Between interest rate fluctuations, energy credits, and bank liquidity issues, capital raising for the Low-Income Housing Tax Credit (LIHTC) equity market has become increasingly difficult. But the vital tool for affordable housing construction is more important than ever: the United States has a shortage of over seven million low-income rental units, according to the National Low Income Housing Coalition. And no state has an adequate amount of affordable housing.
Industry experts Dudley Benoit, senior managing director for Affordable Equity Investor Relations, and Macy Kisilinsky, senior managing director for Affordable Equity Originations at Walker & Dunlop, explain the current LIHTC dynamics and how industry players are rethinking their approach in light of these challenges.
A challenging year
Banks, driven by their Community Reinvestment Act (CRA) mandates, have traditionally been major players in the LIHTC market. Recently, though, liquidity issues in the banking sector have left many institutions with less capital available for affordable housing investment, putting pressure on the entire LIHTC equity market.
Economic investors, meanwhile, are also pulling back. Typically, investors compare LIHTC credit yields to 10-year Treasury and triple-B bonds, Benoit notes. As interest rates rose over the last few years, investors began to demand higher yields on LIHTC investments to remain competitive with other yield opportunities.
The recent decline in rates hasn't immediately translated to lower-yield demands from investors. "There's a lag," Benoit explains. "We may see it in six or nine months down the line, but today investors are not dropping their demands."
Another wrinkle, Kisilinsky notes, is the fluctuations in the market. While developers have not lost interest in pursuing LIHTC deals, investors searching for increasing rates of return have eaten into affordable housing plans. Developers are getting some help from state credits covering the gap, but Kisilinsky notes "the number of units they're able to build is less, and even on CRA deals, you're often delivering tough news to the developer."
Additional competition for LIHTC dollars has come from energy credit programs, such as those in the Inflation Reduction Act. These credits are appealing due to their shorter time frames and transferability with similar yields as LIHTC credits. "Unless you've got a real commitment to affordable housing or ESG, it's hard for a disciplined investors to choose LIHTC," Benoit says.
Strategies for investors and developers
In response to these challenges, investors are increasingly focused on working with experienced sponsors and high-quality projects. In other words, a "flight to quality," Benoit says. Developers who want to appeal to the widest number of economic investors are putting forward transformative projects with compelling stories and significant community impact.
Kisilinsky suggests that acquisition-rehab projects with tenants in place, especially those with project-based Section 8 vouchers, can be attractive in the current market. "You reduce the amount of risk with construction because it's already been built," Kisilinsky explains.
While the current market presents significant challenges, there's potential for positive change on the horizon. The growing national focus on affordable housing could lead to increased support for LIHTC projects. And local initiatives like state tax credits could help unlock new opportunities for affordable housing development, Kisilinsky adds.
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