Are Real Estate Developers the Answer to Affordable Housing Shortage?
Not all real estate developers are focused on big projects guaranteed to generate millions. Some are chipping away at the country’s affordable housing problem. We heard about their efforts at Bisnow's Multifamily Annual Conference in DC last week.
Washington vowed earlier this year to pour $100M into affordable housing each year until 2019. The program will create 1,000 new units and preserve 7,500 units in the city, Mayor Muriel Bowser says, but she also wants the private sector to step up.
In front of a crowd of over 500, the mayor said she’s incredibly proud of the economic development happening all over the city, but she’s also keenly aware of the pressure it’s putting on housing prices. For a city growing by 800 people a month, there’s still a wide mix of prosperity spanning all eight wards.
The Housing Production Fund raises $50M a year from tax revenue and another $50M comes from general funds. Developers use the funds for new affordable housing or to make improvements to existing units. She also passed a DC law that requires new public land developments to include 30% below market-rate units or 20% if the project is not near a Metro stop.
She urges the private sector to help come up with more ideas, especially preserving and renovating the 8,000 public housing units in varying stages of disrepair.
The obvious question for developers is how to sustain a viable business in affordable housing. Boston Capital CEO Jack Manning (right) explained how his firm does it, in a chat with Nixon Peabody DC managing partner Jeff Lesk. Boston Capital is responsible for pushing Congress in 1986 to approve the Low-Income Housing Tax Credit.
Since its creation, the program has created 2.5 million new apartment units for low-income tenants. Boston Capital will develop 80,000 affordable housing units this year, slightly down from last year’s 90,000. (Blame rising construction costs.)
Jack says the firm’s focus on multifamily units and affordable housing has been such a big success because the need for affordable housing has gone up. No matter an economic boom or bust, people still need affordable places to live. A recent Harvard study estimates a need for 5 million more affordable housing units in the US.
But, Jack admits that what has led to his success is also a worrisome trend. “Creating 80,000 units with tax credits, that’s only 1.6% of the need. It’s barely scratching the surface.”
That’s why we need more Bobby Turners. The Turner Impact Capital CEO colorfully described how he “pivoted” a career creating great wealth to working on real estate projects that have a social impact. One way is tackling tenant turnover and increasing workforce housing. He’s taking a handful of vacant apartment units and offering them for free to teachers, police or any other low-wage but high-impact worker, in return for tutoring in the building or parking a police car in front of the building. “You can change the relationship between the landlord and tenant," Bobby says, "and create a private rentership that increases the duration of tenancy and enriches your communities.”
Since capital markets are making a comeback, financing options for affordable housing projects have increased, according to our affordable housing panel. Chase Community Development Banking executive director Brett MacLeod (holding the mic) says he’s seeing more tax-exempt bond transactions because rates are at historical lows.
Other tools affordable housing developers are using: cash collateralized bonds; congressionally allocated HOME Funds, which are growing again after shrinking from $1B a year to $60M; and other state-funded initiatives that folks like Enterprise Homes president Chickie Grayson (in red) had to rely on as HOME funds dried up. Chickie and Brett were joined by HUD program administration office director Priya Jayachandran and Nixon Peabody affordable housing practice leader Stephen Wallace.
Philanthropy is also filling gaps in bond transactions, says Columbia Residential chief development officer Ray Kuniaksky. His firm is seeing several of its affordable housing projects hit their 15th year, which means limited partners are starting to exit. In order to take control, Columbia Residential is using the bond financing structure as a mechanism to preserve and renovate affordable housing units. That strategy is a little more challenging with new construction because the gaps are so large.
With increasing financing options, HUD is seeing its affordable housing funding stabilize at a comfortable $11B, Priya says. At its peak, multifamily generated $18B worth of business. Now the agency’s role is a countercyclical source of capital during dips in the economy. The agency is also focusing on underserved parts of the market, where capital markets have been reluctant to go. HUD has an affinity for Section 8 programs and conventional lenders have become more comfortable in those deals. But they still tend to be clustered in urban markets.
The agency is also working on shrinking the processing time for funding requests. During the '08-'09 peak, it could take as long as two years for approval. Market-rate apartments could go from groundbreaking to ribbon-cutting in less time.