Buyers Get Aggressive About Affordable Housing

The widespread layoffs and pay cuts stemming from the COVID-19 pandemic have made the need for affordable housing more critical than ever.

“The vast majority of low-income households are rent-burdened,” says David Leopold, senior vice president and head of Affordable Housing at Berkadia. “Demand for units that low-income people can afford vastly outstripped the number of units available to them. So we came into this crazy COVID crisis with that state of affairs, and unfortunately, COVID hasn’t improved them.”

Investors recognize this need, according to Leopold.

“We’ve seen consistent investor appetite,” Leopold says. “This is from buyers of real estate, not LIHTC [Low-Income Housing Tax Credit] investor appetite.”

Berkadia is seeing buyers who want to be aggressive about buying affordable housing. “The appetite is high,” Leopold says. “Cap rates have come in, particularly on the Section 8 product.”

Leopold says those buyers believe the long-term need for affordable housing should last well past COVID.

“For the most part, in major metros, the allowable rent in these restricted properties are well below market,” Leopold says. “Investor appetite suggests a belief that the declines in market rents, which are appreciable, will not exceed the gap between current market rents and restricted rents.” 

While market-rate rents are declining, it’s doubtful they challenge affordable housing.

“To the extent that the top-of-the-market rents decline a little bit or even more than a little bit, it doesn’t affect restricted-rent affordable until that number is such that now restricted rents are equal to market rents,” Leopold says. “Most major metros have a long way to go before that happens.”

Most of these affordable properties had waiting lists, even before COVID.

“Even in this environment, if you build a rent-restricted property in most markets, you lease it fast and at a discount to market,” Leopold says. “Most properties I’ve been to are well-managed and still have waiting lists. The fact that starts have lagged in prior years means that the affordable housing crisis continues. We went into COVID with an affordable housing crisis in most markets.”

That crisis will probably be exacerbated in the near term. COVID-related construction issues, combined with a pullback from LIHTC equity sources, have stymied new production to a degree.

“Supply chain issues that mirror the conventional multifamily market, but exacerbated by a pullback in the tech equity markets have made it worse,” Leopold says. 

Some states, like Pennsylvania and New Jersey, have allowed affordable housing to be considered “essential” during the COVID shutdowns, which helped keep production moving along.

“Certainly, we have experienced construction delays with inspections,” Leopold says. “Not all jurisdictions had enough inspectors. So there were delays.”

Overall, multifamily permits have fallen 22% from September 2019 to September 2020, which exacerbates the housing crunch, according to Leopold.

“That 22% is not as dramatic as it sounds because the numbers were so inflated last year,” Leopold says. “But if new multifamily starts continue to decline, then the broader trend of rent and occupancy rates will be impacted.”