5 Ways To Make Affordable Housing Development Feasible
U.S. cities continue to swell in population. But for people looking to live in urban areas, limited affordable options are the new normal.
The U.S. needs an additional 4.6 million apartments to meet demand by 2030, the National Multifamily Housing Council and the National Apartment Association estimate. The U.S. Department of Housing and Urban Development defines affordability as housing for which the occupants pay no more than 30% of their household income on rent. But across all renter households, nearly half allocate more than 30% of their income toward housing.
Despite high demand, affordable housing inventory continues to decline while luxury development experiences oversupply across major markets. Discouraged by rising construction costs, land restraints and zoning regulations, developers favor market-rate housing. Apartment completions in the 150 largest U.S. cities increased to nearly 400,000 units in 2017, but luxury buildings accounted for almost 80% of the new supply in the current cycle.
“Recent developments in the tax credit arena have affected how developers are able to make new affordable housing projects viable,” Skender project executive Joe Pecoraro said. “The old formula just doesn’t work as well, if at all, in today’s new reality. Developers and their construction partners will have to explore new ways of financing deals and new ways of building to keep affordable housing deals cost-effective."
The push for more affordable development has led some developers to look beyond government incentives. From working with nonprofits to partnering with a contractor specializing in lean construction, here are five ways to make affordable housing more cost-effective.
Use Local Tax Incentives
At the federal level, Low Income Housing Tax Credits have become the primary option for developers looking to reduce their tax liabilities when investing in affordable housing. Since their inception in 1986, LIHTCs have been responsible for about 90% of all the affordable housing built in the U.S. and have provided more than 2.5 million affordable rental units.
Under the Tax Cuts and Jobs Act, which passed in December, the lowering of the corporate tax rate has made LIHTCs less effective for developers. The decrease in value is estimated to lead to at least 200,000 fewer units over the next decade. While the new federal budget for 2019 will increase the budget for competitive LIHTCs 12.5% over four years and add 29,000 units over the next decade, incentives have also emerged at the local and state level to help bridge the gap.
In Chicago, the existing affordable housing ordinance requires residential developments that receive city financial assistance or involve city-owned land to provide 10% of the units at affordable prices. Developers can also pay up to $225K into an affordable housing development fund to opt out of setting aside affordable units. Many choose the latter, which has prompted Chicago Mayor Rahm Emanuel to propose a pilot affordable development program along Milwaukee Avenue and the North Branch Industrial Corridor.
Developers building in those areas will be required to either devote 15% of their units to affordable rentals or build affordable units within 2 miles of the new building.
Work With A Nonprofit
Independent groups have also taken steps toward building up communities with a mix of affordable housing and local businesses. That is the mission of Preservation of Affordable Housing Chicago, a nonprofit group with expertise in financing, developing and managing affordable communities.
Skender worked with POAH Chicago as the general contractor to bring a 95K SF transit-oriented development to Chicago’s up-and-coming Woodlawn neighborhood. Woodlawn Station features a main building that contains 55 units and two additional buildings containing 12 and three units, respectively. This project replaces housing for 35 former Grove Parc Plaza residents and provides another 20 units for middle-income residents and 15 units of market-rate housing. The mixed-use project also supports local entrepreneurs by offering below-market rents and tenant improvement projects.
Skender also served as the general contractor on the Midtown Crossing Apartments, a 45K SF affordable housing development near downtown Des Plaines, Illinois. The 33-unit independent living facility is owned by Over the Rainbow Association, an Illinois nonprofit association that provides affordable, handicap-accessible housing solutions for people with physical disabilities.
Preserve Existing Affordable Housing
POAH also focuses on preserving existing affordable housing stock. In Woodlawn, the organization bought and renovated nearly two dozen vacant and abandoned buildings with the help of the city of Chicago and the Community Investment Corp.
Preservation can help maintain affordable housing inventory and is a more financially sustainable method of keeping with demand. Across the U.S., approximately 100,000 affordable housing units are built each year. But for every unit built, two are lost due to deterioration, abandonment or conversion to more expensive housing. Compared to building new projects, preservation allows developers to bypass high land costs and restrictive land use regulation, which lead to higher rents. New affordable housing can be double the cost of preservation. Renovating existing housing stock also helps maintain the architectural character of a neighborhood.
Already a popular method for building cost-effective manufactured housing and single-family homes, modular construction has started to make waves in multifamily construction to combat rising construction costs and delays. Because the construction of each unit occurs off-site at large production facilities, teams can focus on repeating the design pattern and simultaneous builds. Each unit is then stacked together like blocks on-site.
The process allows construction to be done up to 50% faster and eliminates wasted materials because manufacturers know exactly the quantity they need.
In Chinook, Oregon, the first modular multifamily affordable apartment project in the Northwest shaved five months off its 18-month construction timeline using modular design. It cost $190K/unit, and future projects using modular design could bring the cost down to $150K/unit.
Skender recently announced it will open an advanced manufacturing subsidiary, taking modular construction into the future by integrating the design, construction and manufacturing processes.
Optimize Construction Schedules And Costs
Modeled after manufacturing principles developed by Toyota, lean construction is a methodology for improving reliability in delivering construction projects by dramatically reducing waste and enhancing owner value, particularly on complex, fast projects. Working with a general contractor with experience in lean construction practices and optimizing schedules can help keep affordable housing projects on budget and affordable for future tenants.
Skender has become a pioneer of lean construction, with Executive Vice President and partner Afshan Barshan helping found the Lean Construction Institute Chicago Community of Practice. Lean construction projects are three times more likely to be completed ahead of schedule than conventional projects, and twice as likely to be completed under budget.
To learn more about this Bisnow content partner, click here.