By John Williams
Investment in the affordable sector truly allows both private and institutional investors to align their profits with their goals for making positive social impact.
Although the low-income housing tax credit (LIHTC) emerged unscathed in the passage of the Tax Cuts and Jobs Act last December, many industry leaders are wondering whether the corporate tax cut will reduce the amount of LIHTC equity available, leading to a slight decline in new affordable housing development.
While the federal government hasn’t necessarily dismantled all policy in favor of affordable housing development and preservation, very little has been done to drive business in the sector forward. And it’s unlikely we’ll see any federal policy changes in the coming years that fully address the nationwide housing crisis and improve the availability of affordable and workforce housing, especially with the new corporate tax changes.
As very little is done in Washington to bolster the affordable housing sector, the question becomes: Who will ensure that Americans have access to affordable and workforce housing?
Perhaps the answer lies with private and institutional investors, who have both the capital and the incentive the federal government lacks. Although it might seem counterintuitive, these investors have a lot to gain from focusing their attention on affordable housing.
Based on our deep experience as one of these investors, we at Avanath Capital Management have compiled the main factors that make affordable housing investment attractive to both private and institutional capital.
A Mainstream Product Rarely do investors implement investment strategies that focus solely on affordable or workforce housing. Rather, many investors, both private and institutional, tend to regard the affordable sector as an alternative or niche opportunity, using affordable assets as a way to diversify their portfolios.
But why only target 15% of today’s U.S. renters when you can aim for 72%? According to a 2017 U.S. Census Bureau report, over 58% of renters earn less than $50,000 a year, with the average household income coming in around $57,000 annually. This means that affordable and workforce housing investments truly cater to the majority of Americans.
Avanath serves households that make $30,000 to $70,000 a year, which, based on the same survey, represent over 72% of renters in the country. In reality, affordable investment doesn’t serve a niche market but, rather, caters to the average American renter.
Despite this fact, a majority of multifamily investors concentrate on market-rate product that targets renters who make over $100,000 a year. That accounts for approximately less than 15% of the American renter base. As more and more investors recognize that affordable housing isn’t a niche market, increased capital and activity will flow into the affordable and workforce housing sector, increasing the preservation, and even creation, of affordable rental units.
Potential for Strong Returns Investors are increasingly finding that affordable assets can provide risk-adjusted returns that consistently exceed the performance of market-rate product. Affordable and workforce properties are almost always recession-proof, with demand actually increasing during economic downturns. Because of the severe need for, and lack of, affordable housing stock across the country, affordable communities have measurably high occupancies and low turnover, which increases a property’s net operating income (NOI).
For example, at our Castelar Apartments in the heart of Los Angeles, the property had a waiting list of over 600 people in 2017. Of the development’s 111 units, only one was made available in the past year. Even when renters do decide to leave affordable housing, there are hundreds of other households vying for a spot, decreasing the usual marketing and other costs associated with apartment turnover.
The costs of high turnover that market-rate investments must shoulder can significantly diminish investor returns. Statistically, the average market-rate multifamily community has an average turnover rate of 50%. The high turnover rates mean lost revenue while the unit is vacant plus increased administrative costs to secure a new resident, complete the leasing process, and prepare and clean the unit for the next tenant.
Affordable portfolios, on the other hand, consistently maintain occupancy rates of approximately 98% or higher. The intense demand for these units, coupled with a lack of supply, ensures that a property’s NOI is high and that investors see strong ROIs.
Opportunity for Significant Social Impact Not only does the affordable housing sector afford investment in the country’s most in-demand rental product type, it also allows institutions and private individuals to invest in positive social change.
In the latest Annual Impact Investment Survey conducted by the Global Impact Investing Network, over 60% of investors reported that they track the financial performance of their investments alongside the Sustainable Development Goals (SDGs) set forward by the United Nations. As clients and companies increasingly demand positive social impact from their investments along with returns, the impact investing sector, which includes affordable housing, will become increasingly prominent and in-demand.
Many investors are also finding that the affordable housing space enables them to align their values with profits without sacrificing one for the other. This new motivation to be socially responsible is increasingly driving private and institutional investors to the sector where the federal government comes up short.
Ultimately, as rents reach historic highs and both federal and local governments do little to abate the economic pressures on nearly half of the U.S. population, there’s increasing agreement that the investment community can solve many of the nation’s housing problems, all while maintaining profitability.
Investment in the affordable sector truly allows both private and institutional investors to align their profits with their goals for making positive social impact.
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