Unless an 11th-hour agreement is reached, an impasse will trigger the first U.S. government shutdown since 2019. Starting December 21, 2024, many non-essential federal government operations will be limited or suspended, but most multifamily financing activities will not be disrupted.
With home prices nearing all-time highs, single-family rental (SFR) housing is uniquely positioned to capture an even larger slice of the for-sale market. As structured capital markets rebound, SFR will benefit from a set of tailwinds that include robust levels of new construction and favorable trends in cap rates and debt yields. Arbor’s Single-Family Rental Investment Trends Report, developed in partnership with Chandan Economics, shows why this sector’s prospects are so strong.
Building on an organizational commitment to the inclusion of individuals from all backgrounds, Arbor — in partnership with the Real Estate Pride Council and Dr. Sam Chandan, Founder of Chandan Economics, Founding Director, NYU Stern School of Business C.H. Chen Institute for Global Real Estate Finance, and Co-Chair of the Real Estate Pride Council — hosted a speed networking event in Manhattan on November 20 for local LGBTQIA+ students and commercial real estate mentors.
Small multifamily continued to moderate through the midpoint of 2024, amid strong demand despite an elevated interest rate environment and rising property-level yields.
As the interest rate outlook brightens, unique opportunities for outsized returns abound, Dr. Sam Chandan, Founding Director of the C.H. Chen Institute for Global Real Estate Finance at the NYU Stern School of Business and the Non-Executive Chairman of Chandan Economics, explains in this top-level overview of Arbor’s latest Special Report.
Continually challenged by low inventory, affordable housing sits at a crossroads following the 2024 election. Incoming leadership plans to introduce market-based principles to an agenda that may also include an expanded Housing Choice Voucher program. Arbor’s Affordable Housing Trends Report Winter 2024/2025, developed in partnership with Chandan Economics, provides insight into a pivotal multifamily sector about to embark in a new direction.
The skies surrounding commercial real estate markets are clearing, suggest the Emerging Trends in Real Estate 2025 (ETRE 2025) findings. As pandemic-related structural changes settle into place, cyclical economic trends, such as interest rates, demand, and construction levels, are now the key drivers to watch.
As more single-family rental (SFR) operators rely on build-to-rent (BTR) development to supply new inventory, construction starts have steadily risen, reaching another record high in the third quarter of 2024. SFR/BTR construction has eclipsed 92,000 units in the last four quarters — an all-time high and an annual increase of 31.4%.
Arbor Realty Trust and Chandan Economics’ newest joint report series, Affordable Housing Trends Report, focuses on a critically important segment of the multifamily residential market in the United States: affordable housing. The affordable housing market is a complex but vital part of the housing industry that is increasingly receiving attention from the public and private sectors.
This report series will provide proprietary research and analysis that connects the many disparate data points into a single source for multifamily investors, owners, developers and other industry stakeholders. Our aim is to provide a better understanding of the many facets of affordable housing and the major trends shaping the market.
Published semiannually, this report will mainly focus on Affordable housing supported by government subsidies or tax incentives like the Low-Income Housing Tax Credit (LIHTC), as well as the Naturally Occurring Affordable Housing (NOAH) segment. It will address some of the significant changes we’re seeing both in terms of policy decisions and market dynamics and describe some of the opportunities for investment and financing in the space.
Key Findings
Affordable housing, denoted with a lowercase “a,” broadly refers to housing that costs less than 30% of a household’s income. This threshold can vary based on other industry definitions. Capital-A “Affordable Housing” is defined as units that are supported either by a government subsidy or tax incentive.
Units that do not receive subsidies, but are affordable to low- and moderate income renters. In this analysis, a NOAH unit is defined as one where a renter household earning at most 80% of the Area Median Income would spend less than 30% of its income on rent plus utilities.
The federal government’s major program for assisting low-income renters in the private market. A subsidy is paid to the landlord and the occupant pays the difference between the rent charged and the subsidy.
Tax credits provided for the acquisition, construction and rehabilitation of affordable rental housing for low- and moderate-income tenants.
A U.S. government agency that supports community development and home ownership. The Agency oversees many Affordable housing programs, including the HCV and Project-Based Section 8, and provides mortgage insurance for multifamily properties.
