NEW YORK CITY-Regardless of whether multifamily inventory per se is reaching the saturation point in certain markets, the affordable segment faces an acute shortage, says CohnReznick LLP in a new report. The study, which focuses on the operating performance of apartment properties financed with Low Income Housing Tax Credits, cites an imbalance between supply and demand generally; in almost every one of the past 15 years, LIHTC demand has outpaced supply.
“For those who think that our country has ‘too much housing,’ the fact is that most markets have a shortage of rental housing,” says Fred Copeman, CohnReznick principal and leader of its Tax Credit Investment Services practice, in a release. “When it comes to affordable rental housing, this report confirms that we have a critical shortage not only in our major cities, but across the entire country. There is, in short, no room at the inn.”
As one indicator, CohnReznick says, occupancy rates in housing credit properties are high, with the median rate exceeding 96% each year between 2008 and 2010. The locally based firm calls this “another indicator of the tremendous imbalance between the increasing demand and short supply of affordable housing properties. Following CohnReznick’s earlier look at the LIHTC segment in August 2011, many survey respondents noted that “unfavorable economic conditions led to enlarged tenant bases across properties in their affordable housing portfolios.”
Operating performance improved during those three years, CohnReznick says, and at the same time the number of properties than underperformed on per-unit cash flow decreased consistently between ’08 and ’10. “The most significant improvement was the lower percentage of housing tax credit properties operating below break-even,” the report states. “Based on the data collected, the percentage of properties operating below break-even was 33.7% in 2008, 28.3% in 2009 and 25.2% in 2010.”
A number of factors could have contributed to these improved performance metrics, CohnReznick says. They include higher rental rates, lower occupancy turnover or collection losses, lower hard debt service levels and lower-than-projected operating expenses or better expense underwriting practices.
“However, none of these factors can be singled out as a principal or overriding source for improved operations,” according to the report. “Of the various causes explored, CohnReznick found that more efficient expense underwriting and more favorable debt-to-equity ratios are the two primary contributors to improved performance.”
The report also notes that the housing-credit properties compare favorably to their market-rate counterparts in terms of foreclosures. One reason, the report states, is an improvement in terms of forecasting both yield and housing credit delivery.
“While developers and syndicators tend to overestimate timing of credit delivery, the data suggest that syndicators have become more accurate in their forecasts of tax credit timing than they were in the housing credit program’s early years,” the report states. Further, it notes, “Whether improved DCR and cash flow metrics can be sustained in the coming years will depend on a number of factors, including whether the industry continues to benefit from the historically low interest rate environment that it has enjoyed in recent years.”