“Workforce” Apartments Gaining Investors’ Interest

High-end apartments have attracted most investment dollars during the almost 10-year bull run that began at the end of the Great Recession, but now more affordable units are getting attention from investors. From the Wall Street Journal:

A venture led by Prudential Financial Inc. is spending nearly $600 million for 4,000 housing units aimed at lower-income workers, the latest sign that investors see bigger gains in lower-rent apartments than in the upscale ones that have led the recovery.

These so-called workforce housing units usually are in older buildings that cater to price-conscious renters, paying about $1,000 a month for a one-bedroom unit. Around 6.3 million units, or about 41% of all the rental apartments in the U.S., fall into the workforce category, according to CoStar Group Inc., which tracks buildings that are five units and greater…

Workforce housing rents are increasing at a faster rate than upscale units because of high demand and the dearth of new supply. Meanwhile, most of the 100,000 units that become obsolete annually fall into the workforce and affordable category, according to a report set to be released by commercial real-estate-services firm CBRE Group Inc. later this week.

Mr. Munk, of PGIM, pointed out that investing in relatively small improvements to workforce housing units —like a new carpet or a washer and dryer—can produce a big payoff in a higher rent. “If we can spend $10,000 to improve a particular unit, that could potentially bring in $200 a month more in rent,” he said.

A Menu of Ideas for Addressing the Affordable Housing Crunch

Nancy Burke, VP of Government & Community Affairs at the Colorado Apartment Association, wrote an article for the Colorado Real Estate Journal that summarizes the challenges faced by the multifamily industry in terms of developing affordable housing and offers a nice overview of the many different approaches being taken around the country to address the ever-increasing demand for affordable housing solutions. Here’s a taste:

Thirty-two percent of multifamily construction cost is from regulation. The National Association of Home Builders and NMHC states regulation imposed by government accounts for an average of 32.1 percent of multifamily construction costs. Building codes, development requirements, impact fees, inspections and other fees contribute to this highly regulated industry, which translates into higher rents and reduced affordability.

Lack of labor, land prices and costs of materials have increased over 30 percent in the past two years. The not-in-my-backyard movement and moratoriums placed on multifamily construction equate to millions of dollars in legal fees and slows the time for units to reach the market. Blocking new development doesn’t keep people from moving in, but it usually prices people out of the neighborhood. Building more lessens the likelihood of displacement and gentrification…

The U.S. Department of Housing and Urban Development created a “landlord task force” to look at incentives and reduce regulatory requirements in the complicated process of offering housing choice vouchers. Onboarding each renter costs nearly $1,300.

Minneapolis incentivizes landlords to retain a 40 percent tax abatement if 20 percent of the units are set aside for 60 percent area median income or less, for a 10-year term.

New Orleans is constructing a co-living roommate model arrangement in a multifamily building near downtown. It features furnished rooms, paper products and house cleaning for under $1,300 per month. Management is working with AirBnB to allow residents to rent their rooms and retain 75 percent of the proceeds…

Denver is a point of reference in affordable housing solutions, too. City Council recently adopted the Lower Income Voucher Equity Denver program, the first-of-its-kind, public-private partnership highlighting an integrated, transitional, two-year affordable housing model that is being considered in other cities. It is designed for working citizens earning $23,000 to $67,000 (40 to 80 percent AMI) that leverages employer and foundation support to buy down rents.

 

Co-Living Not Just for Students Anymore

With the growing popularity of shared workspaces (think We-Work) it probably shouldn’t surprise anyone that shared living spaces are beginning to catch on. Of course, the student housing sector has been using this model for years, but in the market rate apartment world it hasn’t been seen until very recently. One issue is that local ordinances often prevent them, but as the affordable housing issue becomes more prevalent in virtually every city and town across the country, both housing providers and municipal leaders are looking for creative solutions and co-living looks like a good option. The Wall Street Journal recently ran an article that had some interesting data about this new housing approach:

This product, which is less than 10 years old and found primarily in large U.S. cities, represents only a tiny niche in the multibillion-dollar apartment industry. But developers are now preparing to build some of the largest new co-living properties in North America, a sign that the appeal of this type of housing could be broadening…

San Francisco-based co-living startup Starcity last week agreed to purchase a development site in downtown San Jose where it plans to build a 750-unit co-living building…

Rents at the company’s properties range from about $1,600 to $3,100 a month—not cheap but less than the average studio apartment rents in the Bay Area. Half of the rents at the new San Francisco property will be even further below market, affordable to people making as little as $35,000 a year, under new state legislation that streamlines the permitting process for projects with an affordable component.

