Housing affordability continues to be a major crisis across the United States. For many, homeownership falls outside of reach as prices soar in key markets and construction costs make it difficult for builders to turn a profit on starter homes. The result is many would-be first-time homebuyers pushed into the rental market, another place where supply and demand dynamics pose critical problems. Despite the challenges many Americans face finding quality housing options, the situation offers multifamily property owners a key investment opportunity, specifically with existing rental units in the affordable and workforce arena where long-term demand is all but assured.
That demand is better understood when reviewing the decade-long run of new construction activity focused primarily in the upscale marketplace. During the same period, considerable construction costs, lacking incentives and local regulatory constraints made the delivery of new supply of lower cost units financially infeasible for developers. Compounding the situation further are the institutional capital requirements for return on investment, which are often unachievable with new ground-up affordable rental developments. These issues persist today and the result is a deep shortage of apartment units with rents palatable for lower income individuals and families.
Existing supply figures paint the picture. The National Low-Income Housing Coalition’s (NLIHC) Out of Reach 2020 report indicates there are only 36 affordable and available rental homes for every 100 renter households with extremely low incomes. Additionally, every state and nearly every county in the U.S. lacks an adequate supply. As a result of all these factors, existing affordable and workforce rental units are in extremely high demand with the nation’s lower income renters, of which there are unfortunately many.
Notably, the struggle to afford rental housing is not confined to minimum wage workers. The average renter’s hourly wage is $18.22, several dollars below the National Housing Wage (NHW) of $23.96 per hour. As a point of comparison, some of the most important workers recognized during the COVID-19 outbreak earn even less. For example, the median wage for grocery store cashiers, maintenance workers and home health aides is between $11.60 and $12.94. These essential workers need to work between 74 and 82 hours per week to afford a modest two-bedroom apartment while only spending 30 percent of their income.
The economic stress brought on by COVID-19 has aggravated the affordability issue further as record levels of America’s workforce became partially or fully unemployed during the pandemic. While some of those affected have returned to work, not all jobs have rebounded. Many are still struggling to pay their rent.
Though somber, the affordability crisis provides a silver lining for apartment owners, specifically those actively investing in the affordable and workforce arenas. Pent-up unit demand for these existing properties makes them highly attractive assets. Financing availability, whether for the acquisition or refinancing of these properties, remains essential to ensure these rental units aren’t converted or demolished. Fortunately, despite all of the challenges of the COVID-19 pandemic, liquidity does still exist in the market today to the benefit of the borrower.
True to their missions of providing key finance solutions for housing, Freddie Mac and Fannie Mae provide critical avenues for apartment finance, serving borrowers nationwide. Both offer attractive small balance loan options for multifamily properties and owners across the country.
Freddie Mac’s Optigo Small Balance Loan Program offers financing for qualifying multifamily properties with loans ranging from $1 million to $7.5 million. Available as an acquisition or refinance solution, the program serves borrowers with workforce properties that include five residential units or more with 90 percent or more occupancy. Notable components of the program include full-term interest-only options, low interest rates, non-recourse, up to 80 percent loan-to-value and flexible pre-payment options. Competitive pricing and streamlined loan processes are also cornerstones of the program.
Fannie Mae’s Small Loan Program offers an ideal option for financing affordable apartment properties. The program offers loan amounts up to $6 million in markets across the country, including in regions where other lenders are less active and options are sparse. With fixed and variable rate options available for the acquisition or refinance of a property, the benefits of Fannie Mae’s program include competitive interest rates, non-recourse debt, flexible pre-payment options and quick loan closings. A maximum LTV of 80 percent is offered in 5- to 30-year terms. Both Fannie Mae’s and Freddie Mac’s programs are enabled through partnerships with reputable lenders able to offer proven expertise, speed-to-close and nationwide coverage.
While the agencies act as a key debt resource today, they, similarly to alternative debt providers, are naturally taking a conservative approach to deals right now. One obvious factor in lenders’ cautious stance is the looming, unresolved issue of renters who still owe back rent to their landlords. Being closely watched is the federal eviction moratorium that began in March 2020 and extended to June 30, 2021, and which has recently been struck down by a federal judge before getting a temporary stay order. The growing debt owed may cause further displacement once it expires. In a March 2021 update to its October 2020 report, the Federal Reserve Bank of Philadelphia estimated that 1.8 million renter households will owe $11 billion in rent—approximately $6,100 per household. That number represents 5.4 percent of all renter householders and 15 percent of those who experienced job loss due to COVID-19.
While debt providers are being more cautious, financing properties is not impossible. It may just be a bit more arduous to source capital in the coming months. Experienced owners will likely navigate and weather obstacles more effectively than newcomers to the space and continue to get their deals done.
It’s important to remember that current challenges within the sector don’t adequately reflect the overall quality of the asset class. Existing affordable and workforce apartment property supply is nowhere near meeting surging demand. These assets will remain highly instrumental in housing a large populace for years to come, particularly near major metros where employment centers are located. Debt solutions for these properties, both for purchase and refinance, remain accessible. While delinquency distress will undoubtedly need to be addressed, long-term ROI driven by demand will help the sector overcome the pain. All considered, owners should be encouraged by the bullish investment prospects for this essential real estate class. Of course, as is true for all real estate opportunities, investors should closely evaluate the merits of any specific property investment before moving forward. However, the long-term outlook of the sector still clearly points to a positive opportunity overall.
Pat Jackson is CEO of Sabal Capital Partners, LLC., a single-source commercial real estate lender. Sabal is a partner to both Fannie Mae and Freddie Mac, financing affordable and workforce multifamily properties nationwide.
