With more than 38 million Americans losing their jobs in the nine weeks ending May 16 due to the coronavirus lockdown, demand for affordable housing properties has skyrocketed. Over the past few years, most developers have focused on delivering high-end communities, putting the affordable housing sector under a lot of pressure long before the pandemic hit.
Keith Harris, the executive vice president of acquisitions for Avanath Capital Management, views the current economic environment as an opportunity. With more than three decades of experience in investment advising, Harris now leads Avanath’s acquisitions and strategic growth within the affordable housing market. In the interview below, he explains the reasons behind his optimism and shares his expectations for the affordable housing market as the economy begins to slowly reopen.
To what extent has your activity been impacted by the pandemic?
Harris: We have been quite busy. In fact, we still have several acquisition deals in the pipeline and are looking at new deals, even in the current economy. We believe demand for affordable units will likely increase as income levels are reduced by today’s recessionary environment. We have been and continue to be bullish on the affordable sector in strong economic times and as we move through the current crisis. This has been a challenging time for everyone, and it will take some time for the overall multifamily market to recover. That said, affordable housing is a consistently recession-resistant sector within multifamily that is well-positioned for continued strength.
How did you adapt your acquisition strategy to the new market conditions?
Harris: Avanath has traditionally taken a long-term view of acquisitions and the properties we hold in our portfolio. We look to acquire assets that allow us to add value and to achieve strong risk-adjusted returns for our investors on an ongoing basis. We will continue to utilize this strategy even as COVID-19 changes the economic ambiance. The pandemic and economic shutdown are temporary situations that will eventually be resolved, so we view this environment as an opportunity. While we will underwrite prudently, we will likely see a downward tick in pricing. We intend to remain aggressive in our acquisition approach, which may allow us to acquire assets at a discount.
One challenge in the current environment is due diligence. It has obviously become more difficult to conduct due diligence on properties as travel and stay-at-home orders are in place. That said, we are beginning to see many areas throughout the country begin reopening or put phased reopening plans in place, so we view this as temporary. In fact, Texas, for example, is a target market for us and it has already started to reopen.
Are property owners of low- to moderate-income multifamily housing more vulnerable since their tenants are more likely to have a hard time during this period of disruption?
Harris: No, we’ve actually found the opposite to be true. Because we focus on rent-regulated affordable housing, our residents pay no more than 33 percent of their income toward rent, whereas market-rate renters are typically paying a much higher percentage of their income. In addition, many of our residents utilize Section 8 housing vouchers. Section 8 authorizes payment of government-funded rental housing assistance to private landlords of low-income households. Therefore, our Section 8 residents are less likely to default on their rental payments, despite the current environment.
As a general statement, the affordable housing sector tends to maintain a strong performance in times of economic uncertainty and economic growth. Demand for affordable housing is consistent over time and even tends to increase during times of economic turmoil. This sector is also extremely supply-constrained. Demand for affordable housing continually outstrips supply, regardless of where we are in the economic cycle.
Have the added financial difficulties brought on by the pandemic exacerbated supply constraints?
Harris: As unemployment figures continue to rise, more individuals will be opting for affordable housing communities, resulting in an influx of demand in the sector. While supply cannot simply keep up with this growing demand, we will likely see more developers be incentivized to build more affordable housing than they were before the pandemic.
Developers who were previously focused on luxury apartment communities are now seeing, and will be influenced, by rent collection concerns among landlords of market-rate housing developments and increased demand for affordable properties. Local and state government leaders are also very focused on affordable housing in their areas since they don’t want to see a rise in homelessness from the layoffs. Public health concerns over coronavirus among the homeless population is another driver of policies that support affordable housing development to keep people off the streets.
How much have the fiscal stimulus packages softened the blow for the affordable housing industry?
Harris: We see this funding as being quite helpful in softening the blow for our industry and providing much-needed assistance to residents. This stimulus package provides $3 billion to housing providers to help individuals currently assisted by HUD to safely remain in their homes or access temporary housing assistance. The package will help keep Section 8 voucher and public housing households stably housed and continue housing assistance contracts with private landlords for project-based Section 8 households, along with a variety of other items.
What are your top three recommendations for affordable housing operators and owners facing challenges during these difficult times?
Harris: First, approach this crisis from a human perspective. Check in with residents to make sure they are well, and let them know you will listen to them if they have lost income and are concerned about paying rent.
Second, evaluate your costs and income so you have a clear idea of the financial picture of the properties you own. Try to reduce unnecessary capital expenses that can wait until cash flow is more stable. Be creative and proactive about cutting where you can.
Third, realize that this is just a temporary situation. COVID-19 will pass, the economy will rebound and we will see prosperity again. While it may take some time for this to happen, keeping in touch with residents, investors and lenders will help you work through any issue before it becomes insurmountable.
Do you have any data on May rent collections across Avanath’s portfolio?
Harris: Our experience is that rent collections have remained resilient in the affordable and workforce housing sectors. We have only received less than 40 rent-relief requests across more than 10,000 units to date. This is indicative that affordable housing properties are seeing relatively few cases of residents not being able to afford their rent, compared to market-rate properties.
Can you tell us about a recent noteworthy deal?
Harris: Avanath recently purchased three affordable housing communities with a combined total of 341 units in Denver. These transactions presented an opportunity to expand our firm’s presence significantly in the Colorado market and create economies of scale among our Denver properties. We are also looking at deals in several other markets, including Washington, D.C.
How do you expect the situation to unfold for the affordable housing industry?
Harris: Based on how this property sector has performed historically through many economic cycles, we believe affordable housing will continue to be strong and is better positioned than most asset classes. The sector is also boosted by the fact that investors are taking more of a defensive strategy and allocating more capital to affordable housing as part of a diversified portfolio. This trend is particularly true among European investors, who see U.S. commercial real estate—especially affordable housing—as a safe haven and a reliable alternative to real estate in their own markets.
How are you preparing for the aftermath of this crisis?
Harris: By carefully tracking how each of our properties is being affected by it and understanding the virus’ impact on each market where we have a presence. We will continue to provide the best possible service to our residents and make investment decisions that are best suited to protecting our investors’ capital and delivering the best possible returns in any scenario we face.