Investors Are Overlooking the Yields in Affordable Housing

Investors may be overlooking the profitability of the affordable housing segment of multifamily assets. Affordable housing has recently become a popular investment class, but there is still a misunderstanding about the stability of the sector. Affordable housing has an attractive risk-return profile and is better positioned to perform through a recession than class-A apartments.

“A lot of people think this sector is riskier because of a lower income credit profiles or because there is more paperwork and regulatory work—and no doubt you need an experienced operator because there is more work to be done—but we think that it is particularly attractive for a few reasons,” Jonathan Needell, president and chief investment officer of KIMC, tells GlobeSt.com.

First, there is typically strong demand for affordable housing, but new apartment development this cycle and low wage growth has driven affordable housing demand up. “It is a paradox,” says Needell. “The cost of new construction goes up, so the more that you build new, the less affordable housing is available because you have either torn down or gentrified affordable units. On top of that, millennials, which is a great demand set, have an inability to pay for the highest quality apartments, and when you combine that with demographic demand, you end up with a need for affordable housing greater than it has been in the past.”