Preserving Workforce Housing

"Affordable housing" by BrightFarm Systems

The Urban Land Institute has issued Preserving Multifamily Workforce and Affordable Housing: New Approaches for Investing in a Vital National Asset. Stockton Williams, the Executive Director of the ULI Terwilliger Center for Housing, opens the report with a Letter from the Author,

Real estate investors seeking competitive returns increasingly view lower- and middle-income apartments as an attractive target for repositioning to serve higher-income households. In response, creative approaches are emerging for preserving the affordability of this critical asset class for its current residents and those of similar means—while still delivering financial returns to investors.

This report from the ULI Terwilliger Center for Housing provides a broad-based overview of this rapidly evolving landscape. It profiles 16 leading efforts to preserve multifamily workforce and affordable housing, including below-market debt funds, private equity vehicles, and real estate investment trusts.

Collectively, the entities leading these efforts have raised or plan to raise more than $3 billion and have acquired, rehabilitated, and developed nearly 60,000 housing units for lower- and middle-income renters, with thousands of additional units in the pipeline. Several are actively raising more capital to expand their activities. They are meeting a pressing social need while delivering cash-on-cash returns to equity investors ranging from 6 to 12 percent.

The report is written with the following primary audiences in mind:

■ Developers and owners looking for new sources of capital to acquire, rehabilitate, and develop multifamily workforce and affordable properties;

■ Local officials and community leaders seeking options for attracting or creating new sources of financing to meet their rising rental housing needs for lower- and middle-income families; and

■ Real estate investors and lenders interested in more fully understanding their range of options for a product type that offers financial as well as social returns.

As the country continues to grapple with the worst housing crisis for lower- and middle-income renters it has ever known, the private sector and community-based institutions must play an ever-greater role in ensuring that existing affordable properties remain available to the many who need them, while doing what they can to produce new units where possible. The financing vehicles profiled here show what is possible and suggest opportunities for further progress. (iv)

I found Part II particularly useful, with its overview of financing vehicles. Many readers of this blog will benefit from a description of below-market debt funds, private equity vehicles and real estate investment trusts, particularly as they are illustrated with real world examples like the Bay Area Transit-Oriented Affordable Housing Fund, Avanath Capital Management and the Community Development Trust.

How Housing Matters

The Urban Law Institute, with support from the MacArthur Foundation, has launched a web portal devoted to housing, How Housing Matters. According to the website,

the Foundation selected the Urban Land Institute Terwilliger Center for Housing to create and curate a new online portal that would serve as the central source for the growing body of research on how housing matters to other pivotal drivers of individual and community success.

Through this portal and wide-ranging research, publications, convenings, awards, and technical assistance, the ULI Terwilliger Center facilitates the provision of a full spectrum of housing opportunities—including affordable and workforce housing—in communities across the country.

The How Housing Matters site is both a clearinghouse for crosscutting research and a platform for engaging practitioners, policymakers, and researchers across a range of fields. The resources on the site offer practical tools for those committed to using evidence and an interdisciplinary approach to create higher-quality housing.

Through How Housing Matters, the Foundation and the Institute hope to encourage practice and policy innovations that facilitate collaboration among leaders and policymakers in housing, education, health and economic development. The ultimate goal is to better and more cost-effectively help families lead healthy, successful lives.

I am not sure that I like how the website is organized — I don’t find it very intuitive — but I am sure that it will be populated with a lot of important research.

Reiss on Investing In Real Estate Versus REITs

Investopedia quoted me in Investing In Real Estate Versus REITs. It reads in part,

The U.S. real estate market is finally starting to fire on most, if not all, cylinders, with investors’ enthusiasm gathering steam seemingly each passing month.

According to a study from the Urban Land Institute and PwC,expectations on profitability from the U.S. real estate sector are on the upside going forward. “In 2010, only 18% of respondents felt the prospects for profitability were at a good or better level,” the ULI reports. “This has improved steadily each year, with 68% of respondents now feeling that profitability will be at least good in 2014.”

The study reports that myriad investment demographics are pouring into the market, including foreign investors, institutional investors and private equity funds, as well as leveraged debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.

“The anticipated interest in secondary markets is indicative of how the U.S. real estate recovery is expanding beyond the traditional investment hubs,” says Patrick L. Phillips, chief executive officer at the ULI. “Access to greater amounts of both debt and equity financing, combined with a sustained improvement in the underlying economic fundamentals, means that the opportunities and returns offered in smaller markets are potentially very appealing.”

A burgeoning profit avenue for investors is the real estate investment trust market, a market that is truly growing by leaps and bounds. Ernst & Young reports the REIT (Real Estate Investment Trust) market has grown from $300 billion in 2003 to $1 trillion by 2013, with growth expected to accelerate going forward.

By definition, an REIT is a corporation, trust or association that owns and, in most cases, operates income-producing real estate and/or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors. This allows individual investors to earn a share of the income produced through commercial real estate ownership, without having to go out and buy or finance property or assets.

REITs differ from traditional real estate investing, primarily due to the fund-heavy strategic asset flow from REITs, versus the traditional free, more direct access flow from real estate investing (like becoming a landlord or buying stocks from homebuilding companies.) But both investments offer distinct advantages

*    *     *

some industry experts say the advantages of both investment classes cut much deeper than the descriptions above.

