Market Correction Could Revive Affordable Housing
A new UCLA report shows that naturally occurring affordable housing is disappearing, but a downturn could revive the market.
Affordable housing is disappearing, but as the cycle continues to mature and a recession looms in the future, investors could revive the market. A recent report from UCLA Anderson Forecast took a close look at naturally occurring affordable housing, and found that capital is showing increasing interest in workforce housing as the probability of a recession increases. If a recession strikes in the next two years, it could revive the market.
“That seems likely, especially if there is a market correction or downturn over the next year or two,” Maya Saraf, UCLA Anderson School of Management MBA 2019 alumna, tells GlobeSt.com. “A lot of current research points to a softening in demand for class-A properties, with a corresponding strengthening in demand for class-B and C properties. Moreover, if there is a recession, there will likely be even greater demand for affordable units, particularly from workers who lose their jobs or suffer pay cuts.”
That supply demand dynamic is actually reviving the market before a recession strikes. The investment fundamentals are fueling interest. “Due to strong demand and low vacancy rates, workforce and affordable housing produce stable cash flows and are therefore relatively low-risk as compared to luxury housing that could perform quite poorly if there is a recession,” Saraf says. “Capital seeking “safe” investments in the event of a downturn will be attracted to this asset class and has the potential to revive this segment.”
Value-add investment has driven the decrease of the affordable housing stock, but in many markets, particularly mature primary markets, value-add opportunities are limited. However, the trend has several depleted the affordable housing stock. “Much of the existing research supports the idea that value-add investing has diminished the supply of existing affordable units,” says Saraf. “A developer can make greatly superior returns by converting a NOAH property into a high-end building, compared to returns from simply keeping rents affordable. Further, as this supply of existing affordable units decreases, not enough new affordable units are being built to replace these lost affordable units. This further decreases the supply of affordable units and forces low- and middle-income tenants into relocating further away from high-rent areas or doubling or tripling up in units.”