Amid Rising Costs And Demand, Private Equity, Institutions Investing In Affordable Housing
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New York City’s affordable housing developers are increasingly seeking out institutional investors and pouring in more of their own equity to get affordable deals across the line.
The United States is in the grip of a housing crisis that has forced millions of renters to spend sizable chunks of their income on places to live.
In New York City, where the average Manhattan apartment rents for more than $3K a month, the problem is particularly acute. Mayor Bill de Blasio has set an ambitious target of creating 300,000 affordable units over a decade, with 5% set aside for the homeless, a goal the city says it is on pace to reach by 2026.
But the need for affordable housing remains critical. Between 2000 and 2016, the number of jobs in the city went up by nearly 17%, but the housing units went up by just 8%, according to NYU Furman Center.
Meanwhile land prices in the city have spiraled — though they have backed down from their peak in 2015 — and construction costs are the highest in the world.
Developers and industry players told Bisnow to make affordable housing deals work, it is now necessary to look further afield for financing.
“We are seeing shift to the hybrid approach — you have real equity that is coming in that is looking for a return,” said BRP Cos. Director Andy Cohen, who will be speaking at Bisnow’s New York City Affordable Housing and Community Development event Oct. 16. “For a large project, you are looking at institutional investors: funds, bank funds, insurance companies, other equity funds.”
His firm is co-developing La Central, a massive complex set to bring around 1,000 housing units to the South Bronx, alongside Hudson Cos., ELH Management, Kretchmer Cos. and Breaking Ground.
BRP is also developing a 669-unit complex in Jamaica, Queens, in partnership with Goldman Sachs, known as the Crossing at Jamaica Station. The firm has also reportedly partnered with Jeff Sutton to build 300 rent-regulated units at 90-02 168th St. in Manhattan.
Cohen said traditionally higher-yield investors are increasingly seeing the value in affordable housing, although the process can be more complicated and it takes extra time to make them feel comfortable with the city’s approvals process and debt sources.
The demand is so great, Cohen said, which means it is a safe bet. At one of BRP’s projects, the company received more than 20,000 applications for 240 apartments through the affordable lottery process. Another project, with just 140 units, received over 40,000 applications.
“With luxury condos, the bottom could fall out …if you are building at $4K a foot and the economy takes a hit,” he said. "On an affordable deal or a mixed-income deal, there is always going to be demand for rental units that are priced between $1,500 and $3K a month.”
Ariel Property Advisors Executive Vice President Victor Sozio said a decade ago, the capital stack for Section 8 properties would be built largely on bond financing, tax credit, equity and deferred developer fees. But these days, there is real equity in the deals.
“The buyer pool is expanding tremendously where a lot of these properties are purchased with more traditional financing structures,” he said. “That is a result of investors taking notice of, not only the downside protection inherent in these deals, but the scalability of it … If you have a long-term approach, it can be a very attractive investment.”
Sozio was part of the team that brokered the $340M sale of the Savoy Park in Harlem to Fairstead Capital in 2016. The buyers reportedly secured a $238.9M Freddie Mac loan from the multifamily finance arm of Capital One to close the deal, and agreed to keep the 1,794-unit complex affordable until 2052.
He was also one of the brokers that brokered the sale of Polyclinic Apartments, an affordable housing complex at 341 West 50th St., to Standard Communities for $110M.
“It was purchased by a group that had real equity in it, but went out there and was able to secure very advantageous financing,” Sozio said. “I perceive that as a win-win for all; they got a trophy, affordable asset in prime Midtown West. And it was also preserved for a long time going forward.”
Camber Property Group Rick Gropper said developers may shy away from affordable housing because the financing can be complicated and take more time to put together.
But those that have the patience are figuring out ways to bring more private equity into the deals, reducing the reliance on tax exempt bonds. He said many of the deals his firm has closed over the past eight years included some form of conventional private equity.
“We are less reliant on tax-exempt bonds, which is the most scarce in the city,” he said. “[Having this form of equity] enables us to close more quickly, use less city subsidy and stretch resources further."
Camber Property Group's projects include The Hemlock & The Mulberry, two rental buildings in the Longwood neighborhood of The South Bronx, which it is developing with Property Resources Corp.
"Funds, high net worth investors, insurance companies, life companies are learning that you can earn a reasonable return in the affordable housing space, and you don’t have the same risk as with market-rate housing” Gropper said.
Hudson Cos. principal Aaron Koffman said private equity groups have even approached the firm to buy its buildings outright, which they have declined.
“I never thought 10 years ago there would be so much interest from private equity in affordable housing,” he said.
It is a good thing there is, because Koffman said affordable deals that used to take five sources of financing now require 10 different sources.
His firm is a co-developer at La Central in the Bronx and has 3,000 units in the pipeline in the city that has some type of affordability component.
To feel comfortable with the project, Hudson Cos. is putting more equity into its deals, and tailoring buildings to be competitive for pools of funding the firm would not have sought out in the past, like the Federal Home Loan Bank.
"There’s a gap in the underwriting. Filling the gap is the challenge, [but] it can be fun," Koffman said. "This is the world we live in now.”
Koffman, Cohen and Sozio will be speaking at Bisnow’s New York City Affordable Housing and Community Development event Oct. 16 at the New York Bar Association, 42 West 44th St.
CORRECTION, OCT. 8, 5:30 P.M. ET: The rendering of La Central is courtesy of BRP Cos., FXCollaborative, and MHG Architects. An earlier version misstated the firms responsible for the rendering. This story has been updated.