Capital Market Solutions for Housing Affordability

The talk of privatizing Fannie Mae and Freddie Mac intensified in 2019 with the release of The Treasury Housing Reform Plan. In an environment where housing seems to become less affordable, that concerns some people because the GSEs finance a large amount of affordable housing.

“They [the GSEs] are mandated to provide a fair amount of that type of financing [for affordable housing],” says Brian Stoffers, global president of debt structured finance for capital markets at CBRE.

The good news is that money is lining up—outside of the GSEs—to tackle affordability through workforce housing investments. While developers are looking for ways to build more affordably, equity and debt providers are showing increased interest in workforce housing.

“I think debt is chasing that space because these properties typically have really good records of occupancy with low turnover and they cashflow quite well,” Stoffers says. “There’s been a reawakening to the notion that this is a really good asset class to invest in.”

Interest is also strong on the equity side. “There are groups that perhaps in the past only had funds targeted toward class A [apartments],” Stoffers says. “They are now looking at class B and C rentals and bringing their quality levels up a bit. Those are renters that rent by necessity and not by choice. There’s more equity chasing that space.”

In most cases the capital lining up for workforce housing is focused on existing assets. With land and construction costs rising, it is not easy to build workforce housing without a government subsidy. “It’s very difficult to build workforce housing at those price points,” Stoffers says. “So, typically workforce housing results from class A or class B properties aging out after 30 or 40 years. You don’t see the ability for many groups to build it right out of the box.”

But Hilary Provinse, executive vice president and head of mortgage banking for Berkadia, sees some former Low Income Housing Tax Credit [LIHTC] developers trying new approaches to build more affordable apartments without subsidy. To bring down costs, these developers are constructing stick-built, garden-style communities further out of cities where land costs are less expensive.

“They’re also looking at some of the modular opportunities to see if it is possible to get development costs down little lower and build more workforce-targeted projects that aren’t rent restricted projects,” Provinse says. “It is the first time we’ve been having conversations with some of those historically affordable developers.”

Still, to be able to produce more affordable new apartments, Stoffers thinks localities need to reduce fees and regulations and allow for more building in infill locations. “For instance, they could allow building on surplus land from school districts or governments, where the land can be subsidized and the fees could be reduced,” he says. “That is going to help.”