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Why Multifamily Investors Are Betting on Affordable Housing in 2020

Posted on Dec 4 2019 - 5:02am by 2!xMyNQ#FV8h4U

Factors including low home affordability, defensive investment strategies, and new tax-exemption legislation emphasize the considerable upside to investing in the affordable sector.


By John R. Williams  ( Article

With its strong fundamentals, the multifamily asset class is increasingly attracting higher levels of institutional and private equity investment both domestically and abroad. Earlier this year, CBRE reported that in 2019, U.S. investment activity in apartment communities would exceed $150 billion, approaching peak volumes, while demand for multifamily properties across Europe remains healthy as well.

Given the crowded marketplace, apartment valuations have soared, creating challenges to profitability for some investors in the multifamily space. As a result, this cohort continues to search for innovative ways to increase ROI in such a heated environment. One solution that continues to rise to the top of investor targets is affordable housing.

Avanath has been investing in the affordable housing sector on behalf of institutional investors since our inception in 2008. This asset class delivers stability in times of both prosperity and economic uncertainty. Resident retention rates are consistently high, providing a steady source of rental income for investors.

Further, demand for affordable properties consistently outpaces supply by a wide margin. As the gap between the need for affordable units and delivery of these units nationwide grows, this property type is becoming increasingly attractive as a niche market for investors of all categories.

Several drivers of this demand are making a stronger case for affordable housing investment in 2020 and beyond. Here are a few of those drivers:

1. Low Housing Affordability

The inventory of single-family homes for sale has been shrinking for some time, leading to rising home prices and decreasing affordability in many markets.

Even historically low interest rates have not done much to move the needle on the national homeownership rate, and wages have not kept up with sales price growth.

In addition, market-rate apartment rents continue to increase as luxury apartment communities capture the bulk of multifamily developers’ capital, largely because only high-end apartment buildings pencil for development in the face of rising construction costs.

All of these factors are creating higher tenant demand for residential units that lower and middle-income families can afford. In fact, the more affluent a particular submarket or neighborhood is, the greater the demand for affordable communities that serve the workforce.

2. Defensive Investment Strategies

While affordable housing is beneficial to investors regardless of timing, the sector is especially rewarding late in economic and real estate cycles.

Late-cycle dynamics can create a challenging financial environment for sectors such as office, hospitality, and retail, which are susceptible to fluctuating demand. Alternately, demand for affordable housing remains consistent throughout all cycle stages, making this category a particularly wise defensive strategy for the investor community.

3. New Tax-Exemption Legislation

Some of the newly passed housing laws serve to aid in the development of affordable housing communities.

For example, in California, SB 196 was recently passed by the state legislature. In addition to giving community land trust affordable housing developments property tax exemptions, the bill has several built-in benefits that experts believe will aid in bringing and keeping affordable housing in the market. One of these benefits is separate tax-exemption levels for for-sale and for-rent properties, meant to protect lower-income families.

SB 196 and similar federal and local legislation provide tax breaks to those involved in the affordable housing arena, which boosts development and investment in this sector and makes affordable communities more available to those who need them.

Affordable housing investment will continue its upward trajectory, and it will garner increased attention from institutional and private equity investors in the years ahead. This is a smart investment category for entities seeking to diversify their portfolios and increase their yield. With low home affordability, defensive investment strategies, and new tax-exemption laws as drivers, the affordable sector is well-positioned to help investors meet their financial and strategic objectives in 2020 and beyond.