The National Low Income Housing Coalition estimates that the U.S. has a shortage of 6.8 million affordable rental homes. Further, the share of U.S. renter households that pay more than 30% of Area Median Income (AMI) on rent – a threshold the federal government uses to define whether or not a unit is affordable – sits at a concerning 42.7%.
States with large populations like Florida and California are particularly rent burdened, with the share of households spending nearly one-third or more of their income on rent totaling 50.0% and 48.4%, respectively, according to the latest American Community Survey (Chart 1).
The troublesome picture of national rental affordability comes after a decade-long stretch between 2011 and 2020 when average annual rent growth topped average hourly earnings growth.1 While the pandemic did temporarily reduce rent prices nationally, it did not result in a permanent reset of rent levels. Rental housing costs are soaring in 2021, with asking rents growing 10.3% from a year earlier through August, according to RealPage.
Further exacerbating the affordability crisis, the shutdown’s labor market impacts, both in terms of total employment loss severity and pace of recovery, have asymmetrically affected low-income workers. Due to loss of employment and wages, many low-income households could not make their rent payments. A Chandan Economics analysis of the Census Bureau’s Household Pulse Survey indicated that low-income renters consistently had lower rent payment rates than moderate- and high-income renters throughout the pandemic (Chart 2).2 The recent end of the eviction moratoria adds another layer of pressure to low-income renters as it may present additional negative impacts on this renter population.
1 Based on Chandan Economics Analysis comparing the average hourly earnings wage growth of private sector workers and the Bureau of Labor Statistics (BLS) Consumer Price Index for rent of primary residence.
2 Data are from weeks 2, 14, 22, 30, and 37 of the U.S. Census Bureau’s Household Pulse Survey.
The single-largest Affordable housing program that directly addresses supply is the low-income housing tax credit (LIHTC). LIHTCs come in two forms: a 9% tax credit to incentivize new Affordable development and a 4% tax credit for the rehabilitation and preservation of Affordable supply. According to the National Housing Preservation Database, LIHTCs collectively support roughly 2.5 million rental units.
The number of new low-income units placed into service under the program topped out at 126,796 in 2007. Since then, the number of new units placed into service fell in nine of the next 12 years, gradually sliding to 42,895 through 2019 — a 66% drop-off from its peak (Chart 3).
The decade-long slowdown of new LIHTC unit additions comes as changes in the tax code and other forces have reduced some of the incentive for adding new affordable units. Naturally, the implied value of the tax credit is more valuable in a high-tax environment, meaning that when corporate tax rates were reduced following the 2016 election and subsequent passing of the 2017 Tax Cuts and Jobs Act, a LIHTC lost some of its attraction.
The LIHTC equity price per credit dropped from $1.04 to $0.95 from fourth-quarter 2016 to first-quarter 2017, as investors anticipated and eventually received a decrease in tax liabilities (Chart 4).3 Since then, the quarterly average for LIHTC equity prices has remained between $0.91 and $0.94, according to Chandan Economics’ analysis of Novogradac’s LIHTC Equity Pricing Trends data.
As a result of the price drop, LIHTC syndicators and affordable housing developers re-structured transactions to maintain economic yields for investors and to promote continued liquidity in the space. Additionally, the more recent run-up in acquisition, construction and renovation costs has made formerly feasible transactions more challenging and reduced the number of units a tax credit allocation could support.
The drop in LIHTC equity prices also meant that Affordable developers faced more competition for the 9% LIHTC, pushing them toward the 4% LIHTC. At the same time, the GSEs expanded their platforms to allow for greater use of debt private placements, leading to further expansion of 4% bond executions.
Between the first quarter of 2017 and the first quarter of 2018, the share of new mortgages on LIHTC properties utilizing the 4% tax credit surged from 22% to 52%. The tax credit became more attractive after the December 2020 passage of the Consolidated Appropriations and Recovery Act, which established a minimum credit floor. Through second-quarter 2021, the share of LIHTC mortgages utilizing the tax credit remained elevated at 40%.