“To tackle our affordability crisis we need both private sector solutions and public sector solutions,” said San Jose Mayor Sam Liccardo, referring to his city’s new co-living project.

 

HUD Shifts Focus to Liberalization of Land Use Regs

The US Department of Housing and Urban Development recently announced that it is going to reverse some Obama-era policies related to integrating lower-income housing into wealthier neighborhoods and place more focus on promoting more affordable housing development overall.

According to an article in the Wall Street Journal, “HUD will begin holding stakeholder hearings on how to change the way it determines whether communities are enforcing the Fair Housing Act, which requires local governments to institute policies that help break down patterns of housing segregation. HUD stakeholders include nonprofit groups, academic researchers and private businesses.

But local officials in some communities said the process was costly and amounted to the federal government forcing them to put low-cost rental buildings in wealthier areas.”

So, instead of focusing its attention on the integration piece HUD will try to create incentives for local governments to liberalize land use policies and make it easier for developers to build more housing in general. From the WSJ article:

Policy makers have long puzzled over how to create incentives for cities and towns to build more housing. Local officials are often in a difficult political position because the loudest voices among their constituents tend to be those objecting to development. At the same time, federal and state governments have limited control over local zoning.

Mr. Carson (HUD Secretary Ben Carson) said the new rule would tie HUD grants, which many communities use to build roads, sewers, bridges and other infrastructure projects, to less restrictive zoning.

“I would incentivize people who really would like to get a nice juicy government grant” to take a look at their zoning codes, he said.

 

Affordable Housing’s Headwinds

You can add financing to the litany of challenges being faced by affordable housing developers. From the Wall Street Journal:

Rising interest rates are undermining efforts to build more affordable housing, creating larger funding gaps for an industry already grappling with cuts in government subsidies and rising construction costs.

This year’s climb in borrowing costs—coupled with expectations that they will keep rising—has driven down the amount of debt used to fund affordable housing deals, said Michael Novogradac, managing partner of Novogradac & Co., an accounting firm that specializes in affordable housing…

The permanent debt rate—a measure of the long-term debt projects pay to lenders—was 4.18% for a Bridge project completed in the Mission District of San Francisco in 2016. This year, a proposed development less than a mile away, with the same developer and a similar amount of debt, closed at a rate of 5.06%. The fed-funds rate rose about 1% in the interim…

Affordable housing, which constitutes about a quarter of all new apartment construction in the U.S., is already facing a number of difficulties, including a decline in government subsidies and rising construction costs.

Freddie Mac’s Plan to Help Cap Rents

Freddie Mac is launching new lower-cost financing to apartment owners who agree to cap rent increases for the life of the loans. From an article in the Wall Street Journal:

The program, announced Tuesday, will begin immediately and be available all over the country. Mr. Brickman said he hopes hundreds of properties will take advantage of it.

The initiative comes at a potentially appealing time for real-estate investors who are facing a slowing rental market. Freddie Mac will provide mezzanine debt—which is more risky but pays a higher interest rate than senior debt—at below market cost.

While rent increases have naturally slowed over the past year or so, the initiative protects tenants from steep hikes when the market accelerates again. Operators who receive the low-cost loans must have at least 50% of the units affordable to households making the local median income or below. Borrowers must then agree to limit rent growth on 80% of units.

Regulations Account for Almost One Third of Apartment Development Costs

The National Multifamily Housing Council (NMHC) and National Association of Home Builders (NAHB) released the results of research that found that regulation imposed at various levels of government accounts for 32.1% of multifamily development costs. From an article in Multifamily Executive:

These regulatory costs include a broad range of fees, standards, and other requirements imposed at different stages of the development and construction process. According to the study, 7% of regulatory costs come from building-code changes over the past 10 years, 5.9% is attributable to development requirements (such as streets, sidewalks, parking, landscaping, and architectural design) that go beyond what the developer would ordinarily provide, and 4.2% of the costs come from nonrefundable fees charged when site work begins.

