Institutional Investors Funneling Funds Into Affordable Housing To Hit ESG Targets

As the nation's affordable housing crisis worsens, institutional investors and private companies are stepping in with their capital, propelled by the growing demand for environmental, social and governance investing.

Cecil Phillips, the CEO of developer Place Properties, said at a Bisnow multifamily conference last week that a demographic shift is occurring at institutional investment firms with younger leaders with more awareness of ESG. At the same time, institutional investors are still expecting market returns for investments into projects that, on their own, wouldn't provide that guarantee. 

“They see their capital needs to do well and good,” Phillips said, adding that ESG has become “more than the flavor of the month." 

“[Institutions] are making investments in our company and our projects, expecting to make a market rate of return," he added. "But also, if we don't provide a social good — in this case, affordable shelter — they're not going to be interested in it."

The easiest way to provide returns in exchange for new affordable product is to reduce construction costs, Phillips said, especially through modular construction, which can be upward of 20% less than traditional construction. Place Properties has launched an affiliate company called Impact Housing, which develops modular single-family housing geared toward lower-income buyers. Place purchased a modular construction plant in March and has so far delivered 100 homes, and has contracts to produce 50 houses per month starting in January, Phillips told Bisnow in an email after the event.

Since the social strife during the summer of 2020, corporations have increased their funding of ESG causes. Overall, 72% of respondents to the Royal Bank of Canada Global Asset Management's Responsible Investment Survey 2021 said ESG principles are used when making investment decisions.

This year alone, New York Life, the largest mutual life insurer in the U.S., donated $50M to the Enterprise Community Loan Fund to improve access to affordable and low- and moderate-income housing. Regions Bank established a $126M tax credit equity fund in August for affordable housing in the Northeast, Southeast and Midwest. Blackstone Real Estate Income Trust purchased AIG's interest in an affordable housing portfolio in the U.S. For $5.1B.

But along with the new sources of private capital, developers still have to perform "capital stack gymnastics" to fund affordable housing, TriStar Real Estate Investment founder Margaret Stagmeier said. Stagmeier's firm renovates older apartment complexes to keep them affordable to low-income households and creates after-school programs for resident children in conjunction with a local public school.

“It's hard to get traditional banks to look at blighted apartment communities with very high crime near failing schools. So we got creative," Stagmeier said of a 2017 housing project in Atlanta, where the firm had to raise $12M.  

Stagmeier said it got a bank loan, but also financed the project with federal tax credits, a $1M loan from the Atlanta Housing Opportunity Bond Program, $1.3M from a foundation and nearly $3M TriStar itself raised through a social impact fund. That recipe allowed TriStar to keep its cost of capital to 3.7% as well as hold rents to $711 per month, affordable to families making 45% of the area's median income. 

Private investors still seeking market returns, though, threatens the affordability status of projects, she said.

“In capital stack gymnastics, for every percentage you pay your capital, we had to raise our rents about $50 a month," she said.

The need for affordable housing in the U.S. is difficult to overstate, experts say. While 5.2 million U.S. households are on federal rental assistance, 4 in 10 low-income people in the U.S. are either homeless or pay over half a household's income for rent and other housing-related costs, according to the Center on Budget and Policy Priorities.

“There is not enough public money available to generate the capital sufficient to provide affordable housing for the needy,” Phillips said, adding that 7.6 million affordable housing units are currently needed in the U.S.

Urban Oasis Development principal Joel Dixon said affordable developers can offset the capital returns from institutional lenders by building in emerging markets or investing in value-add deals.

“There are new capital partners that are coming in,” Dixon said, whose firm develops and offers financial assistance for affordable housing in Atlanta. "On the private side, we're talking to Goldman Sachs, we're talking to all these other groups who are starting to realize the returns can be there because even though the types of projects we're doing are high impact, they're not always low return. We just need to get the money to get it to that point.”

Even with the help, both from municipalities and from private investors, adding to the affordable housing stock remains complicated for developers, especially as construction costs remain the biggest stumbling block for developers to provide affordable housing, RangeWater Executive Managing Director Brian Oates said.

“It's a really, really challenging topic,” Oates said. "There's no great answer, quite honestly."