Investors May Hold Key to Solving Affordable Housing Crisis
By Chris Callahan July 12, 2022 10:00 am
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As average rents surge annually more than 11 percent nationally and as much as 39 percent in some cities, the housing ecosystem as a whole is responding with enhanced opportunities for collaboration to address the rental housing crisis.
With pandemic-induced realities that have both necessitated and accelerated innovative public/private partnerships, investors and lenders are among those exploring new ways to develop long-term solutions to address pervasive concerns. And the formula is both effective and mutually beneficial — owners and mission-oriented investors advance their prudent business goals while directing capital that makes meaningful impacts across their communities and the nation’s affordable housing crisis.
What makes housing “affordable”? The U.S. Department of Housing and Urban Development (HUD) defines housing as affordable if housing expenses, including utilities, are 30 percent or less of a family’s gross annual income. This 30 percent is what a renter is expected to pay when receiving subsidized housing. Households that pay above this 30 percent threshold are considered “cost-burdened” or “rent-burdened” because they could have difficulty paying for other essential expenses like food, clothing or medical fees. Those who pay 50 percent or more of their gross annual income on housing expenses are considered “severely cost-burdened.”
In its 2021 report, “The Gap: A Shortage of Affordable Rental Homes,” the National Low Income Housing Coalition (NLIHC) states that the U.S. is short nearly 7 million rental homes. NLIHC also reports almost half (49 percent) of all renters are considered cost-burdened. For every 100 extremely low-income households that would qualify for affordable rentals, only 37 homes are available to meet that need. But the shortage does not only impact these households: Many that fall in the cost-burdened category are essential community workers who can’t afford to live in the same geographies in which they work.
The pandemic certainly accelerated an already growing problem of low supply of affordable rental housing. Not only were low-wage workers disproportionately affected by deep unemployment, but would-be homeowners were stalled by the same labor issues, soaring home prices and supply chain delays. As a result, these factors created a perfect storm: crowding rental markets and record-high rent increases. Compounding these rental cost factors for all families are soaring inflation levels.
For decades, public-private partnerships have helped foster the building and preservation of affordable housing after HUD subsidies began incentivizing private owners. An example of this was HUD’s introduction of its project-based Section 8 rental assistance program in 1974, and later the Section 8 Housing Choice Voucher program in the 1980s. Investment capital flowed primarily through financial institutions motivated and incentivized by the Community Reinvestment Act to pursue investments in housing via Low Income Housing Tax Credits (LIHTCs), introduced in 1986. Banks, and later, community development financial institutions (CDFIs) became and remain strong traditional partners in the ecosystem of affordable housing.
Additionally, there is much attention in Washington, including potential policy initiatives and a national Housing Supply Action Plan announced in May, that could increase the provisions for multifamily housing and preservation that could help narrow the affordability gap. However, federal resources alone will not be enough to solve the crisis.
Opportunities for the private sector to address needs in affordable housing are robust and booming. The recent evolution of mission-oriented corporate and private lenders, as well as philanthropic foundations have supported the growth of environmental, social, and corporate governance (ESG) lending and investing. Many companies are finding that investing in affordable housing aligns with both their financial goals and their corporate mission and allows entities to share the risks and rewards by leveraging efficiencies and experiences toward a common cause.
The market is ripe for innovation, not just in the transaction selection or the layers of the capital stack, but also in the partners and models executed for these much-needed projects.
Nontraditional partners like Microsoft (MSFT) and Amazon (AMZN) have pledged millions to create or preserve affordable housing in select markets. Community land trusts have become successful partners in the development of affordable housing. And innovative development solutions, like intergenerational housing for seniors and families, and workforce housing near work facilities to attract and retain talent, could see opportunities for new subsidies.
As the crisis continues to unfold, what we need to reverse this direction seems clear: Vision, innovation and collaboration. Successful models will be flexible, share risk, bring critical capital for a competitive and timely acquisition, and tackle challenges in equity for underserved and rural populations. This is certainly possible among the various lending and investing partners across the housing ecosystem; we are already seeing it.
As an industry partner, I am challenged and proud to play a part.
Chris Callahan is CEO of X-Caliber Capital, a direct commercial mortgage lender and loan servicer.
