Developers look to mixed-income projects to expand affordable housing

Mixed-use properties and public-private partnerships are also new structures that market participants are eyeing.

Lending and investment activity in the coming years will be driven by a widespread affordability crisis, with market participants looking at new structures – particularly mixed-income housing and public-private partners – to create more housing that is affordable for everyone.

“The capital markets for affordable housing and market-rate housing are fairly robust and there is a well-understood playbook for pure, affordable low-income housing and market-rate housing,” says Alicia Glen, founder and managing principal of New York-based development company MSquared. “We really think that combining these two asset classes presents a unique opportunity to contribute toward solving the housing crisis.”

With this investment thesis, MSquared’s strategy has focused on combining these two types of residents, with a further overlay of proximity to public transportation and other services to create mixed-income, mixed-use communities – in the same building, if possible. “These are all factors which have a significant impact on affordability,” Glen adds.

As the multifamily market evolves, so do its investors. “We need different kinds of investors, who understand the connection between affordability, sustainability and diversity of income and people – both in the buildings themselves, and in this field,” Glen notes.

“Our strategy of leveraging public sector housing and urban revitalization programs to drive multiple social impacts also offers a very interesting financial proposition for investors. If we want to break the status quo, we need to have different players at the table with myriad skill sets and perspectives. We need to understand the difference between policy and finance and how we use both to put these deals together.”

“We need different kinds of investors, who understand the connection between affordability, sustainability and diversity of income”

Alicia Glen

Los Angeles-based Primestor Development, a multifamily developer focused on building mixed-use workforce and affordable housing in West Coast markets, late last year held a topping out ceremony for a seven-story Los Angeles development it is working on with partners that include Bridge Housing, Los Angeles County and the Coalition for Responsible Community Development.

Evermont, the mixed-use property in South Los Angeles, is a public-private partnership expected complete in Q3 2024. It will comprise 180 affordable apartments, including a concentration in senior housing, a Target and additional retail and commercial space. It is also adjacent to a transit hub, says Primestor CEO Arturo Sneider.

The firm, which has focused on developments in primarily Latino sub-markets for more than 32 years, concentrates on what it believes is the disconnect between the demographic reality of Latino neighborhoods and populations in the US and the real estate and business environment related to those communities.

“We are a firm that focuses on urban infill development and redevelopment in very dense areas where others historically have not been willing to invest. Our biggest focus is around consensus planning and community building strategies,” Sneider adds.

Primestor has a hefty pipeline of about a half-billion dollars and is looking forward to moving ahead. “It helps us that we have long-standing relationships with lenders and have done a lot of repeat business because they know our style and underwriting criteria. We continue to find that we can do either construction or permanent financing and will be testing the market soon on a couple of larger projects,” he says.

While mixed-use and mixed-income developments have been rising in urban markets, single-family residential and build-to-rent projects have been taking center stage in more suburban markets, according to a December report from Berkadia.

It sees the growth in these projects as the next step in the evolution of the multifamily sector. Mackinley Robinson, a senior director at Berkadia Commercial Mortgage, notes the SFR space is the fastest-growing component of the US housing market.

Scaling SFR and BTR

Berkadia cited a 3.5 million gap in housing units as well as the increased cost of buying a home as key drivers for investors, with end-users wanting to rent because of the ability to have neighborhood optionality and low-density living. The firm has increased its focus on the sector, putting into place a dedicated team.

“Over the past three to four years, we have seen notable clients move into this space or dedicate a portion of their investing into this space. There are more investors, both public and private funds entering the space every day,” Robinson says.

There is a primary delineation between how terminology is typically used between BTR and SFR that is important to understand, Robinson says. The BTR sector is comprised of purpose-built communities that are typically contiguous and adjacent. “This is as opposed to the scattered site-SFR space, where investors are buying sections of a subdivision and lumping them together, or going in and buying homes by zip code,” he adds.

The largest lenders on permanent debt in BTR are Fannie Mae and Freddie Mac, with the ability of HUD to complete loans as well subject to more specifications concerning building density and accessibility. “On the scattered site type of projects, we are seeing primarily the large money center banks continue to serve that market,” Robinson says.

These projects fit in a middle ground between multifamily and single-family. While there is not a strong overlap, there are some synergies. “To get a single-family mortgage is completely different from getting a mortgage for five units, the technical delineation of residential and commercial real estate,” Robinson notes. “On the scattered site side of the business, we are pulling from a single-family world and modifying it to work for a commercial use. On BTR, we are pulling it from a traditional multifamily world. Either way, we have to modify and adapt, and it involves a very hands-on and active approach to the capitalization.”

The BTR sector has not been insulated from the macro-economic impact. Robinson notes debt and equity are more restrictive and selective.

“Lenders are looking for deals that check more boxes with stronger clients. It has been harder to source and find capital to put into projects across the board,” Robinson says. “That said, two or three years ago, there were one or two players in the SFR/BTR space, and now we are seeing an average of one a month enter the space as a lender or equity partner. In general, groups are becoming more comfortable with the product type as they see more data demonstrating benefits that otherwise complement their portfolios.”

As the commercial real estate market gears up for its next cycle, Glen believes there will be more focus on mixed-income housing and projects and an increase in interest from lenders in this sector.

“Beginning to figure out how to leverage market rate development and private sources of capital is also becoming increasingly interesting to affordable housing developers. We can source deals through the affordable housing and market rate world and the public sector, which is increasingly realizing that a segmented approach is not producing the best outcomes,” Glen says.