What Investors Need to Know About Affordable Housing
JLL’s affordable housing team on the dynamics currently shaping this asset class, as well as its unsung upside.
While 2020 was a wild ride for everyone in the real estate world, it may have served as the smelling salts for some to the strength, resilience and need for the affordable housing sector. With affordable properties maintaining collections north of 90 percent, while luxury apartments in Los Angeles and New York experienced vacancy and bad debt losses and the legislature and housing regulators further prioritizing affordable housing, the space appears poised for a resurgence in 2021.
Lower-wage employees were hit exceptionally hard during the pandemic, bringing the need for more affordable housing to the forefront. According to JLL’s collections data, however, rent collection for many Class B and C units have remained relatively strong through the pandemic. From April 2020 to January 2021, Class B properties did not see a significant drop in the percentage of units that paid rent on time: 94 percent in both April 2020 and January 2021 and 94 percent on average over the 10-month period. Class C properties maintained 90 percent on-time payments. Both classes likely benefited from stimulus checks and unemployment benefits.
As more investors look to get involved in solving the crises, below are some forward-looking insights on the current and future state of the sector that should be top of mind:
Agencies are on board with the most attractive lending options
The agencies—Fannie Mae and Freddie Mac—are serving as one of the most attractive lender options for affordable developers. The Federal Housing Finance Agency, the regulator that oversees both Fannie Mae and Freddie Mac, announced that for 2021, each agency lender shall be limited to $70 billion for a four-quarter period, down from $80 billion in 2020. Of that $70 billion, the FHFA required that 50 percent, or $35 billion, must meet mission requirements, which are units at 80 percent of the area median income.
Additional requirements necessitate that 20 percent of the $35 billion must be utilized for units restricted at 60 percent AMI. While this limitation will likely cause more selective lending to market-rate properties and other asset classes that do not meet these mission goals, it should further enable the agency lenders to provide aggressive quotes and liquidity to affordable housing developers, as they strive to hit the full allowable cap.
There is also a large influx of new institutional capital flowing into affordable and workforce housing—both debt and equity. Institutional capital, debt funds, life companies and foreign banks are all leaning in to invest in the space due to the lower-deemed risk and social benefit. This is also creating large opportunities for owners and developers to use creative new options to favorably finance new developments and recapitalize existing assets and portfolios.
What you need to know about the 4 percent tax credit fix
A major driver for affordable housing in 2021 will result from the 2020 stimulus bill that locked in a fixed 4 percent Low Income Housing Tax Credit rate for transactions with bond allocations meeting the required rules. Previously, the rate was set weekly by market movement. In December 2020, the rate was 3.09 percent, and it has been below 4 percent since 1988.
As a result, more credits are available per project, which will immediately allow new 4 percent LIHTC projects to become more feasible. Novogradac, an expert in the affordable housing space, estimated that nearly 126,000 additional rental homes will be created with the change to the 4 percent floor rate.
The change will drive more housing developments and create more competition for bond allocations. Several states were in a competitive situation for bond cap prior to change, notably California, New York and Georgia. Following the change, it’s anticipated that every state will rapidly become competitive and allocation priorities will vary. States are quickly creating new rules and we are initially seeing a heavier focus on new construction, lower income set-asides and less emphasis on year 15 resyndications. We are also seeing tighter budget controls and less flexibility with bond cap on awarded transactions.
Keep an eye on growth and recovery trends
Rent growth for LIHTC properties is impacted by AMI and income limits for each respective market, with the Department of Housing and Urban Development releasing these numbers every April. Similar to HUD’s prediction model, JLL’s Affordable Housing team uses technology to forecast these numbers and projects AMI and income limits will be impacted by the pandemic in 2021 and, to a lesser degree, in 2022. JLL projects that in 2023, there will be another material impact to max rents due to job losses and lost wages sustained during the pandemic.
The debt markets are currently performing well, despite the increase in interest rates, with an abundance of capital driving a highly liquid market back to pre-pandemic pricing. Additionally, the investment sales market seems ready to explode with U.S. dry powder estimated to exceed $200 billion and global dry powder over $400 billion, near 2019 records. Furthermore, BOV and RFP in the investment sales space is up significantly in Q1 2021 over last summer, with sellers looking at dispositions in the short term, in an effort to avoid negative tax implications.
Ultimately, if rates continue to rise, it will slow down transactions in the short term, but available capital and demand metrics will remain, and the long-term outlook remains very bullish for the affordable housing space.