Affordable housing properties have healthy operating fundamentals with strong occupancy and stable cash flow. What’s more, a national affordable housing shortage has created tremendous demand for more units. The fundamentals have generated remarkable investor appetite for affordable housing — but there is a downside: High interest rates and a challenging capital markets environment have made it increasingly difficult to secure funding and close affordable housing deals.
“Despite the strong demand for these investments, difficult financial execution has hindered market activity,” said Robert Likes, president KeyBank, Community Development Lending & Investment. “I’ve worked in the banking side of commercial real estate for 34 years, and I’ve never seen anything like the tug of war that continues to grip the affordable housing market.”
Despite the challenging market dynamics, KeyBank’s affordable housing team continues to grow loan volumes year over year. We talked with Likes about how he and his team are accomplishing that, what obstacles the market is still grappling with, and what lies ahead.
Balancing Headwinds and Tailwinds
For the past two years, affordable housing investment activity has trended down, but not due to a lack of demand. Affordable housing is among the best performing asset classes in commercial real estate. The sector offers investors a combination of immense demand, unmet supply, and high barriers to new construction. It is no surprise that an increasing number of investors and developers—from small nonprofits and regional companies to REITs and institutional investors—want exposure to affordable housing to take advantage of these attractive market fundamentals.
“Investors see affordable housing as a defensive play in an uncertain economic environment,” said Likes. “In fact, KeyBank’s affordable housing deals are currently getting leased up at proforma rents and accelerated occupancy timelines.”
The NRP Group’s Via Sana Apartments in Cleveland is a model example of KeyBank’s work and the tremendous tenant demand for affordable housing. Located near The MetroHealth System, the 72-unit property opened in the summer 2022, and it is fully occupied with a waitlist of over 300 potential renters.
“Unfortunately, these kinds of deals are still rare, as high interest rates continue to impede deal activity,” said Likes.
Interest rates are the single biggest headwind for affordable investors. The 10-Year Treasury, which is an earmark for many affordable housing deals, climbed above 5% last year and currently hovers around 4.5%. In this rate and capital environment, investors have struggled to secure sufficient capital to meet their investment needs.
“Affordable housing deals aren’t easy to begin with, and high interest rates are an additional obstacle to an already challenging market complicated by market volatility, reduced market rents and rising insurance costs,” explained Likes. “Together, these headwinds have made it difficult to get deals done.”
Renewed stability over the rest of 2024 and beyond could provide a lifeline to affordable housing investors. Interest rate increases have stalled for the past six months, while construction costs have stabilized.
“This stability will prove critical to putting an affordable deal together. In the second half of the year, we expect to see more affordable housing acquisitions,” added Likes. “We should see more developments get off the ground and more states be able to fill funding gaps that have been caused by the rising rates and construction costs.”
Uncovering the best execution for clients
As activity picks up, Likes said he and his team are prepared to support clients and communities as volume ramps up.
“We offer a vertically integrated platform with a comprehensive suite of tools and experienced professionals ready to meet the capital needs of our clients,” added Likes. “And we have a long track record of success in getting projects off the ground.”
“We take great pride in those accomplishments and want to do as much as we can to continue helping our clients and communities with affordable housing,” said Likes. “Our mission is to create positive impact in people’s lives and there’s no better way to do that than to help meet this critical need.”
KeyBank’s holistic, integrated platform has been crucial to its success. The team leverages a variety of solutions and products—both debt and equity from tax credits to bridge loans and lines of credit to construction loans, mortgage banking options, private placements, and government-sponsored entities—to provide the best execution for clients.
Learn more about how KeyBank can find the right solution for you.
