What’s Ahead for Affordable Housing and Senior Borrowers?

Regions Bank’s Troy Marek on the outlook for two key multifamily segments.

Troy Marek

The new year is fast-approaching and all eyes remain on inflation, interest rates, and how both may continue to impact the multifamily and senior housing arenas in 2024. Occupancy, new supply, rising operator expenses, and finance considerations are all top of mind with industry insiders.

Recent economic reports indicate inflation is slowing down. While that doesn’t mean higher prices will suddenly become a thing of the past, it is providing a measure of optimism that, broadly speaking, prices in various sectors of the economy can ease moving forward.

Multifamily fundamentals remain solid, even amidst the challenges of the day. While we have now passed the sector’s peak streak performance of recent years, rent growth and occupancy are both stabilized. Also, with for-sale housing less attainable for many, a large swath of Americans are remaining in the rental market longer, a factor that keeps demand for units elevated.

Unsurprisingly, multifamily lending volumes were down this year alongside sales transactions, which have slowed due to the gap in pricing expectations between buyers and sellers. The good news is the Mortgage Bankers Association expects lending activity to increase again in 2024. Additionally, Freddie Mac and Fannie Mae, the two agencies which consistently provide liquidity throughout the year and financing options to borrowers even during challenging market conditions, have been consistent in their finance activity this year and are expected to remain so next year. In a sign of that, the 2024 multifamily loan purchase caps for Freddie Mac and Fannie Mae will both be $70 billion, for a combined $140 billion supporting the sector. These caps are set by the FHFA and are based on projections for the multifamily debt originations market. They require 50 percent of the agencies’ business support affordable housing. Loans supporting workforce housing will be exempt from the caps.

Freddie Mac and Fannie Mae also remain highly focused on lending solutions for affordable and workforce rental units, continuing to offer finance incentives to property owners, whether 100 percent of their community’s units serve Americans with lower incomes, or just a portion do so. This bodes well for owners in this subset of multifamily, which today remains highly undersupplied, even as demand for units is surging in all 50 states.

Two things might help address the perpetual shortage of affordable rental units. One is legislation with bipartisan support in Congress that, if passed, could result in the development and delivery of needed units. The other is the trend toward converting empty office properties into residential units. The White House recently released a guidebook outlining the various incentives and programs that encourage the conversion of office to affordable rentals and numerous agencies, including HUD, are involved. It will remain to be seen what occurs with these initiatives. However, any additional supply of apartments for Americans with low incomes is welcome.

Senior housing challenges

The senior living sector continues its steady recovery post-pandemic. NIC data points to occupancy rates increasing for nine consecutive quarters as new supply delivery slows. Interestingly, occupancies in once dominant markets have declined while others that previously ranked at the bottom have climbed. Overall, occupancy has a little way to go to hit pre-pandemic levels, but it may meet that benchmark as soon as next year.

Rising expenses are a top concern for senior facility owners and operators. Insurance is a key factor as rising insurance rates, as well as insurers vacating certain markets altogether, are real issues. Labor is another worry. Recent operator surveys indicate that specific to labor, staff turnover and the attraction of community and caregiver staff are key challenges.

Unfortunately, the cost of debt for senior facilities is elevated due to interest rates, impacting operators and facilities. In some instances, the cost of debt, coupled with the rising cost of construction, has delayed the timeline of new projects. In other cases, it has made them unfeasible. Additionally, while debt remains available, it is more limited.

Operators who are skilled in the sector and who possess strong existing relationships with their lenders— whether bank, agency or other—will fare better than others when sourcing loans to acquire or refinance properties today. Senior housing requires a specialized skillset and lenders are much more inclined to work with operators that have a proven record of success in the space.

Though some lenders have slowed finance activity, HUD financing is readily available for qualified nursing homes, intermediate care facilities, board and care homes and assisted living facilities alike. Given the environment, with many lenders having expanded their underwriting guidelines and/or slowed lending, HUD remains an ideal alternative for owners and operators of senior living facilities.

Troy Marek is head of Real Estate Capital Markets for Regions Bank, a nationwide senior housing and multifamily real estate lender. Visit Regions Real Estate Capital Markets.  

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