The multifamily market exploded in 2021 with record-high values and deal volume, as investors chased properties both large and small. Affordable housing properties are also enjoying booming investment.

“Years ago you would have never purchased an affordable housing asset at a 5 cap rate, a 4 cap rate,” WinnCos. CEO Gilbert Winn said last week in Boston during Bisnow’s Future of New England Multifamily event. “We’re occasionally selling assets at these much greater valuations than we ever have.”

Affordable units, ranging from workforce housing where rents are approximately 80% of an average median income, to deeply affordable housing where rents are as low as 30% of AMI, saw steady cash flows during the pandemic, experts said. In Boston, tenants in workforce housing were often essential workers and paid rent, Boston-based Small Property Owners Association President Allison Drescher told Bisnow in September. At the same time, the Boston Housing Authority had an eviction rate and turnover that was characterized as low by a BHA spokesman.

Beyond Boston, other affordable housing experts identified the same trend. The consistent cash flows have attracted investors to the limited supply of affordable housing nationwide, Jonathan F.P. Rose of New York-based Jonathan Rose Cos. told RE Journals last month. Cap rate compression has caused significant volatility in acquisition prices for affordable assets, Arbor Realty Trust Managing Director for Affordable Housing Arthanais Williams told NAREIT in August.

The nation has a shortage of 6.8 million homes for low-income renters, or 37 affordable units for every 100 extremely low-income renters nationwide, The National Low Income Housing Coalition reported in March. The daunting supply and demand delta is the cause for rising prices for luxury and smaller property assets in Boston, where investors are pricing out affordable housing developers for scarce assets and even scarcer developable sites.

“The cost of land has gone through the roof,” The Mount Vernon Co. founder and Chairman Bruce Percelay said. “Life sciences is paying perhaps twice or three times per acre [what] multifamily could afford.”

Further driving up asset prices are construction material and labor challenges as well as the difficult permitting of multifamily projects in suburbs.

“We try to avoid situations where we’re building or buying affordable housing in communities that actively resist it,” said Alexander Finigan, senior acquisitions manager at the Preservation of Affordable Housing.

Inflation is also going to hurt multifamily developers and landlords, Winn said. The affordable housing developer said water costs are up 9% across the company’s 100,000-unit portfolio while payroll has spiked 8% since last year.

And in Massachusetts, taxes make the math all the more difficult, Marcus Partners co-Chief Investment Officer Ryan McDonough said.

“We’re in other markets; those are markets where it’s formulaic, much easier to underwrite,” he said. “Underwriting taxes in Massachusetts is scary.”

Developers like WinnCos. have found a model in planning affordable housing projects in which they’ll replace affordable homes on a 1-to-1 ratio and add market-rate housing to the community. WinnCos. is doing just that at the Mary Ellen McCormack development in Boston, developing 1,370 affordable housing units alongside 600 new market-rate units to reduce the public subsidies needed for the affordable funding.

“That’s a model that I think works. The math does not work without significant state subsidies,” McDonough said. “I think that the type of project going forward is going to make more sense.”