Last month, affordable housing developer Jonathan F.P. Rose of Jonathan Rose Companies was awarded the ULI Prize for Visionaries in Urban Development by the Urban Land Institute, the D.C.-based nonprofit housing and development policy organization. Along with a $100,000 prize, the prestigious award’s aim is to highlight and honor those who are blazing new trails and setting a high standard for quality in the land use and development field.
Based out of New York City, Jonathan Rose Companies has acquired a number of high-profile affordable housing developments in and around Chicago in recent years, and has plans for continued investment in the midwestern metropolis. Rose recently spoke with REjournals about the current need for affordable housing, the process of maintaining existing affordable housing, and how Chicago developers and elected leaders are working to build housing for all.
In this current moment, when we look at the big stories in commercial real estate, we see a lot of news about how certain submarkets are booming. But when we talk about affordable housing, it seems like there may still be a bit of a void there. What’s your take on that theme and how it relates to Chicago?
So, obviously multifamily is booming all over the United States, but the affordable subsector is booming too. There is a tremendous amount of investment money seeking to buy, but it’s a very limited supply. And one of the reasons is because affordable housing can have very consistent cash flows and we’re seeing that in Chicago as well as markets all around the country.
When we talk about Chicago, there’s always this idea or perspective that for a big city, rents or home prices are going to be much lower than New York or San Francisco or other places. But at at the same time, there’s a lot of other pressures on the housing market here, whether that’s appreciation, inflation, or stagnant wages. How do we look at this general need for affordable housing in Chicago? And how does it relate to other, more expensive markets?
We find that every city — literally almost every city in America — has a desperate need for affordable housing, so it’s not just Chicago, New York and Los Angeles, etc. We’ve got a need in North Carolina and Columbus, Ohio and a lot of places that you might not have thought of. We’re having an affordable housing crisis, so the essential issue is that the cost of housing, and the construction costs, are high and incomes have not risen in alignment with the rising costs, so we’re seeing this issue everywhere.
The area median income in Chicago for a family of four is at $93,000, which by the way is almost twice the national average, so the incomes are higher here in general, but it is not as evenly distributed as it could be. So there’s a substantial number of people who cannot afford the price of the housing that’s here. And also because of decades of under-investment, some of the housing stock that is affordable isn’t in great condition.
And finally, affordable housing is great when it’s in conjunction with jobs and retail and other pieces to revitalize neighborhoods. Mayor Lightfoot has really focused on revitalizing the neighborhoods on the south and the west sides, which I think is a wonderful idea. And safe, affordable housing can be a very important contributor to that work.
One of the things we’ve been very active in is affordable housing preservation; in buying existing affordable housing, particularly projects would probably be section eight or other financing, that is at risk of going to market. We’ve been buying buildings to extend the affordability, and often these projects are under-invested and need new investment in things like roofs and windows. So we’ve been buying existing affordable housing and renovating it and seeing enormous demand and need for that in Chicago.
We’re seeing so much money out there looking for a home and there’s so much competition in certain submarkets and different product types, but I’m wondering how we’re looking at the housing market right now.
There’s an enormous amount of demand for investment in affordable housing. There are a lot of institutions and individuals who have raised funds but there’s probably more capital available than product, so the cap rates on affordable housing are getting bid down quite low. Good affordable housing projects are selling between a 3% and a 4% cap rate these days, including in Chicago.
The second thing we’re seeing is the emergence of the single family home rental markets. One of the things that came out of the last recession was the institutionalization of big companies owning single family rentals. And the way they buy them — because they’re buying tens of thousands of units a year — is by buying in an automated way. So they’ll say, these are the 20 markets we want to be in, and they’ll have an algorithm that’ll just scan every home that’s on the market. It’s really just computers figuring out what the best deals are to bid on.
So what this is doing is outbidding the regular buyers. Not only do we have a shortage of housing, we have a production shortage of affordable and workforce housing. We have investors who are buying what exists. Some of them are preservation buyers like we are, but many of them are buying [properties] to raise the rates, thus reducing the supply. And then on the affordable homes side, you also have an enormous amount of capital that’s buying up the existing affordable homes and taking them out of the market and driving up the prices too.
We’ve got a big push from the city and the Department of Planning and Development via the INVEST South/West program to take some serious steps forward in these communities that really need the investment. Going forward, do we need to keep seeing the hand of local municipalities or leaders pushing for this type of development, or are we going to be or see a point where there’s naturally occurring affordable housing in the market?
Yes, there always will be a need because with affordable housing, the construction costs are too high and the rents are low. So there’s always going to be a need for subsidies and those subsidies are always going to be allocated in some way or another, based on public policy decisions.
So, for example in Southern California, there’s such a major homeless crisis that most affordable housing funds are being focused on homeless housing. And in New York, there’s definitely a lot of funds focused on homelessness, but then there’s also an effort to create more mixed-income communities where the affordable housing dollars go farther.
There are different strategies in different cities and each one is responding to its demographic and tenants. I believe that cities have to provide targeted affordable housing funds — pick a city in America today where the market itself can provide housing that is inexpensive enough to be affordable.
This article also appears in the October 2021 issue of Illinois Real Estate Journal.