One big difference is that the market for REIT shares is much closer to the efficient market described by Nobel Prize winner Eugene Fama than the market for individual real estate parcels is, says David Reiss, a professor of law at Brooklyn Law School, and an expert on REITs.

“That means that the price of a REIT’s shares is more likely to contain all available information about the REIT,” he says.

“Because individual real estate parcels are sold in much smaller markets and because the cost of due diligence on a single property is not as cost-effective as it is on REIT shares, an investor has a better opportunity, at least in theory, to get a better return on his or her investment if he or she does the diligence him or herself.”

Promoting Affordable Housing, and the Winner Is . . .

I had blogged about a competition to generate ideas to lower the cost of affordable housing, the Minnesota Challenge to Lower the Cost of Affordable Housing.  I was pretty excited about this challenge and was happy to see that a winner has been chosen:  the University of Minnesota’s Center for Urban and Regional Affairs (CURA).

CURA’s winning proposal is here.  Basically, they

propose a three-stage program for addressing the state and local regulatory cost driver. First, we will identify and summarize best practices at the state and local levels for reducing regulatory and permitting barriers to affordable housing. There is a significant national database of initiatives that can provide examples for possible implementation here, as well as the Affordable Housing Toolkit established by ULI Minnesota. Second, we will conduct an analysis of where a more complete adoption of best practices is likely to have the largest effect on the production of affordable housing, particularly those suburban cities with the largest future affordable housing goals. Finally, we will take advantage of the fact that the Metropolitan Council of the Twin Cities is currently drafting a Regional Housing Policy plan, which is a vehicle that could implement regulatory reforms and create incentives for local governments to adopt practices and policies to reduce development costs. (1)
These are all valuable things to do, but I have to say that I am disappointed that this is as good as it gets when it comes to innovation regarding reducing the cost of affordable housing construction. Perhaps the takeaway lesson is that building affordable housing is expensive and that we can only cut costs a bit at the margins. I am hoping, however, that I am wrong about that and that some innovative ideas are still out there. Are there big ideas about inclusionary zoning?  About modular construction? About public/private partnerships? We’ll have to wait and see.

Reducing The Cost of Affordable Housing Development: Lessons for NYC?

Enterprise and the Urban Land Institute have issued a report, Bending the Cost Curve on Affordable Rental Development: Understanding the Drivers of Cost, that identifies affordable housing development’s “most commonly cited cost drivers, provides a brief overview of their impact and applicability, and includes high-level recommendations to promote a more efficient delivery system.” (4). As the report notes,

Affordable housing delivery is shaped by a number of procedures, regulations, and policies instituted at all levels of the system—each with associated costs. Development costs may be dictated by site constraints, design elements, local land use and zoning restrictions, building codes, delays in the development process, efforts to reduce long-term operating costs, and the affordable housing finance system. Most affordable developments rely on multiple funding streams, both equity and debt, each of which carries its own set of requirements and compliance costs. While there may be some alignment of affordable housing land use regulations, financing tools, or programs, far too often developers must seek a complex series of approvals or obtain waivers to bring a project to fruition. This process alone can introduce costs through delays to the development timeline as well as introduce additional uncertainty and risk, which, in addition to regulatory barriers, can also increase costs. (3)

While the report offers no shocking insights into affordable housing’s cost drivers, it does provide a good overview. It also brings to mind research that NYU’s Furman Center did some years ago about the drivers of the high cost of housing construction in New York City.

Given that Mayor-Elect de Blasio has put affordable housing at the center of his campaign, his team should focus on reducing these costs as part of his overall affordable housing strategy. Mayors Bloomberg and Giuliani were not able to make any significant progress on this issue, even though doing so would be quite consistent with their approach to governance. Perhaps that makes it even more of a compelling goal for the de Blasio Administration.

Reiss on Government’s Role in Housing Finance

The Urban Land Institute New York Blog posted Housing Finance Leaders Gather to Discuss the Future of Freddie and Fannie about a recent panel on the housing finance market. It begins,

Housing finance industry leaders came together last week to debate the future role of government-sponsored lending giants, Fannie Mae and Freddie Mac. Both entities were placed under the conservatorship of the Federal Housing Finance Agency (FHFA) during the financial crisis from which they have yet to emerge.

Panelists included David Brickman, Head of Multifamily for Freddie Mac, Robert Bostrom, Co-Chair of the Financial Compliance and Regulatory Practice at Greenberg Traurig, Mike McRoberts, Managing Director at Prudential Mortgage Capital Company, David Reiss, Professor of Law at Brooklyn Law School, and Alan H. Weiner, Group Head at Wells Fargo Multifamily Capital.

The debate centered around the proper role for the mortgage giants and to what extent government-backed entities should intervene in capital markets.

A market failure or liquidity crisis is the only reasonable basis for government intervention in the housing market, according to Reiss. “However, it is not possible for the government to create liquidity only in moments of crisis, so there is a need to have a permanent platform that is capable of originating liquidity at all times,” said Brickman. Fannie Mae, which was created during the Great Depression and Freddie Mac, which was created during the Savings and Loan crisis, were both responses to past market failures.