KeyBank Community Development Lending & Investment provided a $200 million construction loan to Conifer Realty and Community Preservation Partners for the rehab of Andrews Terrace in Rochester, New York.
Community Preservation Partners KeyBank Community Development Lending & Investment provided a $200 million construction loan to Conifer Realty and Community Preservation Partners for the rehab of Andrews Terrace in Rochester, New York.

Top affordable housing lenders are optimistic this year will be better than 2023.

Rising interest rates, construction costs, and operating costs all strained the budgets of affordable housing projects last year. Uncertainty about the future made it difficult to adapt existing plans or make new ones.

Developments under construction struggled to stay on budget. Planned developments struggled to find construction loans. Completed developments struggled to close permanent loans. And potential buyers struggled to come to agreement with sellers on the right price for existing affordable housing properties and development sites.

Soft financing and some rigid program deadlines helped make deals happen in 2023. Now developers face many of the same challenges again in 2024.

“We’re still dealing with the same exact costs we were dealing with last year,” says Robert Likes, national manager of KeyBank Community Development Lending & Investment.

But these costs are no longer rising as quickly or unpredictably. Top affordable housing lenders hope that more stability will help them make more deals to finance affordable housing.

“There’s optimism that this year is going to be better than last,” says Jim Flinn, vice chairman of the debt and structured finance team at CBRE Affordable Housing.

Lending Volume Down in 2023

In 2023, Affordable Housing Finance’s Top 25 affordable housing lenders provided more than $55.7 billion in permanent and construction loans to developments that serve households up to 80% of the area median income (AMI). That’s a drop from the more than $64.6 billion in loans provided by 2022’s top lender list.

Citi Community Capital retained its spot at the top of the list. It lent nearly $6.5 billion to affordable housing properties last year, just slightly above the $6.3 billion in 2022.

KeyBank, Bank of America, JPMorgan Chase, and Merchants Capital followed, with lending volumes between nearly $6.1 billion and $4.1 billion. Wells Fargo; Berkadia; U.S. Bank; JLL; and Ready Capital Affordable Multifamily, formerly known as Red Stone Tax Exempt Funding, rounded out the top 10.

Top 25 Affordable Housing Lenders of 2023

Company 2023 ($ in millions) 2022 ($ in millions)
1. Citi Community Capital 6,497.5 6,338.8
2. KeyBank Real Estate Capital 6,067.0 5,330.0
3. Bank of America 4,491.0 5,052.0
4. JPMorgan Chase Bank 4,100.0 5,856.0
5. Merchants Capital 4,094.9 5,864.9
6. Wells Fargo 3,638.1 4,800.5
7. Berkadia Affordable Housing 2,882.0 3,548.0
8. U.S. Bank 1,910.0 1,348.0
9. JLL 1,900.0 2,310.0
10. Ready Capital Affordable Multifamily 1,892.7 1,250.1
11. Lument 1,888.0 1,925.0
12. Stifel, Nicolaus & Co. 1,885.5 2,080.0
13. Capital One 1,765.0 1,693.0
14. Greystone Servicing Co. 1,701.3 1,726.6
15. Deutsche Bank Securities 1,641.4 2,650.3
16. Walker & Dunlop 1,597.2 1,516.9
17. NewPoint Real Estate Capital 1,308.5 1,520.6
18. TD Bank 1,159.0 1,042.6
19. CBRE 976.0 2,770.8
20. Bellwether Enterprise Real Estate Capital 926.3 1,111.5
21. M&T Bank 871.2 N/A
22. R4 Capital Funding 822.8 1,025.3
23. PNC Real Estate 716.4 998.5
24. RBC Capital Markets 567.4 492.4
25. Boston Capital Finance 413.0 502.0

Source: 2023 Lenders Survey, February 2024. Totals include permanent and construction loans for properties at incomes up to 80% of the area median income.

Note: The Top 25 rankings reflect only those companies that provided Affordable Housing Finance with figures. If you'd like to be considered for next year's rankings, please contact Christine Serlin at [email protected].

Interest Rates Strain Project Budgets

High interest rates have strained the budgets of affordable housing developers.

