Before the covid-19 pandemic, it was a truth universally acknowledged that there was an acute shortage of attainable housing in the US. As the pandemic continues, this shortage has become even more apparent.
According to data from Harvard University’s 2022 State of the Nation’s Housing Report, 30 percent of all US households had unaffordable rents or mortgage payments, when analyzed in conjunction with monthly household incomes. Additionally, 1 in 8 householders were spending more than half of their incomes on housing costs. The report also tracked a roughly 20.6 percent year-year increase in home prices from March 2021 to March 2022 and rent increases of 12 percent during the same period.
“There was a worsening of the national housing crisis in 2021, and the pandemic only exacerbated the problem for people earning lower incomes,” says Vince Toye, head of community development banking and agency lending at New York-based JPMorgan Chase.
The state of the post-pandemic economic environment means that while similar housing needs exist, the means of developers and investors to achieve them are more constrained. Toye says the interest rate and inflationary pressures potentially accompanying a recessionary environment would likely require greater patience and creativity for transactions financing affordable housing to close.
“We’re seeing many transactions with substantial financing gaps to fill as they were ready to close, and we have been working with developers to assist to the extent that we can. There may also be more sources and types of financing involved,” Toye says.
One longstanding problem lenders and multifamily developers have had to contend with has been NIMBYism (‘not in my back yard’), a pressure which has long prevented new construction of multifamily housing.
But this is starting to change as there is greater realization that the attainable housing shortage is larger than a single community or region, says Stephanie Wiggins, managing director and head of production for agency lending at Madison, New Jersey-based PGIM Real Estate. A spotlight on the widening wealth gap in the US which has often made the housing crisis an issue for voters across all regions, she adds.
Despite occasional resident opposition, Wiggins says the persistent need for addressing the affordable housing crisis is barreling through NIMBYism and other obstacles as communities wake up to the dire need for units. Both Fannie Mae and Freddie Mac have expanded their affordable housing loan options, which has opened more avenues for lenders steeped in the space.
Fannie Mae, for example, has recently expanded its list of properties eligible for pricing discounts under its Healthy Housing Rewards Enhanced Resident Service program. Freddie Mac similarly has enhanced the list of projects and properties eligible for its non-low-income housing tax credit (LITHC) forward program to widen the scope of what is considered affordable.
Like its New Jersey peer, New York-based investment manager Nuveen has seen the affordable housing gap most at the tenant level, where the pace of annual wage increases has not been enough to best support working families dealing with the brunt of the issue.
Pamela West, managing director overseeing affordable housing portfolio management at Nuveen’s real asset group, says it is critically important for lenders to continue their investments in affordable housing projects because of those widening economic gaps.
“They need to think about tightening spreads, how to make this a little bit more attractive given where the cap rate environment is and where these assets are trading, because you can’t just swipe all the juice out of the deal through lending,” West says. “It takes away from other things like services and other expenses that are going way up. Insurance is going way up on affordable housing, and all these states and cities are grappling with how to handle taxes.”
Carving out deals now requires more sensitivity to how the math truly works on affordable housing loans, West says. In her view, most lenders have shifted some products because of the current environment and pivoted slightly from market-rate housing. “That’s super positive and we need more of that capital in there,” West says. “But it has to make sense on the transaction.”
Lending on affordable housing opportunities in major metropolitan areas such as New York City has been made harder in recent months with legislative stalls on renewing some tax incentives historically used to encourage new unit creation.
Specifically, New York’s 421a tax subsidy – which contained requirements around affordable unit creation to qualify for its use – was allowed to lapse at the state level in June, in turn subverting momentum and interest from local developers and managers alike from pursuing new affordable housing project opportunities.
“The removal of 421a has and will continue to create fewer projects that are built for rental in the core markets in New York City where I really believe the politicians want there to be more apartments,” says Ben Tapper, New York-based director of Lee & Associates national investment services group.
Brandon Polakoff, principal and executive director of tri-state investment sales at Toronto-based Avison Young, says the lack of 421a – seen even before when it was allowed to lapse from the end of 2014 through April 2016 – makes deals nearly impossible to underwrite from a lender’s perspective.
“The challenge is developers will build those rentals and then the taxes are typically – I know it sounds crazy – around 40 percent of EGI on a new construction building,” Polakoff says. “When that happens, the deal just doesn’t make sense. The price gap is too large to bridge between the developer’s required returns and the sale price the land owner wants.”
Bank, insurer priorities
While Nuveen, PGIM Real Estate and JPMorgan Chase are not the only financiers trying to drive more affordable housing lending momentum, their strategies each offer insight into maintaining a stable practice to stymie disruption to the US’s supply of affordable units.
JPMorgan has set aside $14 billion for new loans, equity investments and other funding efforts to create and preserve 100,000 affordable rental units as part of the company’s five-year, $30 billion Racial Equity Commitment announced in October 2020.
Atop its own remit of preservation and creation opportunities, PGIM Real Estate is seeing more requests to refinance existing tax credit deals, because the lack of bond cap in many states makes re-syndication difficult, according to Wiggins. Though acquisitions have slowed because of the increase in interest rates over the course of 2022 to combat inflation, Wiggins says PGIM expects activity to pick up again.
“We are seeing more favorable terms in affordable versus your garden variety, market-rate housing and again, it’s good business,” Wiggins says.
West says Nuveen’s continued investment in affordable housing is a win-win for itself as a lender and to clients seeking favorable returns, particularly when supply can keep pace with demand.
“There’s this conundrum of needing more mixed income housing, but we’re so far behind on supply for affordable housing that we have to figure out what that balance is,” she says. “What I am pushing for over the next year, and what I am interested in following for sure, is zoning, tax subsidies provided in states and policy around housing.”