The shrinking supply of workforce and affordable rental housing in cities across the United States has sparked innovative financing vehicles from an array of real estate firms to preserve the units, helping stem the loss of an urgently needed product, according to a report released by ULI and NeighborWorks America.
Preserving Multifamily Workforce and Affordable Housing, published by the ULI Terwilliger Center for Housing, profiles 16 leading efforts to retain the affordability of rental units that either have lost or are at risk of losing government subsidies, as well as “naturally occurring” affordable units that are likely to be repositioned to serve higher-income households.
Ronald Terwilliger, chairman of the Terwilliger Center, noted that the initiatives are in response to the tremendous demand for affordable rentals, which has soared in the postrecession years due to wage stagnation, tougher home purchasing requirements, and lingering financial stress. “The lower- and middle-income workers who are the lifeblood of local economies across the country have limited and declining options for affordable homes near their jobs, which hurts them as well as employers,” Terwilliger said. “The innovative firms and partnerships profiled in our report reflect remarkable leadership in alleviating a problem that almost every community faces or will face soon.”
The report documents the extent to which the nation’s supply of affordable apartments for the working class has been shrinking and is likely to decline further—perhaps by hundreds of thousands of units in the years ahead—as a growing number of properties in strong markets are rehabilitated for market-rate occupancy, while those in weaker markets become increasingly dilapidated.
“The need for affordable rental housing in this country is at a crisis stage. Millions of Americans are paying an inordinate amount of their incomes on rents,” said Paul Weech, NeighborWorks America president and chief executive officer. “The level of need compels us to look for innovative approaches that can accelerate our ability to address these needs.”
In response to this trend, a range of private sector real estate firms and community-based financial institutions have created a variety of investment funds and other vehicles to acquire these types of properties, invest in their improvement, and keep them affordable to their current residents and others of similar means. In addition to serving an important social purpose, these vehicles are delivering significant financial returns to their equity investors, ranging from 5 to 12 percent, according to the report. The 16 programs profiled are a mix of below-market debt funds, private equity vehicles, and real estate investment trusts. Collectively, these efforts have raised more than $2 billion and acquired, rehabilitated, and developed nearly 60,000 units—with many raising additional capital to expand their activities.
Preserving Multifamily Workforce and Affordable Housing, published in collaboration with NeighborWorks America, was written by Stockton Williams, executive director of the Terwilliger Center. “As the country continues to grapple with the worst housing crisis for lower- and middle-income renters it has ever known, the private sector and community-based institutions must play an ever-greater role in ensuring that existing affordable properties remain available to the many who need them, while doing what they can to produce new units where possible,” Williams said. “These financing vehicles show what is possible and suggest opportunities for further progress.”
“This report highlights some very important and promising new approaches for attracting new and increased capital to affordable housing production and preservation,” said Weech.
The three types of financing vehicles are as follows:
Below-market debt funds, which are established by partnerships of private, public, and philanthropic institutions to provide affordable housing developers with low-cost loans. Programs profiled are the Bay Area Transit-Oriented Affordable Housing Fund in San Francisco; the Denver Regional Transit-Oriented Development Fund; the New Generation Fund in Los Angeles; and the New York City Acquisition Fund.
Private equity vehicles, which are entities that use private capital to acquire and rehabilitate multifamily workforce and affordable housing properties, delivering satisfactory returns to investors while maintaining their affordability. Programs profiled are Avanath Capital Management, the Enterprise Multifamily Opportunity Fund, PNC Affordable Rental Housing Preservation Fund 1 LLC (operated by PNC Bank); Rose Affordable Housing Preservation Fund LLC (operated by the Jonathan Rose Companies); Turner Multifamily Impact Fund; and Urban Strategy America Fund.
Real estate investment trusts (REITs), an investment vehicle created by the U.S. Congress to provide a means for small-scale investors to invest in income-producing real estate. REIT activity includes property acquisition and development, debt and equity investments, and a mix of both. The REITs profiled—Community Development Trust and Housing Partnership Equity Trust—focus specifically on affordable multifamily developments.
The report points out that investments in the preservation of existing workforce and affordable housing result in higher financial yields than investing in new construction; it cites research from the U.S. Department of Housing and Urban Development indicating that preservation costs 30 percent to 50 percent less than developing new units. It notes that preservation is also more beneficial from a social standpoint, since it contributes to neighborhood and community stability.
“The workforce and affordable housing segment of the market now offers an array of investment opportunities for investors of all types—from financial institutions and pension funds to family offices to high-net-worth individuals,” Williams said. “It’s an option worthy of consideration by those who are interested in earning a competitive return and making a positive difference in their communities. These investment vehicles are a scalable solution to an important aspect of the affordable housing crisis.”