Financing for and development of affordable housing has long been a critical issue in the U.S. In Chicago, over 440,000 households pay more than half of their income on housing, according to the Center on Budget and Policy Priorities.
While the need hasn’t gone away, creating workforce housing continues to be a challenge. From sourcing the money to back a project to sidestepping NIMBY and gentrification landmines, the situation hasn’t gotten any easier over the years. So what is the current state of affordable housing and what might be its prognosis?
In June, the Trump administration proposed ending the conservatorship of Fannie and Freddie, effectively privatizing these government-sponsored enterprises. Could this legislation affect the availability of affordable housing in this country? And just how stable is the footing beneath workforce housing regardless of potential changes at the federal level?
Phil Melton, executive vice president, national director of affordable lending and FHA lending at Bellwether Enterprise, notes that the prospect of privatization for Fannie Mae and Freddie Mac is well-trod territory.
“There’s been a lot of conversation about that for the past few years,” Melton said. “Prior administrations were looking at the same thing and they all recognize there is a need for Fannie and Freddie, that they provide a tremendous benefit to the market.”
When it comes to privatization of Fannie Mae and Freddie Mac, it’s important to split single-family liquidity from any focus on multifamily. These two camps tend to be rolled together in the public consciousness, but they should be treated differently.
Regarding multifamily financing, Melton believes that some methodology of privatization probably makes sense. “If you look at the profits that are being generated by both Fannie and Freddie, with the right safeguards in place, you probably now have a mechanism that can be differently regulated than it was before,” he said.
“Practically all of their earnings get swept up to the Treasury, so we’re not left with a capital buffer that we would use in a privatization,” Melton said. “There is a tremendous value that [Fannie Mae and Freddie Mac] bring as multifamily lenders, providing that liquidity for affordable and pro-workforce housing that’s really pretty important in the market.”
Irrespective of Fannie Mae and Freddie Mac, the lending environment for affordable housing still remains very robust. There is still significant Community Reinvestment Act (CRA) need, which means banks are aggressively pursuing opportunities. Rate increases, on the other hand, could have the most potential impact in the forthcoming months and years.
“As rates go up overall, you start to see compression on loan proceeds,” said Melton, “which makes transactions that are already tight even tighter to try and get done from a developer perspective, because we’re not going to be as low in the rate environment as we have the last couple of years.”
The jury is still out, however, on the newly created Opportunity Zone program, simply because the mechanics of the system have yet to be explained. While investors await guidance from the Treasury Department, some are starting to put funds together within the constraints that they expect to be in place, though there aren’t any guarantees yet.
Perhaps the most impactful strategy will come from institutional investors with a mission focus beginning to invest in various funds. This comes with its own challenges, as the return on investment for affordable housing can’t match market rate, making it a less enticing endeavor.
“That’s the sort of thing you need to find, investors that are willing to take what may be a slightly lower-than-market-rate yield from an investment perspective,” said Melton. “If they did a conventional market rate property, they are probably looking for yields in the 20s. For something that has a mission focus it’s more like 13 to 15 percent. So we need to find some of that institutional liquidity that’s willing to invest those sorts of dollars knowing that the rents aren’t going to be quite as robust and won’t be able to grow quite as much.”
Even with a blank check to develop affordable housing, finding a place to install it can be hard. Every affordable unit that a developer proposes in a market rate neighborhood equals a dozen community activists concerned about falling housing prices. And the opposite is true as well, with attempts to add market rate housing to impoverished areas eliciting cries of “gentrification.” Somewhere in between lies mixed-income housing development.
“You see municipalities coming up with ways of requiring some sort of inclusionary housing policy in order to get permitting. I think that’s a good first step,” said Melton. “The second thing is being able to figure out ways to make the capital stack work such that you’ve got enough market rate units to subsidize the affordable, and find investors to be able to do that.”
In the past, certain areas in certain cities were known for their affordable housing and that was the primary rental source for that particular marketplace. In recent years, affordable housing has been installed with some success into specific markets.
“More and more communities are trying to find ways to do that, to be able to keep their teachers and firefighters staying and living in the communities where they work,” Melton said. “I think that it has to be a policy issue at the local level, as well as the state level, to really drive some of that. Affordable housing can be a real boon to a community, in terms of the dollars and return and the trickle-down economics that occur when you start developing in an area.”
Preservation of Affordable Housing (POAH), a nonprofit organization dedicated to preserving and creating affordable communities, recently completed Woodlawn Station, their fifth new construction project along Cottage Grove Avenue in Chicago. The property will provide replacement housing for 35 former Grove Parc Plaza residents, another 20 units for middle-income residents and 15 units of market rate housing.
Funding for the project came from POAH, the Illinois Housing Development Authority, U.S. Department of Housing and Urban Development and other lending partners. Nia Architects designed the project and Skender served as base building and interior construction manager.
A lot of the biases are starting to dissipate as more and more communities are seeing the high quality that developers can employ when they’re conducting affordable housing transactions. Are investors willing to follow, putting equity behind mixed-income projects so that the haves and have-nots aren’t perpetually divided?