Naturally Occurring Affordable Housing Is Disappearing

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Naturally occurring affordable housing is disappearing. According to a new brief on affordable housing from UCLA Ziman Center for Real Estate, naturally occurring real estate, defined as class-B and class-C housing with below market rents, is disappearing as a result of value-add investment and a lack of new affordable housing development. Affordable and workforce housing are a critical component of the housing market, and according to the report, if there isn’t a correction or rent control regulations, naturally occurring affordable housing will continue to disappear.

“Naturally occurring affordable housing is a critical piece of meeting the demand for affordable housing in high-cost cities,” Maya Saraf, UCLA Anderson School of Management MBA 2019 alumna, tells GlobeSt.com. “Because there is not enough new affordable units being built, it is critically important to preserve the existing supply of affordable units, which includes NOAH.  Building new affordable housing, such as those built with federal low-income housing tax credits, is besot by challenges including restrictive zoning, nimbyism, and rapidly escalating construction costs. Providing enough affordable housing in high-cost cities requires multiple solutions in addition to building new affordable housing. These include inclusionary zoning, allowing accessory dwelling units by right, and importantly, preserving the supply of existing affordable units.”

Repositioning class-B and class-C product into high-end luxury housing has provided the most optimum returns. Despite high demand for more affordable product, it generally offers lower returns than value-add business plans. “Even though there is high demand, developers may choose to demolish or convert these units into luxury units due to the relatively higher returns they can earn,” says Saraf. “A developer can come in and buy an older NOAH building, often for a discount, renovate the building with high-end features and finishes, then raise rents substantially to make a much greater return on investment than if they preserved the building as affordable.”

For investors that are interested in investing in and developing affordable housing, there isn’t always enough in the capital stack to work out the deal. “On the other end of the spectrum, a developer may choose to convert the property to LIHTC housing in order to access tax credit equity,” says Saraf. “Although this helps preserve the supply of affordable units, LIHTC housing has stringent requirements in terms of rents, hold periods and required renovations. Moreover, tax credit equity generated in LIHTC projects may not be enough to fund acquisition and rehabilitation costs, leaving projects with funding gaps that must be made up through other sources such as soft debt or public subsidies.”