“Many just can’t make the budgets work,” says Jeremy Johnson, managing director and head of Citi Community Capital.

The benchmark Secured Overnight Financing Rate (SOFR) rose above 5% in 2023—up from close to zero in early 2022. That drove interest rates for many floating-rate construction loans higher than 8% last year—up from close to 3% in 2022, according to experts.

Recent statements by Federal Reserve officials give developers hope short-term interest rates might ease 75 to 150 basis points this year, but even that would still leave short-term rates several hundred basis points higher than in early 2022.

“Rates will come down, but much slower than they went up,” predicts Helen Feinberg, managing director for RBC Capital Markets.

Citi Community Capital is providing financing for New Providence, a combination shelter and affordable housing development in the heart of New York City from Monadnock and nonprofit Project Renewal.
Citi Community Capital is providing financing for New Providence, a combination shelter and affordable housing development in the heart of New York City from Monadnock and nonprofit Project Renewal.

The number of new construction loans Citi provided in 2023 to affordable housing developments was down 20% compared with 2022. Citi made up the difference in part by making larger loans—a total of $3.8 billion in affordable housing construction loans in 2023, up from $3.4 billion in 2022.

Not every planned development can afford to support larger loans, especially with high interest rates, which require projects to hold larger interest reserves.

“The interest rate environment was the largest challenge for us last year,” says KeyBank’s Likes.

Developers also struggled to pay the high cost of construction, which has risen quickly in recent years. These costs rose a moderate 2.4% in 2023, but that leaves costs stuck at a high level after the double-digit price increases from 2020 (up 7.6%), 2021 (up 15.5%), and 2022 (up 4.8 %), according to the Producer Price Index for inputs to multifamily construction from the Bureau of Labor Statistics.

The rising cost of property insurance has also cut into the amount of debt properties can afford. “It is a conversation that has come up in every meeting we have had with every client for the last couple years,” says Likes.

Property insurance premiums rose 50% to 100% in many parts of the United States in the last few years, according to experts. More recently, insurance costs seem to have stabilized at a high level—for now.

“Predicting insurance costs has become challenging,” says Kamara Green, executive vice president and national director of affordable production for Bellwether Enterprise Real Estate Capital.

Developments that had already started construction strained to cope with these rising costs in 2023.

“If your interest rate doubles in a matter of six months, you are probably going to run out of interest reserve and be out of alignment in your budget,” says Likes.

In addition, construction delays often added months to the time developers were forced to pay these high costs.

Developers are “absolutely” relying more than ever before on soft financing and grants from local, state, and federal housing programs, says Likes.

“We did hundreds of deals last year—most of them had multiple sources of financing beyond the equity from low-income housing tax credits (LIHTCs), the construction loan, and the permanent debt,” he says.

But even generous local officials only have so much soft financing to give. Developers are, once again, having to cut their development fees to make deals work, according to Likes.

Some affordable housing developers have broken under the pressure of rising costs. “There have been a couple sponsors that went under in 2023,” says Green. “Others continue to navigate compressed cash flows and access to developer fees in delayed projects.”

Many construction lenders like regional banks also hesitated to make new loans to real estate developments after the failures of Silicon Valley Bank and First Republic Bank in early 2023.

“A couple of banks had major challenges, which reverberated through the entire finance industry,” says Likes.

However, affordable housing developers still have choices as they struggle to make their budgets work.

“When we would submit a bid, we were never the only one,” says Likes. “It was very competitive.”

As interest rates and construction costs stabilize, developers are hoping to find solutions to stalled projects like these.

“We’re now looking again at a lot of those ground-up development deals that were put on ice in mid-2023,” says Englund. “Fannie Mae and Freddie Mac are getting very competitive in the 4% LIHTC space.”

The government-sponsored enterprises are eager to make loans to mission-rich affordable housing properties in 2024, says Englund. In 2023, they were below the volume target set by regulator Federal Housing Finance Agency.

“The agencies may also help borrowers save on transaction costs—one of the key determinants of net returns,” says Vince Toye, managing director for JPMorgan Chase Bank.

