Considering the unprecedented challenges faced in 2020, the affordable housing industry managed to do pretty well. Projects still got built, capital continued to be available for new deals, and, perhaps, new light was shined on the importance of a place to call home.
Having weathered economic downturns and market turmoil before, the industry once again found its footing after the initial shock of the COVID-19 pandemic and the subsequent shelter-in-place orders that began in March and April.
Developers will have to continue to overcome the immense challenges brought on by the global pandemic in the new year. Even with hopes riding on the vaccine being distributed nationwide, COVID’s presence still will cast a long shadow.
“Is there any doubt that the COVID-19 won’t continue to be the biggest issue in 2021?” says Richard Gerwitz, co-head of Citi Community Capital. “The impact on tenants and landlords, the continuing local budget crises, the increased need for shelters and supportive housing. As eviction moratoriums end, and the infection rate has increased, the beginning of the year in particular may be the most challenging time for us as yet.”
In spite of all the issues the industry is confronting, the number of projects seeking low-income housing tax credit (LIHTC) or private-activity bond allocation has continued to rise, according to Gerwitz.
“The availability of 9% LIHTC allocation has almost always been a challenge, but now private-activity bond allocation availability is also being fully utilized in an increasing number of states,” he says. “With an emphasis on building new units, allocation plans and decisions are concentrating on new construction, making it more difficult to finance the preservation of at-risk units.”
Lenders are also being more cautious, particularly in terms of underwriting commercial income, either by requiring a master lease, discounting rents significantly, or not considering such income at all. Mixed-income has been an increased trend, and lenders are being similarly cautious about how market-rate unit rents, or the rents for units with limits above tax credit unit rents, are underwritten, he says.
Partially as a result of how tight certain states are in terms of allocation, Gerwitz has seen affordable housing developers who focus on those regions begin to look outside to different geographic areas. “More are looking to strike up partnerships with developers in other parts of the country where there is more opportunity,” he says. “It has also been interesting to watch a number of real estate developers and equity investors who historically have focused on market-rate housing turn their attention to the affordable sector, buying up portfolios as they become available. As cap rates have declined and competition for conventional portfolios has driven prices higher, the stability of seasoned affordable projects has become more attractive.”
What Comes Next
While the hotel, office, and retail sectors became largely untouchable, multifamily housing, both market-rate and affordable, showed resiliency in 2020.
“Even in a pandemic, deals were still closing, albeit at a slower pace, and operationally we didn’t see a large change in our rental collections and/or overall operations,” says Henry Flores, vice president of Madhouse Development Services, an affordable housing developer based in Austin, Texas. “Obviously, we had our fair share of residents dealing with various COVID-related issues, but we were pleased with our overall portfolio performance.”
Looking ahead to 2021, Flores expects to see a “flight to quality” in the financing markets. “Lenders and investors are really turning to existing relationships with tried-and-true developers, who have weathered similar circumstances—if that even exists,” he says. “Underwriting is given even more scrutiny, and we saw the agency lenders implement new reserve requirements, which were directly related to COIVD. Obviously, those additional costs always put more strain on affordable transactions, but we think 2021 will be another good year for the affordable housing industry as a whole with demand continuing to outpace supply.”
Jeff Kittle, president and CEO of Indianapolis-based Kittle Property Group, expects capital partners to “continue to tread lightly, underwrite thoroughly, and look for extra safety valves in deals.”
“Non-Community Reinvestment Act (CRA) deals and highly leveraged bond deals will continue to be challenged to attract closable capital for all but the most seasoned, durable, and deep-pocketed sponsors,” he says.
Kittle adds there may be uncertainty with capital partners due to the many moving parts that exist, including possible tax reform, CRA reform, a new administration as well as a 4% fixed rate in the LIHTC program for bond deals. “The uncertainty will generally slow transactions down, and some transactions will be delayed or won’t find partners,” he says.
In December, Congress approved $900 billion in COVID-19 pandemic relief and $1.4 trillion in government funding for the rest of fiscal 2021, a deal that includes a permanent minimum 4% LIHTC rate for housing bonds issued after Dec. 31. Affordable housing advocates have been seeking a 4% fixed rate for years. President Trump was holding up the bill while seeking changes at press time.
