by Brianna Crandall — December 11, 2015—The shrinking supply of workforce and affordable rental housing in cities across the United States has sparked innovative financing vehicles from an array of real estate firms to preserve the units, helping to stem the loss of an urgently needed product, according to a report released last week from the Urban Land Institute (ULI) and NeighborWorks America.
The report shows investments in preserving existing workforce and affordable housing results in higher financial yields than investing in new construction — costing less and contributing to community stability.
Preserving Multifamily Workforce and Affordable Housing, published by the ULI Terwilliger Center for Housing, profiles 16 leading efforts to retain the affordability of rental units that have either lost or are at risk of losing government subsidies, as well as “naturally occurring” affordable units that are likely to be repositioned to serve higher-income households.
Terwilliger Center Chairman J. Ronald Terwilliger noted that the initiatives are in response to the tremendous demand for affordable rentals, which has soared in the post-recession years due to income stagnation, tougher home purchasing requirements and lingering financial stress.
The report documents the extent to which the nation’s supply of affordable apartments for the working class has been shrinking and is likely to decline further — perhaps by hundreds of thousands of units in the years ahead — as a growing number of properties in strong markets are rehabilitated for market-rate occupancy, while those in weaker markets become increasingly dilapidated.
In response to this trend, a range of private sector real estate firms and community-based financial institutions have created an variety of investment funds and other vehicles to acquire these types of properties, invest in their improvement, and keep them affordable to their current residents and others of similar means. In addition to serving an important social purpose, these vehicles are delivering significant financial returns to their equity investors, ranging from five to 12 percent, according to the report.
The 16 programs profiled are a mix of financial vehicles. Collectively, these efforts have raised more than $2 billion and acquired, rehabilitated and developed nearly 60,000 units — with many raising additional capital to expand their activities.
The three types of financing vehicles:
Below-market debt funds, which are established by partnerships of private, public and philanthropic institutions to provide affordable housing developers with low-cost loans. Programs profiled are the Bay Area Transit-Oriented Affordable Housing Fund in San Francisco; Denver Regional Transit-Oriented Development Fund; New Generation Fund in Los Angeles; and the New York City Acquisition Fund.
Private Equity Vehicles, which are entities that use private capital to acquire and rehabilitate multifamily workforce and affordable housing properties, delivering satisfactory returns to investors while maintaining their affordability. Programs profiled are Avanath Capital Management, the Enterprise Multifamily Opportunity Fund, PNC Affordable Rental Housing Preservation Fund 1 LLC (operated by PNC Bank); Rose Affordable Housing Preservation Fund LLC (operated by the Jonathan Rose Companies); Turner Multifamily Impact Fund; and Urban Strategy America Fund.
Real Estate Investment Trusts (REITS), an investment vehicle created by the U.S. Congress to provide a means for small-scale investors to invest in income-producing real estate. REIT activity includes property acquisition and development, debt and equity investments, and a mix of both. The REITS profiled — Community Development Trust and Housing Partnership Equity Trust — focus specifically on affordable multifamily developments.
The report points out that investments in the preservation of existing workforce and affordable housing results in higher financial yields than investing in new construction; it cites research from the U.S. Department of Housing and Urban Development (HUD) indicating that preservation costs 30 percent to 50 percent less than developing new units. It notes that preservation is also more beneficial from a social standpoint, as it contributes to neighborhood and community stability.
Preserving Multifamily Workforce and Affordable Housing is available for download from ULI.
