The Demand for Affordable Multi-family Housing Still Beating Supply: How Incentive Programs Help

The Demand for Affordable Multi-family Housing Still Beating Supply: How Incentive Programs Help

There is a looming canyon between the demand for affordable multi-family and workforce housing and the supply; incentive programs are a necessary bridge across – helping real estate developers build and maintain properties they can offer to prospective tenants seeking safe, affordable housing options. We looked at a comprehensive report from 2015 as well as some current programs to see what challenges developers face as well as the potential solutions for landlords and tenants alike.

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In 2015, the Mortgage Bankers Association published a report  that detailed the affordable housing situation and the causes of the current predicament. The report identified the groups most affected by the need for affordable multi-family/workforce housing:

The Low/Very-Low Income Earners -  Who cannot afford to build or maintain safe, quality housing. The Workforce – Who need affordable housing near job centers. Special Populations – Veterans, elderly, disabled, or the chronically ill whose needs aren't met by the housing market and require affordable housing.

The MBA report noted that there was a confluence of events that created a tighter rental market than before. During the Great Recession, median incomes dropped sharply, and similarly multi-family housing construction slowed to the lowest level since 1964 (when data was first collected). In another bout of poor timing, the huge millennial generation came of rental age, as other groups went from standard home-ownership to multi-family rental living. Lower incomes, slowed construction, plus a large spike in demand for multi-family housing resulted in a very tight rental market with the lowest overall vacancy rates reported since 1985. Despite the lower incomes produced by the recession, rental rates showed growth at twice the rate of inflation.

According to the MBA, of the low/very-low income tenants, 15 million households spend 30% or more on their housing alone. Due to the tight rental market, the workforce group needs options near job centers. Despite other successful programs, the special populations require affordable housing because their needs aren't met by the traditional housing market. Each of these groups faces significant need for affordable housing. The MBA reports reflects that developing land and maintaining property in highly-populated, urban areas is expensive; however, that only underscores the need for incentive programs.

A recent article  in National Real Estate Investor (NREI) tackles a variety of incentive programs for affordable housing. One new rule ensures that lenders Fannie Mae and Freddie Mac must increase mortgage financing to help preserve affordable housing. The FHFA's (Federal Housing Finance Agency) “Duty to Serve” rule has led these huge lenders to create new impressive programs for affordable housing development. According to the NREI article, in 2017's first quarter, Freddie Mac alone financed just shy of 160K multi-family apartments with 83% of them being affordable. The article also states it expanded offerings to include: rehab products to help owners with updating and upkeep of  affordable apartments via low-interest loans, lower interest rates for owners improving energy efficiency, bridge financing, and tax-exempt loans for new construction and rehab projects.

By comparison, in the same quarter Fannie Mae financed 202K multi-family apartments with the majority of those being affordable housing at 85%. The article cites expanded offerings of: M.TEBS program that allows borrowers a low bond rate with rehab/immediate delivery deals, and green financing loans that offer lower interest rates if developers go green.

The NREI article gives examples of programs outside the scope of giants Fannie and Freddie, such as a new program in New York called simply “Affordable New York.” This program gives tax exemptions to properties that meet specific criteria; one of those is that 25-30% of the units at the property must be affordable. This isn't a short-term deal, either – under this program owners have to agree to long-term affordable rent for up to 40 years to qualify for partial property tax exemption.

With the large need for affordable housing and the variety of groups who make up the demand, the supply can only be met through innovative incentive programs that help deliver available properties to prospective tenants. From large lenders like Freddie Mac and Fannie Mae and their incentive programs, to local government incentive tax programs like New York's, developers can look for incentive programs to help develop, update, or maintain affordable housing and add to the supply that is, and continues to be, a necessity for many individuals and their families.

Elizabeth Wheeler