The multi-family development boom over the last several years has thrust affordable housing to the forefront of housing market discussions. According to the “State of the Nation’s Housing 2016” report by Harvard’s Joint Center for Housing Studies, the number of individuals who pay more than fifty percent of their income for rental housing went from 2.1 million households in 2008 to a record 11.4 million households in 2014. As this trend of new, expensive and first-class multi-family and single-family housing developments in urban cores has increased, America’s multifamily housing inventory for lower- and middle-income renters is slowly disappearing.
Some investors have attempted to seize the opportunity presented by the hole in the affordable housing market by attempting to create projects that address this need. Several REITs have been formed in the past few years to specifically address this growing gap in the market, including NexPoint Residential Trust, which went public in April 2015 and focuses on class-B garden apartments in markets in the Southeast and Southwest, and REIT Community Development Trust, a private REIT that seeks to provide long-term capital for the preservation and development of affordable rental housing. Additionally, large multi-family REITs like AvalonBay Communities, Inc. have also focused, in addition to its higher-end developments, on mixed-income communities as part of three brands of market-rate apartments, including “eaves,” a value-priced brand. However, even AvalonBay has struggled to find profitability in these market-rate brands, which only further demonstrates the growing problem with finding an affordable housing solution.
Lenders, cognizant of the challenges facing affordable housing, have also begun to create programs to assist with financing. Recently, it was announced that Freddie Mac would make up to $1 billion dollars available through loans or guarantees to midsize landlords buying single-family homes to be used as affordable-housing rentals. Many midsized landlords have had difficulty finding financing sources because of their limited operating history and the fear of most banks that the homes do not serve as adequate collateral for the loans. Freddie Mac is hoping that by guaranteeing loans from these types of landlords that it will encourage institutional banks to provide more financing.
While there are many sides to the affordable housing debate, perhaps one of the biggest current questions is whether the new White House administration will do anything to address the affordable housing problem. Indeed, as the as the Wall Street Journal recently reported, the current uncertainty around the potential tax reform is actually threatening funding for affordable housing deals. A number of the investors who have recently focused on this housing segment have stalled due to the possibility that a lower corporate tax rate could lower the value of tax credits used to fund these affordable housing projects.
It remains to be seen what the administration will do with respect to affordable housing, and whether they will suggest anything disruptive to the market, like a national affordability housing requirement. However, the affordable housing problem does not appear to be going away anytime soon, and any proposed solution will likely have an impact on both public and private REITs.
