What’s Happening in the Affordable Housing Market

Commercial Observer recently spoke with Alvin Yeung, CPA, a managing director of tax services for CBIZ Marks Paneth, who has extensive experience in the affordable housing development market, and Gina Citrola, CPA, a CBIZ Marks Paneth managing director and shareholder in MHM (Mayer Hoffman McCann P.C.) whose focus is on attest services provided to affordable housing properties. They discuss the economic forces that are reshaping the development of affordable housing and what to expect as the marketplace evolves.

What current trends are emerging in the affordable housing marketplace?

Gina Citrola: It’s important to know the history of affordable housing to understand what’s in store for the future. The term “affordable housing” may conjure images of federally subsidized, high-rise buildings constructed in urban areas such as New York City. That was certainly the result of legislation enacted during the Great Depression and the post-World War II era. After the U.S Department of Housing and Urban Development was created in 1965, rent subsidies were introduced as a percentage of household income. Households with lower incomes, therefore, qualified for an apartment. In addition, new mortgage programs assisted millions of veterans returning from war, which largely increased private homeownership. Since the 2008 recession and in the wake of the COVID-19 pandemic, the concept of affordable housing now applies to a much larger percentage of the American population, including New Yorkers. There hasn’t been sufficient development in the past decade to keep pace with the demand for apartments or houses, particularly as more people have been working from home in the wake of the pandemic. For instance, many households have left New York City for suburban neighborhoods, which has driven up the cost of rent or the price of homes, now exacerbated by inflation.

Alvin Yeung: I would add that with the pandemic over the past three years, development has really come to a halt. Prior to the pandemic, major cities were developing many high-rises to target the affordable housing market. With the pandemic mostly past us now, I do see development ramping up again. I just heard from a client, a major New York City developer, who is reaching out to Nashville to start a project. There’s a need across the country, and developers are open to new locations. Another New York developer I know is working on a project in Oklahoma, utilizing low-income housing tax credits.

Gina: Some states are easier to build in than others. While New York has the most public housing, it also has a lot of red tape to cut through. Its need for housing, attributed to its large population, made it a focus for development. Developers will start looking at other major cities as working remotely has become more mainstream. People who work remotely can now live anywhere, so any location in the country with access to transportation and technological infrastructure could be a viable option for development.

In an age when luxury, high-end projects are very lucrative, what incentivizes developers to build affordable housing for the middle market?

Alvin: The incentives for developers really follow a three-pronged approach. First, state agencies will assist with the development of affordable projects by offering below-rate loans and “soft debt,” which is not repaid through operations but through excess income or surplus cash. Second, federal and state subsidy programs, such as Section 8, still offer rent subsidies, which generally guarantee payment of rent each month. And third, you have the indirect subsidy of federal tax credits such as the federal Low-Income Housing Tax Credit under IRC Section 42, which provides a 4 percent tax credit for affordable projects that use tax-exempt bond financing and a 9 percent tax credit where there is no federal subsidy. In addition, there are a host of smaller incentives. We have been seeing more projects developed through energy efficiency programs, utilizing solar panels and aiming for a smaller carbon footprint.

What determines affordability in the marketplace?
Gina: The federal government defines affordability as housing that costs 30 percent or less of monthly household income, a standard that applies to both rental and ownership housing. The income limits that qualify a buyer or renter for affordable housing are adjusted annually by HUD to account for inflation and the cost of living in the related state. (California and New York have higher income limits.) However, that’s the federal government’s formula. In reality, renters and owners spend a much higher percentage of their income on shelter. Affordability now is really determined by how much disposable income is left to purchase other necessities, including health care. With rising interest rates and inflation, how are investors treating the affordable housing market?
Alvin: Large institutional investors are very interested in this market. Goldman Sachs has placed a focus on investing in community redevelopment and creating affordable housing projects. Any developer will sell credits to large institutional investors. Before the pandemic, institutions were paying $1.15 to $1.20 per credit. I believe that those rates have trended downward as development has slowed to a crawl over the past three years, and with the reduction of the maximum federal corporate tax rate to 21 percent, the credits became less valuable. However, my major developer clients are still putting out bids, working with state agencies to construct affordable high-rises, and continuously exploring development opportunities given the current market conditions.

Amid the volatile economy and significant, long-term changes in the way Americans live and work, what does the future hold for the affordable housing market?

Gina: President Biden recently introduced the Housing Supply Action Plan, a five-year plan that calls for a more comprehensive approach to dealing with the housing crisis. A cornerstone concept of the plan is that affordable housing development will be a collaborative effort among investors, federal and state governments, nonprofit organizations and the private sector. No one sector can solve this on its own. Whether or not the president’s plan is enacted, I believe this all-in approach will be the future of affordable housing. It will encompass government funding, developer initiatives, private sector innovation (such as manufactured and smart homes), investment in technology and streamlined financing of loans to increase access to apartments and private homes to all Americans, no matter where they live or what their income levels are. If this approach proves successful in New York, it will be a road map for the other areas of the country struggling to meet the housing demand.

CBIZ is proud to be a partner of Commercial Observer’s IMPACT Series. As leaders in the accounting space, we are committed to kickstarting pressing conversations surrounding affordable housing and building out more inclusive communities.