The low-income housing tax credit (LIHTC) portfolio continued to show its resilience during COVID-19 and the economic challenges of recent years, but some indicators reveal that the sector is not completely immune from broader headwinds, according to the latest research by CohnReznick.
Overall, LIHTC properties reported a 97.2% median physical occupancy rate in 2022, consistent with prior years. The properties also reported a 96% median economic occupancy rate in 2002, said Cindy Fang, partner and tax credit investment services leader at CohnReznick.
While the LIHTC portfolio continues to be robust, some performance metrics worsened in recent years, said Fang, who revealed the study results at AHF Live: The Affordable Housing Developers Summit in Chicago.Historical information was drawn from 30,600 properties, while the latest 2021-2022 information was reported on 19,200 properties, according to the accounting and advisory firm.
Fang noted that "watch list" percentages rose across properties in all stages of development in 2021-2022, with properties in lease-up reporting the highest representation of 28.6%, followed by pre-stabilized properties, 19.4%, and properties under construction, 17%.
In comparison, 12.2% of the national stabilized housing tax credit portfolio was on the watch list in 2022, rising from 8% as of 2020. While that’s a notable increase, it’s important to note that, consistent with the prior years, less than 2% of the stabilized portfolio severely underperformed and were risk-rated D or F in 2022.
“Most of the lease-up and pre-stabilized properties began construction in 2020-2021 during the height of the pandemic,” according to the report. “Their designated underperformance is likely a result of construction-related matters rather than challenges with market absorption, given the overwhelming need for affordable housing in markets nationwide.”
Fang noted that an increase in operating expenses was a leading factor for the increase in watch list representation among stabilized properties. The four fastest-growing expenses were insurance, administrative, property tax, and utilities.
“While performance metrics worsened, the subset suffering from severe underperformance remained very low,” Fang said.
A cumulative foreclosure rate of 0.50% ranks LIHTC properties among the safest real estate classes, according to the study. Also no new foreclosures were reported in 2021 or 2022.