Big ideas and out-of-the-box solutions are needed to solve the nation’s affordability crisis, according to industry leaders.
“The biggest issue is the growing divide between the availability of resources and the need for affordable housing at the entire spectrum of the market, both on the homeless side and the missing middle,” Richard Gerwitz, co-head of Citi Community Capital, told AHF Live attendees at the opening State of the Industry Power Panel. “At the same time, we are running out of resources and costs are going up—there’s a real problem in just producing enough housing to support the growing population.”
Leading industry stakeholders broke down the challenges hindering affordable housing production as well as the need for innovative solutions to provide housing for a broad income band of Americans to kick off Affordable Housing Finance’s 16thannual conference in Chicago in mid-November.
“Not that I don’t think the industry is doing well, but I don’t think we are innovating enough to really be solving the problems we need to be focused on,” said Carol Galante, faculty director of the Terner Center for Housing Innovation at the University of California at Berkeley. “We have a lot of work to do.”
One issue for the industry is rising construction and labor costs.
“We have a cost problem,” said Caleb Roope, president and CEO of The Pacific Cos., a leading developer of affordable housing. “We as an industry haven’t innovated as we build things. How do we figure out the cost problem?”
Bev Bates, senior vice president of development at The Community Builders, said the general cost creep is an issue for the industry in many markets. “It’s gotten to the point where we rarely open a set of bids and find a pleasant surprise,” she said.
She said the nonprofit’s strategy has been to look at efficiencies, unit sizes, common areas, and amenities relative to market. “We are trying to design something that is sustainable and responsible but also that we can afford to build. Modular has a lot of promise in the space and one we should all be looking at very carefully to move the needle around innovation and cost.”
Roope said modular housing is a big part of how his vertically integrated firm is handling costs. With over a dozen modular projects under its belt, The Pacific Cos. is finishing up a plant outside of Boise, Idaho, to create its own modules because the market doesn’t have enough supply.
For Avanath Capital Management, the business is primarily focused on acquisitions and preservation of affordable housing. Chairman and CEO Daryl Carter stressed the importance of doing smarter renovations that are more cost effective. “One of the biggest challenges in affordability today is in this industry where we are over-improving [Class] Cs to B+s when we should be improving them to B-s,” he said. “We ought to focus on the affordability of all the renovations.
He also added that his firm seeks out diverse subcontractors. “This industry becomes a closed circuit where we’re not bringing new people and new companies in. But bringing more people in reduces some of the costs,” he said.
High construction and labor costs are not the only drivers pushing up total development costs.
“When you look at labor costs and increase in wages, they’ve gone up. When you look at material costs, they’ve gone up,” said Galante, who previously was the Federal Housing Administration commissioner under the Obama administration as well as a nonprofit developer. “But you have to ask yourself, what else is driving this huge differential in cost? I do think it’s building code requirements and other regulatory requirements, but I also believe profit-taking by subcontractors and contractors because they can only do so many jobs and there’s only so much capacity. They are just protecting themselves and their profits, which I understand.”
Galante added that the complex ways affordable housing deals are financed might be a factor in rising development costs.
“One of the things we want to dig into more that I think is adding to the total development cost is the way that we layer so many sources of funding together and how much time that takes when you don’t have a streamlined process to go after tax credits and maybe one or two other sources,” she said. “These kinds of things are within our control to be more innovative about if we take up the charge and if we go to the states and localities and try to rationalize some of those processes more.”
In addition, Gerwitz said the cost of land also is having an impact. With many municipalities and states having excess land, he suggested creating an inventory of the underutilized land that could be used for housing. He cited a one local initiative that scored underutilized land by looking at if the sites were near transportation and shopping and if they had any environmental issues that would impede development, and then sent out an RFP to developers to build on the land with long-term leases. “This is something we can do locally that can have an immediate impact,” he said.
Lessons from the Market-Rate Side
Another suggestion was to take lessons from the market-rate sector, from financing to development.
Roope called out the efficiencies of building on a larger scale. Market-rate developers will build 150, 200, 300 units, with every unit added bringing the costs down. However, affordable housing tends to be smaller to spread around the limited 9% low-income housing tax credits (LIHTCs).
“Market-rate developers have always been incentivized to be more efficient,” added Galante, saying the industry needs to focus on standardized design and smaller units.
Carter, whose firm doesn’t rely on LIHTCs for its acquisition/rehab work, said Avanath focuses on private capital solutions to buy affordable deals, primarily in the preservation space. “There’s a lot of equity on a conventional basis that’s moving into the affordable space, and that’s fueled our growth.” He said about one-third of the capital in its latest fund comes from offshore, with Germany, the Netherlands, and Switzerland being big supporters and investors in affordable housing in their home countries as well as in the U.S.
He also suggested a solution that goes back many decades when the auto companies subsidized single-family development for its workforce and everyone had a 900-square-foot bungalow. “You had a partnership between government, industry, and private developers. I think that’s a model we need to pull back out.”
Galante added that the industry also needs to be looking at a fuller range of the income band than just what the LIHTC program supports and that the housing tax credits alone will not solve affordability issues, especially in California.
“Until we are adding enough supply to households earning 120% to 150% of the area median income in higher-cost areas, those people in that band can’t afford the high market rates and they don’t qualify for affordable, and that’s the mainstay of the workforce,” she said. “All of us in the room can be looking at our business models to figure out how we do that in a variety of ways.”
Bright Spots Ahead
On a positive note, the affordable housing leaders said there’s been an uptick in political support and commitments from large technology companies to solve the affordability problems.
All of the major Democratic presidential candidates have housing platforms, and there’s a bipartisan understanding that regulatory barriers are a problem to more housing production with Department of Housing and Urban Development secretary Ben Carson and Democratic Sen. Cory Booker of New Jersey both backing change.
“There are some big ideas out there,” said Galante. “And I think we all have an obligation to put some more big ideas on the table before 2021 comes around.”
Gerwitz added that while housing is finally part of the national conversation, it also is now part of the local conversation. “There are changes in getting rid of rules and regulations that are an impediment to housing. We have tried to work with modular housing for years, but it’s finally taking hold. I think that’s a great sign. There’s also a willingness on accessory dwelling units, co-living, and all types of innovative arrangements that we haven’t talked about or employed in the past.”