The Affordable Housing Enigma

Recognizing the scale and complexity of the challenge is a commendable first step, but much more work is ahead, writes CAPREIT’s Andrew Kadish.
Andrew Kadish  Image courtesy of CAPREIT

It is a battle that must be addressed, but one lacking a clear solution. And although nearly everyone in the apartment industry and beyond seem to acknowledge the affordable housing crisis, little has been done to make genuine headway in what continues to be a prominent national issue.

The statistics are alarming. Thirty percent of renters spend more than 50 percent of their income on housing, when spending 30 percent is considered rent-burdened. The cost of housing is rising at nearly double the rate of wages. A vast collection of additional data tells a similar story.

While continued efforts from the National Multifamily Housing Council and Urban Land Institute have helped, and increased limits afforded to government-sponsored enterprises Fannie and Freddie Mac are a step in the right direction, neither has made an ultra-significant dent in conquering the crisis.

A broken political system, particularly at the federal levels but also on the state and municipal levels, hasn’t helped. The crisis is frequently acknowledged by politicians, but usually with dismissive comments such as: “We know it’s a broken system, but there are really no viable solutions.” Another component is developers’ increasing propensity to favor Class Triple-A-Plus developments and their misperception that affordable housing cannot be profitable.

As a result, the nation’s policemen, nurses, firemen and other first-responders struggle to find quality affordable housing within reasonable proximity to their occupations. Here’s a look at some of the key components of the affordable-housing conundrum and what might be done to make headway:

GSE Assistance Helps But Not Enough

Fannie Mae and Freddie Mac are the largest suppliers of capital to the affordable sector, and in November, the government-sponsored enterprises were permitted to re-enter the LIHTC (low-income housing tax credit) market as investors. The Federal Housing Finance Agency approved each enterprise with an annual investment limit of $500 million. While that sounds great on paper, it’s equivalent to a Band-Aid on a shotgun wound.

It’s a positive step in the right direction and commendable that the problem has been recognized, but much more needs to be done. It’s almost a certainty that it’s not going to be enough, like attempting to fill a large-scale stadium by giving away 25 tickets. At the federal policy level, state as well as municipal, there just isn’t enough attention given to this crisis beyond political lip service.

Addressing From Within

Although outside assistance is absolutely needed, the apartment industry itself must also address the crisis. The NMHC and ULI have done a commendable job of acquiring volunteers, engaging their constituencies and mobilizing their members to lobby their state government representatives, congressmen and senators, but they can only do so much. It’s going to take much more of a mass political mobilization to actually meet this problem head-on.

The profit mode of most of the market-rate developers adds to the uphill battle because they are seldom prone to invest in the affordable space and continue to compete to have the most luxurious communities.

Invest in Affordable

The fallacy is that apartment operators cannot make money in the affordable space. Granted, it’s not as easy and can be a tough sell, but it’s certainly possible to drive a profit in the affordable sector, whether on a long-term hold basis or on a short three-to-five-year hold term. Without going too deep into investor mode, the potential for double-digit cash-on-cash returns is genuine, as is achieving Internal Rate of Returns in the high-teens to mid-20s and beyond.

Successful operators in the affordable space often operate their affordable portfolio the same way as their market-rate portfolio. The addition of an in-house compliance team helps as well, to ensure the company is complying with some of the affordable-specific rules and regulations. Otherwise, just as with any other properties, success can be rooted in focusing on the basics: Reducing inefficiencies on the expense side, intelligent maintenance expenditures, service attention on the utilities side and by providing better service levels to achieve higher retention rates.

The perception is that too much red tape exists and that the opportunity for revenue is limited due to capped rent levels. Despite these artificial barriers, the potential to make a profit in the affordable sector is real and carries the added benefit of providing a key public-service element.

While these factors outline the affordable crisis, they are certainly not the only issues. Adding to the conundrum, nothing has been done at the federal, state or municipal level to address the rising costs of land and construction materials, and the lack of qualified construction workers.

The affordable housing crisis remains and has multiple tiers. Many in the apartment industry are doing their part to assist, but without fundamental change from within and outside the industry, many of the root problems will continue to persist.

Andrew Kadish is president of CAPREIT.