LIHTC Market Poised to Hold Steady as Year Draws to a Close

A strong majority of low-income housing tax credit (LIHTC) syndicators expect the market to remain stable going into the final stretch of 2024.

About 72% of the recently surveyed syndicators say LIHTC pricing to developers will hold firm, while 28% expect a price dip in the second half of the year. No respondents are forecasting an increase in the next few months.

“We have seen a decrease in pricing over the year so far and are hopeful that the uncertainties that we know are coming have been priced in at this point so that pricing will hold steady in the second half of the year,” says Matt Reilein, president and CEO of the National Equity Fund. “The overall number of bids may decrease, but we expect to see fewer bids per deal rather than lower pricing. It’s likely that many investors are hitting the end of their cycle this year, and they are being more selective about deals due to the lack of holes to fill.”

The supply of housing credits also continues to be constrained after the expiration of the temporary 12.5% allocation increase a few years ago, which should help keep prices steady, adds Stephanie Kinsman, managing director, investor relations, at Red Stone Equity Partners.

“And, there continues to be strong demand for LIHTC product from the LIHTC investment community, including from a few additional non-CRA [Community Reinvestment Act] investors who have recently reentered the market,” she says.

The average price paid per dollar of credit for federal LIHTCs in the second quarter was 87.4 cents, according to Affordable Housing Finance’s midyear survey of syndicators. That’s a drop from 88.8 cents reported in 2023.

Yields to investors averaged about 5.77% in the second quarter, up from the 5.5% average seen a year ago.

“We expect LIHTC pricing to developers to decrease or stay close to the current range during the second half of 2024,” agrees David Leopold, senior vice president and head of affordable housing at Berkadia. “Many investors are fully committed with their equity for 2024, focused on closing out their 2024 pipelines and already looking to 2025.”

A number of investors front-loaded their commitments early in their CRA cycles, he says, noting that the overall LIHTC market appears somewhat capital constrained for deals closing this year that don’t already have a capital commitment.

In general, the LIHTC market seems more settled this year, report several syndicators. “2023 was challenging due to the banking crisis, and we seem to be past that,” adds Steve Kropf, president and CEO of Raymond James Affordable Housing Investments.

Biggest Trends So Far

While rising development and operating costs remain a major issue, other trends need watching, according to syndicators.

“The biggest issue or trend in the LIHTC market so far this year has been the increasing focus of investors on the balance sheets and portfolio performance of prospective development partners,” says Josh Ghena, senior vice president, syndication funding, at Cinnaire. “This trend is particularly pronounced in deals dedicated to supportive housing.”

Carla Vasquez-Noriega, investor relations manager at Merritt Community Capital Corp., agrees.

“Investors seem to be focusing more on sponsor financial strength and experience,” she says. “They prefer to work with developer partners who are already their clients and have a positive performance record. Investors are also focused on ensuring the supportive housing projects they invest in are with syndicators that have deep relationships with sponsors and have the expertise necessary to understand the unique risks of those projects.”

This trend was also cited by NEF, which has a deep history of investing in PSH projects.

“Our industry is at a mature stage, and LIHTC properties built more than 30 years ago need upgrades or those affordable units will be lost,” Reilein says. “This includes the older, moderately rehabilitated PSH developments with stagnant operating subsidies resulting in poor performance and foreclosure, which have been further exacerbated by the extended rent moratorium post-COVID. These issues are directly correlated with the investors’ increased scrutiny of PSH projects. … We cannot give up on PSH as we see large public/private investments in cities/counties like Los Angeles and nationally in veterans housing turning the tide and reducing homelessness in these sectors.”

Julie Sharp, executive vice president at Merchants Capital, notes that deal sizes are also getting larger as developers seek to benefit from economies of scale and address affordable housing needs.

“These massive, large-scale redevelopments are transforming neighborhoods but are difficult to execute,” she says. “Only a handful of investors have the capacity and risk tolerance to take down such large project developments, and they can’t fit within a traditional multi-investor fund.”

There’s also no ignoring that high interest rates and development expenses continue to impact deals.

“More specifically on the construction cost front, the availability and affordability of appropriate insurance coverage has continued to be an issue,” says Jason Gershwin, managing director at R4 Capital. “In working with our developer clients, especially those with projects in coastal communities in states like California and Florida, it has become increasingly challenging to appropriately budget for and lock in the necessary insurance coverage.”

Operating expenses, including insurance, repairs and maintenance, and bad debt allowance line items have continued to rise rapidly, adds Tony Bertoldi, co-president of CREA. “This is driving higher watch list percentages, and syndicators are taking a more thorough approach during the underwriting process,” he says.

Emerging State Credits

Several states, including Alabama, have recently established a state housing credit; about 30 states now have a state credit in addition to the federal LIHTC program.

Investor interest in state credits is increasing, but demand still varies from state to state, according to syndicators. Several also note that no two state credit programs are the same.

“We are definitely seeing a trend of new or expanded state housing credit programs within our footprint,” says Cinnaire’s Ghena. “In our experience, demand for state credits varies significantly depending on the design of the state’s program. In states where the programs have been well-designed, there is a successful and strong market for these credits. However, in states where the program design has fallen short, there has been limited demand, and the market for those credits has not materialized as expected.”

It may take a little time for the market to get familiar with a new program.

“State credits have pretty deep demand through syndicators, but the pricing will vary with the overall supply-and-demand balance,” says Philip Porter, senior vice president and head of acquisitions at Enterprise Housing Credit Investments. “The introduction of new state credits complicates placement as the market adjusts to handle them regularly. Lack of standardization among the state credit programs adds complexity and clouds investor interest.”

However, ample interest exists for state credits, reports Stephen M. Daley, executive vice president at The Richman Group Affordable Housing Corp. “Many insurance/economic investors look to pair state credits alongside federal multi-investor fund investments to enhance overall return,” he says. “In general, state credits have a yield premium over federal returns.”

Looking Ahead

The uncertainty around the November election results is another major issue that could cause temporary anxiety in the market and reduce investor activity, report a few syndicators.

With the election set to bring a new White House administration, eyes will be on new policies and the possibility of tax reform that could shake the market.

“We continue to watch the pricing demands of our investors who may still be on the sidelines, namely insurance investors and economic investors,” says Catherine Cawthon, president and CEO of Ohio Capital Corporation for Housing. “Additionally, November’s election and proposed federal tax bill in 2025 could impact investor appetite, requiring syndicators to be thoughtful and astutely aware of investor demands to meet developer needs.”

However, there are reasons to be upbeat in the coming months, including the prospects of stable or declining interest rates.

This will hopefully result in stability and perhaps even increase investor demand, adds Cynthia Lacasse, executive vice president and chief program officer at Evernorth.

Others agree that a dip in interest rates should help project budgets and deal underwriting.

Several syndicators also point to the industry’s strong track record.

“The market has been and should continue to be resilient and able to adapt to changes,” says Mark Gipner, director, fund development, at CAHEC. “Support for the credit has never been stronger, and the need for affordable housing continues to grow. Those two factors should contribute to a stable market going forward.”