Despite the slowdown in new units placed in service utilizing LIHTC, the dollar volume of newly issued LIHTC mortgages covered under insurance from the U.S. Department of Housing and Urban Development (HUD) has been accelerating. According to a Chandan Economics analysis of HUD’s Insured Multifamily Mortgages Database, the dollar volume of newly HUD-insured LIHTC mortgages grew substantially post-Great Recession (Chart 5). The volume grew from a quarterly average of $254.7 million in 2011 to $862.0 billion in 2020, an impressive 14.5% compound annual growth rate.4
In addition to overall investor demand for Affordable housing and the growing liquidity in the sector, the increase in total mortgage volume has been driven, in part, by structural forces, namely HUD’s policy and procedures. HUD’s most substantial change was the launch of its LIHTC Pilot Program in 2012. The Pilot Program initially allowed for greater per-unit rehabilitation costs under Section 223(f) and streamlined mortgage application requirements, resulting in quicker approval timelines.
From 2012 to 2018, HUD’s loan volume of LIHTC transactions increased from 5% to 34%, according to Novogradac. Updates to the program in 2019 included allowing substantial rehabilitation and new construction (9% LIHTC) under the 221(d)(4) and 220 loan programs. These changes made a majority of LIHTC transactions eligible for HUD-insured mortgage financing.
Most of the attention paid to the affordable housing sector tends to focus on regulation and policy intervention, but the Naturally Occurring Affordable Housing (NOAH) supply is proportionally more significant. A recent McKinsey deep-dive into NOAH concluded that the sector is “not well defined, tracked, or understood.”
According to a Chandan Economics analysis of Freddie Mac multifamily loans originated since the beginning of 2020, 84% of the units captured in the sample that are affordable at 80% or below of local AMI are NOAH properties (Chart 7).6 These data fall generally in line with previous estimates that suggest NOAH is responsible for about three-quarters of all affordable supply.
On average, NOAH properties tend to support higher rents than the Affordable housing sector, though the difference is slight. On second-quarter 2021 closed Freddie Mac loans, the median rent in NOAH properties was $1,154 — just 4.0% higher than the $1,114 in properties with rental subsidies, per the Chandan Economics analysis.
NOAH properties represent a critical cornerstone of the total U.S. affordable housing supply. Yet, because these NOAH properties lack formal agreements or an incentive structure to keep their units affordable, they are the most susceptible to rent increases that would price out low-income renters.
Generally, policy makers have paid more attention to addressing the affordable housing needs of the most severely cost-burdened renters. However, any actions taken to address affordable housing in a meaningful way must consider this segment of the market.
Housing affordability will likely persist as the uneven COVID-19 recovery progresses. The employment recovery has not been as robust for those at the lowest ends of the wage spectrum and those that rely on affordable housing the most. Additionally, the impacts of lifting the eviction moratorium remain to be seen.
Regarding tax credits, there is growing concern that LIHTCs may see some erosion in value going forward. If business income remains down due to the pandemic and related downturn, the resulting smaller tax bills may mean less demand for the tax credits. With Affordable developers often trading their LIHTCs to finance the equity portion of their capital stack, there may be an increased need for state and local government incentives to make Affordable transactions viable.
Still, some recent developments at the federal level could have a positive impact on preservation and creation of new affordable supply. The Federal Housing Finance Agency (FHFA) recently proposed substantially increasing its annual affordable housing goals for multifamily units between 2022 and 2024, which would provide a substantial boost to affordable housing development (Table 1).7 Further, as of Sept. 1, the FHFA announced that it is raising the annual lending caps for each GSE to invest in LIHTCs from $500 million to $850 million.
Additionally, the House of Representative’s proposed HUD budget expands affordability programs that influence renting for low- and middle-income earners. Expansion of Section 8 coverage should provide some relief to low-income renters and increased HOME Investment Program funding should encourage the development, acquisition and rehabilitation of more affordable housing units. The floor put under the 4% LIHTC should also incentivize developers to increase the supply of Affordable housing.
The expansion and modification of existing federal programs is a meaningful step in the right direction. Structural issues are deeply entrenched and adequately addressing the country’s perpetual undersupply of affordable housing will, undoubtably, take significant time. However, a growing conversation and an alignment of public and private ambition are supporting a more positive outlook for a sector where the reward for doing well can also be doing good.
For more affordable housing research and insights, visit arbor.com/blog
