Uncertainty surrounding various tax credit programs is causing many in the market to question their development pipelines.
By Frances Ferguson (MultiHousingNews.com Article) — Looking ahead to 2018, the immediate future for affordable rental housing construction and preservation by nonprofits is mixed. Uncertainty surrounding various tax credit programs is causing many in the market to question their development pipelines. Those tax driven programs have been the source of major financing—providing the critical capital that allowed projects to serve the growing demand for housing for lower income renters. The potential impact on the overall market is worrisome, as both the 9 percent credit and the non-competitive 4 percent credit play key roles in both production and value add markets.
Meanwhile there are several encouraging signs on other financial fronts. These positive signs are coming from three sources: relative predictability for interest rates; innovation occurring in methods to finance acquisition, development and rehab; and a renewed commitment from the government sponsored enterprises to do more to help deals that benefit low- and moderate-income renters pencil out.
Predictability in the capital markets
Interest rates have been bumping around lately, but they are predicted to move slowly higher in 2018. Nonprofit affordable housing developers, like most investors and asset owners, prefer predictability. Although higher rates will increase costs for new construction and for refinancing, next year’s rate increases won’t be a shock. A new chairman of the Federal Reserve is set to take charge in 2018, and the consensus among economists is for no substantive change in the trajectory of interest rate policy. That kind of continuity is good for the affordable rental housing market.
And let’s look at the numbers. I am not dismissing the margin squeeze that comes from higher debt costs for affordable housing developers. I am saying that the sky isn’t falling because interest rates in 2018 are still expected to be low compared to historical levels. For example, a decade ago, the 10-year Treasury, the benchmark for longer-term debt, was about 4.5 percent, more than two percentage points above recent levels. Indeed, the collective forecast from economists surveyed by the Urban Land Institute is for the 10 year to end 2019 near three percent.
Innovation in finance and acquisition
As the affordable housing asset class becomes more widely recognized for the security of its occupancy, operations, and returns, new sources of financing deals are taking shape and gaining momentum. Recently, Aeon, a large nonprofit rental housing owner and developer in Minneapolis closed its first purchase using funds from the Greater Minnesota Housing Fund (GMHF). The $77 million purchase of 10 properties comprised of more than 760 apartment homes was the first transaction financed by the GMHF. GMHF’s mission is to help owners like Aeon maintain the affordability of naturally occurring affordable housing (NOAH), essentially rental homes within financial reach of moderate income families that are not financed with tax credits. The GMHF is one of a growing number of funds focused on preserving existing unsubsidized affordable housing. GMHF is particularly valuable because of the range of returns it offers investors, especially to those investors that are focused on retaining affordability of rental housing over time.
Meanwhile, I also anticipate that 2018 will see growth in participation by the growing set of “impact” investors who will provide patient and social-return based capital. The success of the Local Initiatives Support Corporation’s $100 million bond proved that investors are willing to provide enterprise-level capital for affordable housing and community development, an evolution from project specific support that has been the linchpin of affordable housing and community development for decades. The number of offerings in this space continues to grow, as do the investment advisors who are familiar with them. In addition, the launch of Impact Us is an important new platform for investment in community development funds
The key to providing unrestricted and flexible capital successfully rests on the ability of investors to assess an organization’s strength and weaknesses. I’m seeing more nonprofit developers enhancing their accounting systems, implementing portfolio-wide asset management strategies and bringing on senior level chief financial officer talent, elements necessary to present the best package possible to investors.
The impact of the GSEs
Finally, my 2018 outlook is fueled by the expectation that Freddie Mac and Fannie Mae will accelerate their work to provide capital to the affordable rental housing sector. For years the two companies have been important investors for rental housing—during the financial crisis they often were the only consistent investors. Today, both organizations are re-tooling their small balance loan programs in order to meet the financing needs for the kinds of small apartment buildings that are home to many low- and moderate-income renters. According to the Joint Center for Housing Studies at Harvard, the five- to 19-unit apartment segment is home to 25 percent of all renters, so the GSEs support of loans to this segment is extremely important, particularly to low- and moderate-income families served by nonprofits.
I’m especially hopeful for 2018 because the GSEs have consistently affirmed their financial support for deals that that involve the Low Income Housing Tax Credit, arguably the most successful financing instrument for properties affordable to low- and very-low income renters. Although fewer new LIHTC apartments are being built than are needed to affordably house an increasingly rent burdened population, I expect the GSEs to help keep a floor under prices, enabling more units to be built and rehabbed, all else equal.
The nonprofit affordable rental housing market is confronting critical headwinds going into 2018, but I’m confident that our sector has the skills and innovative energy to push through and maintain and develop the quality homes that we know are needed.
Frances Ferguson is acting vice president for Real Estate Programs at NeighborWorks America, a national non-profit intermediary that supports the development and preservation of rental housing affordable to moderate- and low-income families. In addition, Ferguson leads the Strength Matters program at NeighborWorks America, an initiative designed to increase the operational and financial efficiency of nonprofit rental housing owners.