Over 90% of developers surveyed in the research typically incur hard costs of paying fees to local jurisdictions, both when applying for zoning approval and again when local jurisdictions authorize the construction of buildings. The typical projects of almost all the respondents (98%) were subject to costs at the zoning-approval stage, costing an average 4.1% of the total development costs.

They go on to note that these costs have a direct impact on housing affordability, which is an issue being addressed by almost every municipality in the country, including here in the Piedmont Triad:

“The current regulatory framework has limited the amount of housing that can be built and increased the cost of what is produced,” said NMHC president Doug Bibby in a statement. “At a time when states and localities are struggling to address housing affordability challenges, public and private stakeholders should work together to streamline regulations and take the steps necessary to expand housing in communities across the country.”

Here’s a link to a more detailed summary of the research on NAHB’s website: http://www.nahbclassic.org/generic.aspx?genericContentID=262391

Latest Challenge to Housing Affordability? Wood

Over the past year prices for lumber have skyrocketed and that has put added pressure on homebuilders and apartment developers alike. From an article in the Wall Street Journal:

The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house.

The historic run-up in lumber prices–attributable to a trade dispute with Canada, wildfires and limited rail capacity–comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor…

For a generation setting off to start families in the suburbs, pricier construction materials are another hurdle to homeownership, on top of rising borrowing costs and competition from institutional investors, who are gobbling up homes to turn into rentals in some of the country’s hottest markets.

Apartment developers are also facing skyrocketing costs and, according to several who are members of PTAA, it’s affecting their ability to do deals. One said in an email exchange that his company has passed on several otherwise good projects because cost far outpaces rental rate.

This news is not good for housing affordability either. We’re already seeing an imbalance between supply and demand which will only be exacerbated by higher costs and suppressed development. Until development can catch up with demand it’s hard to see a way in which the affordability question can be answered.

What the Silver Tsunami Means for Apartments

An interesting article at Curbed looks at the impact that retiring baby boomers, aka the “silver tsunami”, are having on having on housing in America, including apartments.

The senior rental market is booming. Between 2009 and 2015, the number of renters over 55 increased by 28 percent, compared to a 3 percent increase in renters 34 years or younger, according to a 2017 analysis of U.S. Census Bureau data by RENTCafe. And the percentage of senior renters making $60,000 a year or more rose from 11 to 15 percent between 2006 and 2016, according to Harvard data.

This has created an opening for luxury urban living for seniors. A recent industry report by JLL, a global real estate firm, noted that more developers are focusing on urban infill projects to take advantage of this demand.

This is, of course, only a small slice of the senior market. There is also a sizable population struggling to pay rent: The U.S. serves only about a third of adults age 62 or older who qualify for housing and rental assistance. By 2035, there may be nearly 5 million eligible seniors who aren’t receiving aid, according to Jennifer Molinsky, a senior research assistant at the Harvard Joint Center for Housing Studies…

In many ways, the senior market is a microcosm of the housing market as a whole. While many developers rightly see potential in new high-end construction, there’s a huge demand for more affordable units that just isn’t being met yet.

 

Freddie to Offer Cheap Loans for ‘Middle Class’ Rental Housing

Freddie Mac is rolling out a plan to incentivize landlords to keep rents affordable on the properties for years to come. From an article in the Wall Street Journal:

Freddie Mac , the country’s largest backer of apartment loans, will offer low-cost loans to real-estate owners willing to keep their buildings affordable to middle-class families for years to come.

The move could open up a new approach to creating and preserving middle-class housing. It uses market incentives rather than government subsidies to persuade real-estate companies to preserve units for the middle of the rental market, an area of concern for policy makers in recent years…

The initiative will offer lower interest rates to landlords who agree to rent the majority of units in a building at levels affordable to tenants making 80% or less of the area’s median income, a range that typically includes nurses, teachers and police officers. The units must remain affordable for the term of the loan, typically about a decade.

To start, Freddie will back up to $500 million of loans to Bridge Investment Group, a Salt Lake City-based landlord with roughly 30,000 apartments around the country. Bridge has identified 38 metropolitan areas for investment.

It will be interesting to see if this moves the needle on the issue of housing affordability. It is nice to see a market-based ‘carrot’ offered as opposed to the regulatory ‘sticks’ that are being considered in many municipalities around the country.