opportunity and are jumping in. According to JLL Research, 2021 saw record levels of liquidity and investment demand for the sector at $44 billion in U.S. affordable housing transaction volume. This is more than four times the market size, going back as recently as 2015. Growth in this market segment is accompanied by two primary trends: supply and demand imbalance and availability of liquidity from a variety of capital sources.

Supply Constraints

The significant imbalance between supply and demand for affordable housing will drive investment opportunities. According to the National Low Income Housing Coalition, the U.S. has a shortage of seven million affordable rental homes, and there is not one state in the country where this relationship is in balance. Adding to the supply and preserving the existing affordable housing stock, however, is no easy task.

Inflationary pressures, increasing costs of construction and rising interest rates are just a few of the headwinds facing the industry. We cannot build or preserve affordable housing fast enough to keep pace. This disequilibrium will impact the industry for years to come.

Since 2010, we have seen prices escalate rapidly for affordable properties. Over this time, the Compound Annual Growth Rate of the average price per unit has been 11.4 percent in the affordable sector vs. 6.7 percent in the overall multi-housing market, according to JLL Research.

Liquidity Abounds

Lending and investment capital are hungry for product.  This year, the Mortgage Bankers Association has projected a $418 billion multi-housing lending market in 2022. Fannie Mae and Freddie Mac have capacity to do a combined $156 billion based on the volume cap limits set by the Federal Housing Finance Agency. The limits require that half of the agency volume must be affordable at or below 80 percent Area Median Income and 25 percent must be affordable at or below 60 percent AMI. In addition, housing goal requirements for affordable units have been increased by 32 to 47 percent over 2021 unit-count goals. Further, the 2022 through 2024 Duty to Serve plan calls for increased levels of investment in the affordable preservation market. To meet these regulatory requirements, the agencies will offer favorable credit and pricing terms for deals meeting these criteria.

Beyond lending, heavy investments are being made in this sector by both private and corporate capital sources. Social impact capital and Environmental Social Governance-minded organizations are seeking investments that provide returns based on a double bottom line, both socially and financially. Here are a few examples.

  • Blackstone, the world’s largest alternative investment firm, recently announced the formation of April Housing to serve as its new portfolio company to create and preserve affordable housing.
  • Lincoln Avenue Capital has signed an agreement to acquire the majority stake in the Housing Partnership Equity Trust REIT, making it one of the largest single private investors in affordable housing.
  • Amazon’s Housing Equity Fund is providing more than $2 billion in below-market rate loans and grants to preserve and create low and moderate-income housing.

These are just a few examples representing the interest and significant investments in this space.

Based on JLL’s affordable housing BOV and debt pipelines, in addition to the aforementioned supply-demand dynamics and the capital coming into this market, 2022 is poised to be another busy year.

Angela Kelcher is a senior managing director in the Dallas office of JLL Capital Markets, Americas.

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