Barings’ Tubian sees lower rates, potential tax credit legislation as multifamily game changers

Lower interest rates and the potential for the passage of tax credits promoting the development of affordable housing could be significant for the sector.

The US multifamily sector could see positive headwinds from two factors in the coming year – the possibility of lower interest rates and the potential for new federal legislation, which would provide tax credits for middle-income housing, according to Daron Tubian, managing director and head of affordable housing investments for debt and equity at Barings.

The benchmark 10-year Treasury rate was at about 4.15 percent as of December 11, a level that represents a decline of about 35-40 basis points over the past few weeks.

“There is now a level of optimism in terms of where interest rates are,” Tubian said. “If rates could stay in the high-3 percent or low-4 percent range, it could be accretive to helping additional projects get financing.”

A potentially larger impact, however, could stem from legislation introduced last week in Congress, which is proposing a new program that would provide tax credits for the development of workforce housing. The bipartisan legislation, introduced by Senators Ron Wyden (D-OR) and Dan Sullivan (R-AK) and Representatives Jimmy Panetta (D-CA-19) and Mike Carey (R-OH-15) is targeted toward middle income families whose income is too high to allow them to qualify for low-income housing.

The legislation, which the bill’s sponsors say could finance as many as 340,000 affordable rental units, would be similar to the existing Low Income Housing Tax Credit program. It would be administered on a state basis, with each state’s housing finance agencies allocating 15-year tax credits to developers. The legislation would include a 15-year compliance period and a 30-year extended commitment.

“If the new legislation does become a program, it would cater to middle-income households that are overqualified in income to live in a LIHTC development but are underqualified to be in a conventional market-rate building,” Tubian said. “It could play a positive role in overall housing production, and in terms of the level of activity, we may see in the middle income-housing space, catering to families earning between 60 percent to 100 percent of area median income.”

The LIHTC program, established in 1986, has financed more than two million apartments and has been key for the creation of low-income housing.  “LIHTC has been the most successful program for the production of affordable housing units in US history”.

“A [workforce housing tax credit] program would mirror LIHTC and to the extent that it does that and is successful, it will be an important game changer,” Tubian said.

Outlook: Activity uptick

While the past year has been very challenging for developers, lenders and investors, Tubian is starting to see an uptick in activity.

Some of the key challenges have been around the amount of construction and permanent financing developers can secure.

“Construction lenders have had to go back and ask their developers to infuse more equity to be able to cover the gap between what they capitalized for construction interest payments going into a project 12 to 18 months ago and the rising rates this year,” Tubian said.

“It is a difficult situation for lenders to go back and ask borrowers for more equity in order to balance out their budget. For some developers with multiple projects going on concurrently, they would need to find ways to do this without imposing significant pressure on their balance sheet and their available liquidity. At the same time, on new projects their inability to size permanent loans to the levels they require due to higher interest rates has only made matters more difficult this year.”

That said, Tubian anticipates a more active 2024: “I believe there will be more transaction volume and while there are other factors, both geopolitical and economic, which could affect the market, the forecasted pipeline right now seems strong.”