Acquisition-Rehab, Interrupted

Many deals to buy existing affordable housing properties also stalled in 2023.

“In the acquisition space, there was a disconnect between buyers and sellers due to the sudden increase in interest rates and impact on pricing expectations,” says Englund. “There’s still a disconnect; however, it’s not as extreme as it was in 2023.”

For example, one of Greystone’s clients acquired three affordable housing properties in 2023 compared with more than a dozen properties during the boom year of 2022. This developer expects to buy as many as nine this year.

The long-term interest rates for permanent loans also swelled in 2023. Developers often use these loans to acquire stabilized properties or replace construction financing after the work is done.

The benchmark yield on 10-year Treasury bonds peaked at nearly 5% in October. That’s up from roughly 1.5% at the start of 2022. That pushed the all-in, fixed interest rates for permanent loans above 7%. These high interest rates cut into how large a loan these properties could support. To make up the difference, many potential buyers would have to find more equity.

“The equity checks that some of the buyers of these properties would have had to write were too big because of the reduction in debt proceeds as a result of rising interest rates,” says Sarah Garland, senior managing director of affordable housing at CBRE.

Many sellers kept their prices high despite these high interest rates.

“Everybody was forecasting by the end of 2023 interest rates were going to come back down,” says Flinn. “A lot of sellers sat on their product waiting for that to happen.”

That meant fewer deals. The volume of loans made by CBRE in 2023 shrank more than 50% compared with 2022. Of course, 2022 had been the strongest year ever for CBRE’s affordable housing.

Many other lenders also report making fewer loans to affordable housing properties without LIHTCs for residents earning up to 80% of the AMI. Citi made just $720 million in construction and permanent loans to these properties in 2023. That’s about half of the $1.5 billion in loans Citi made in 2022.

“A lot of our clients weren’t even trying to buy anything last year,” says Likes. “It was pencils down. People weren’t even actively making offers.”

In 2023, KeyBank provided very limited new acquisition bridge loans to affordable housing properties. “We did a few, but it was almost dried up,” says Likes. In contrast, in the years before 2023, its affordable housing borrowers took out nearly as many acquisition bridge loans as they took out construction loans.

The existing affordable housing properties that sold in 2023 were often owned by sellers who had to sell, because agreements written years before when the communities were first financed with LIHTCs have expired. These deals could work, because the affordable rents at the properties had gradually increased over more than 15 years, along with the AMI.

“Once sellers got their head around it, they were still making money,” says Flinn. However, these deals still took time. “Negotiations between buyers and sellers took time to navigate the volatile interest rate market.”

A few buyers also acquired giant portfolios of affordable housing properties, using credit facilities provided by Freddie Mac and Fannie Mae.

Flinn says, “Since those deals are cross-collateralized, you tend to get better lending and credit terms, on average, with potentially longer amortization and interest-only periods. That can, in part, make up for the higher interest rates.”

Hope for More Deals in 2024

Affordable housing developers and investors seem optimistic that they will do more business this year.

“They’re starting to look at acquisition deals again,” says Likes.

Long-term interest rates did moderate in the last months of 2023, and short-term rates are also expected to ease. That’s not because a sudden and deep recession forced the Federal Reserve to slash rates back down toward 1%. Instead, the U.S. economy continued to grow in 2023, and inflation eased.

“The interest rate environment today is more favorable than it was mid-2023,” says Greystone’s Englund.

The yield of 10-year Treasury bonds is still volatile. It can rise or fall 20 basis points in a single day. However, the benchmark yield tends to jump higher or lower between 3.7% and 4.2%.

“It’s still a lot lower than where it was in October,” says Flinn.

A consensus is forming that long-term interest rates are likely to stay at about this level for at least the near future.

“They’re seeing that a 5.5% mortgage rate isn’t the end of the world, and they’re willing to transact at that level,” says Flinn.

“Where rates are today, we’re seeing deals pencil again with both Fannie Mae and Freddie Mac,” adds Englund.

Progress couldn’t come too soon. The peak for multifamily loan originations was 2021 for both purchases and refinancing. More than half of loans that year were floating-rate debt with the bulk of maturities about three years from the origination date, according to Englund.