“This (4% fixed rate) alone will allow a lot of bond deals to be closed without the need for soft monies or property tax abatements, especially in Texas, which is not popular with local municipalities,” says Rob Hoskins, managing principal of The NuRock Cos. in Alpharetta, Georgia.
Looking at the year ahead, interest rates will likely continue to be low, which will help make LIHTC projects pencil, especially leverage-sensitive 4% properties, adds J. David Heller, president and CEO of The NRP Group.
At the same time, the high cost of land and materials, regulatory burdens such as review times and impact fees, and lower credit pricing are all headwinds that will continue, he says.
Growing Need for Affordable Housing
The nation already faces an affordable housing shortage, and the pandemic will only make a dire situation worse, according to several developers.
“The COVID-19 virus and effects on working-class people will only exasperate the problem in the coming years,” explains Chris Dischinger, co-principal of LDG Development, an affordable housing developer based in Louisville, Kentucky. “The added threat that Congress and the president and president-elect do not deal with the problem could result in mass evictions and a flood of unhoused families.”
The new year will have a lot of similarities with the second half of 2020, including a lot of stress on the families and their ability to pay rent if they’ve lost worked, adds Kittle. “Any new stimulus that includes COVID-related rental assistance will go a long way in helping these families out,” he says.
The recent relief package includes $25 billion in rental assistance and extends the Centers for Disease Control and Prevention’s eviction moratorium, which was set to expire on Dec. 31, through Jan. 31. While this is a needed step, housing advocates say more work and more funding is needed.
Indeed, the situation remains grim as the number of Americans applying for unemployment benefits recently rose to 885,000 in early December, a sign that employers are continuing to struggle and cut jobs under a new wave or restrictions.
“The pandemic has compounded the affordable housing crisis and has highlighted the importance of social determinants of health in low-income communities,” Heller says. “One key social determinant of health is access to safe, quality affordable housing.”
Jim Gillespie, executive vice president at Bellwether Enterprise Real Estate Capital, sees “big opportunities in workforce housing through the continued expansion of debt products designed specifically to finance workforce housing. This, combined with plentiful private capital targeting this product type and the fewer regulations relative to LIHTC, should result in an increased focus and expansion of the workforce housing market.”
Moving forward, the housing industry and the health care sector must work together to identify existing legislative tools that can be used to address the connected crises of affordable housing and poor social determinants of health in low-income communities across the country, he says.
“I think 2021 will be a confluence of two things—the pandemic will result in exponential growth in the need for affordable housing; and the trend toward a greater focus by elected officials, communities, the press on that need is going to lead for a push for new and expanded commitments for support for the affordable housing industry,” adds Deborah VanAmerongen, strategic policy adviser in law firm Nixon Peabody’s affordable housing practice group. “Whether that comes from rental assistance, enactment of the Affordable Housing Credit Improvement Act, or at least major portions of it, or an infrastructure program, or some combination of the some or all of these.”
Bart Mitchell, president and CEO of The Community Builders in Boston, hopes to see extra resources to address the need.
“COVID-19 has only heightened the understanding of all Americans about the importance of healthy housing that families and seniors can afford to overall health and opportunity,” he says.
In addition, racial equity will continue to be another issue for the industry, says Mitchell, whose organization has made major new commitments to advance equity for its residents, workforce, and business partners.
“The biggest issue, I believe, is infusing better racial equity in our development system,” agrees Charlie Werhane, president, capital division, at Enterprise Community Investment. “How do allocating entities, capital providers, and governmental agencies prioritize BIPOC (Black, Indigenous, and people of color) developers who struggle to get to scale? The counter is should we prioritize BIPOC developers?”
With people having to stay at home during the health crisis, another significant issue will continue to be access to technology. The digital divide for many affordable housing residents became apparent in 2020.
“We have learned how to work, learn, and socialize from home through technology, which addresses access to resources, but do low-and moderate-income residents have access to the internet at a reasonable or no cost?” Werhane says. “Technology can help us bend the cost curve but only if cost of entry is not prohibited.”
