The competition to buy affordable housing developments will be fierce this year as demand continues to far outweigh the supply.
The sales market was robust in 2019 and, at a minimum, will be the same in 2020, says Tim Flint, executive vice president at CBRE Affordable Housing.
His firm reported closing $1.9 billion in sales volume last year. These deals involved 21,202 total units, with the properties sold averaging about 104 units.
“For the developers on the general partnership side who own these assets, it’s becoming more and more difficult to resyndicate the properties and get the limited partner out at the same time,” he says. “That’s a function of how the limited partner may want to exit out of a deal, and it’s increasingly difficult to resyndicate properties in certain states. In those instances, the next alternative is to ‘transact’ on the asset.”
And as the industry enters a new decade, there will be an increasing number of low-income housing tax credit.
(LIHTC) properties nearing the end of their affordability restrictions. “That is a natural catalyst to have some form of capital event happen,” Flint says. “The sales decision is going to grow more and more year over year as we move into the 2020s and beyond.”
Almost a half million LIHTC units will reach their 30-year mark and the end of their federally mandated restrictions between 2020 and 2029, according to a report by the National Low Income Housing Coalition and the Public and Affordable Housing Research Corp.
According to the report, this amounts to nearly 25% of all current LIHTC units. These 486,799 LIHTC units, which are in over 8,400 properties, do not receive other types of subsidies that would extend their affordability. At risk of being converted to market-rate apartments, these properties would need to be preserved as affordable housing. In addition, without new capital investment for rehabilitation, these units also are at risk of physical deterioration.
The aging of the LIHTC portfolio is an important trend to watch in the years ahead. Another is the growing interest in the sector from companies that have not historically been active in affordable housing.
“Because they are not necessarily true tax credit developers by nature, their avenue to enter into the market is through acquisitions,” Flint says.
The industry has matured, and data on what it means to own, operate, and invest in affordable housing has become more readily available so that is helping create interest from potential new buyers. The other factor is the growing widespread concern about the lack of affordable and workforce housing, he says.
“Many institutions and multifamily companies have started allocating resources to start to play in the space,” Flint says.
At the same time, the vast majority of groups looking to purchase LIHTC developments understand the program and the long-term restrictions in place. “They’re purchasing them with that in mind and are going to maintain the compliance to the program,” Flint says.
A Seller’s Market
The affordable housing market from 2017 through 2019 was “amazingly consistent,” says Kevin Morris, senior director in Colliers’ Affordable Housing Group.
The number of transactions, sales volume, and the average size of deals have all been steady for the past three years, he says. He’s also seen prices remain pretty stable at a little more than $98,100 per unit last year.
“There’s just not a lot of product,” he says. “Sellers are still in a seller’s market. They don’t have to offer up a higher cap rate to get activity.”
As a result, cap rates have been a steady 6.3% since 2017, according to Morris.
If more product hits the market, that could put pressure on cap rates to rise. However, at this time, all the key factors that affect the market—low interest rates, high demand, scarcity of product—remain the same. At this time, sellers are clearly in the driver’s seat, Morris says, and the one thing they want is certainty of execution. Relationships remain key, he says.
He says he recently worked with a buyer and seller on the sale of a project-based housing assistance payment (HAP) property, where one challenge was the need to do renovations soon after closing. Morris got both parties to agree to keep a number of units vacant so that the buyer could begin the rehab work right away.
Although he is upbeat about the year ahead, the upcoming election has him reflecting on the last presidential election four years ago. Much like then, more business could be done in the first half of the year than in the second if uncertainty around the election resurfaces and slows activity, he says.
Heidi Burkhart, president of Dane Real Estate in New York City, also points out that conditions could change in the second half of the year.
“Any election year brings turmoil,” she says. “I think there will be a lot of deals put into contracts in the beginning half, but every election there is a turmoil period.”
What’s clear is that affordable housing is no longer the “ugly stepchild,” says Burkhart. “It seems to be the favored princess as a lot more people are focused on diversifying and now taking the time to understand the programs.”
With more equity chasing deals, buyers have to be quicker than in the past and willing to commit to hard deposits, she says. Much of her firm’s business involves Section 8 properties.
Burkhart recently marketed a property in East Orange, N.J., which received more than nine offers in the high range of what was being sought.
Her brokerage company reported having its biggest year in 2019. Dane Real Estate secured the equity for the acquisition of several properties across the United States. In addition to the equity placements, Dane had a record year of real estate sales, totaling 72 deals nationwide during 2019, with another seven deals in contract that are anticipated to close in the first half of 2020. Roughly 75% percent of deals took place in the New York City region.
As an example, Dane recently secured the sale of York Town House, a 201-unit, Section 8 property for seniors in York, Pa. The 10-story development sold for over $19 million. The buyer and seller are groups that Burkhart has worked with many times, she says.
Tips for buyers and sellers
It’s important for any real estate professional seeking to get into affordable housing to set up coffee or dinners with top parties in the field, such as lawyers and accountants, or get out to conferences and other events to meet others in the industry, including heads of agencies, according to Burkhart. “Make sure you have the right relationships with people of the highest integrity,” she says. “Reputation is huge in our niche of the market.”
Morris emphasizes the need to stay on schedule. “Do everything possible to keep your timelines for deals tight,” he says. “With uncertainty entering into the market as is the case in every election year, time is of the essence.”
For sellers, getting organized early is essential. “There’s a lot to get done before you can even start transacting, which can sometimes take months or years,” Flint says. “So the better you plan ahead, the more nimble one can be to take advantage of market conditions.”
If you’re a buyer, be accurate, quick, and decisive when making offers. “It’s extremely competitive out there right now, and you have to present a strong case to the selling groups in order to get them comfortable to engage you as the buyer,” Flint says.
