Pembrook CEO: Affordable Housing Can Be Top Performing
- Nov 05, 2019
New housing supply is concentrated in the luxury segment, but the largest demand comes from workforce households. Despite sustained demand in almost all markets, developers tend to avoid affordable multifamily projects. Stuart Boesky, CEO of Pembrook Capital Management, believes that “a large reason for the relative lack of investment into affordable rental housing is simply perception.”
In an interview with Multi-Housing News, the industry expert explains how the private debt market could step up and fill the gap between supply and demand, even in primary markets with high barriers to entry. For example, Pembrook recently closed on a preferred equity investment of up to $50 million to Prana Investments. Currently, the Prana fund owns 17 properties with 435 units in Los Angeles and 22 properties with 806 units in New York City.
In your opinion, how serious is the affordable housing shortage in coastal metros?
Boesky: What we’ve observed for many years and clearly detailed in studies conducted by, for example, Harvard University, the National Multifamily Housing Council and the National Apartment Association, is a shortage of affordable rental housing (ARH) in our major cities. The seriousness varies by location and can pose significant challenges. Simply put, there is overwhelming demand and need for affordable units. Building and preserving these units is essential. And there’s a real opportunity to do so. The capital markets frequently overlook the fact that affordable rental housing can be a top performing investment on a risk-adjusted basis. In my opinion, affordable rental housing is not and should not be a “second-class” asset class.
What are the main factors that cause investors to overlook ARH?
Boesky: A large reason for the relative lack of investment into ARH is simply perception. Many investors simply do not see affordable rental housing as a financially accretive investment. Not only does affordable rental housing have potential to perform well in terms of returns, but it can also be a well-performing asset in poor economic environments.
For example, a study done by CohnReznick in 2017 shows that during the financial crisis, default rates for low-income properties were a fraction of the default rates on market-rate multifamily. This is largely because demand for ARH, by definition, is integral to the market, which creates attractive income dynamics for developers.
There are various means for investors to access affordable housing investment, both debt and equity. As a private lender, we obviously fall into the debt side of the equation. Our role is to facilitate developers’ and owners’ ability to complete transactions, improve properties and acquire new ones by offering first mortgage bridge, mezzanine and preferred equity financing through a team that understands the market dynamics and specific needs of ARH.
Please tell us more about financing affordable housing properties.
Boesky: I’ve been directly involved in financing ARH for over 35 years and my senior team members have over 30 years—on average—of multifamily experience. For example, we recently provided financing in the form of a revolving preferred equity facility for an affordable housing developer, which is backed by over 1,100 affordable housing units in New York and Los Angeles.
In the past, that same developer might instead have secured a bank line of credit secured by their portfolio in order to fund new acquisitions as well as rehab of existing properties. We’ve seen that source of financing retrench since the financial crisis. The private debt market has the opportunity to step up and effectively fill that gap.
What is your opinion on rent control laws in New York? How will they impact the affordable housing market?
Boesky: In New York City, I believe that the rent control laws will severely restrict real estate developers’ ability to rehabilitate their properties. Because of the law’s restriction on landlords’ ability to raise rents, developers will not be incentivized to improve their properties, a central part of their business plans. This conundrum could make it extremely difficult to close deals in New York City.
How do you expect the affordable housing market to evolve?
Boesky: We see a good pipeline of potential deals in New York City and Los Angeles and are optimistic about the affordable housing market moving forward. We believe that real estate credit will be the strongest it has been post-financial crisis as underwriting has become more conservative.