Affordable Value-Add Multifamily Still Offers Strong Returns

Even in a low-yield world, value-add, affordable multifamily is still producing solid returns.

“We’re able to generate value-add multifamily returns in the low to mid-teens,” Daryl Carter, CEO of Avanath Capital Management, said on CBRE’s “The Weekly Take” podcast. “The one thing about the affordable housing industry is the income is very stable.”

The affordable segment traditionally has very low turnover. That dropped even further during COVID.

“Historically, our turnover was about 20% a year,” Carter says. “Last year, it dropped to about 15% a year compared to market-rate properties, which were often 40% to 60% a year.”

At the beginning of the pandemic, Sarah Garland, director of production for Affordable Housing and FHA Lending at CBRE, says people in affordable housing were holding their breath.

“When things shut down, our tenants are typically the most hit because of the employment that they have,” Garland said on “The Weekly Take.” “But what we found was actually quite the opposite. The affordable housing properties performed great whether because they got the stimulus, whether because cities stepped in or whether because they were tax credit deals and they had sufficient reserves to cover.”

Carter says Avanath bought a number of properties in 2020 and didn’t observe a drop-off in values. Most of those communities were 100% occupied with waiting lists. In all, about half of the company’s 80 properties have waiting lists.

“The demand side of affordable housing continues to be very, very strong,” Carter says. “And in fact, the production of new affordable housing has slowed down during the pandemic.”

In terms of forbearances, Garland says affordable housing performed better than the rest of the multifamily sector. In fact, COVID only exacerbated affordability concerns in most major markets around the country. “We saw occupancies increase over 2020 during the pandemic,” Carter says.

With that strong performance, valuations have held strong in the affordable sector. “There’s more equity capital coming into the affordable housing business,” Carter says. “So it makes it a little bit more competitive, but also it provides more liquidity in the space. I’d say the affordable sector, from an investment standpoint, is just as competitive as the market rate sector.”

A lot of capital is flowing into affordable housing from international sources. In Avantah’s last fund, 50% of investors were from Europe, Asia and the UK, according to Carter. He says those investors are much more focused on environmental, Social, and Corporate Governance.

“I do think the European and Asian investors are ahead of investors in the US, particularly in all the events that are happening today in social equity and things like that,” Carter says. “People are asking the questions. Interest in ESG hasn’t been as free-flowing in the US as it’s been in Asia and other places. But we continue to believe that there will be more and more investors that are coming into the market in the US.”

On the affordable debt side, the agencies continue to be the strongest players because of their competitive underwriting requirements, according to Garland. “It’s their mission,” she says. “They are always in the business. They’re not in and out. I would say the agencies control the capital A affordable market space.”

In workforce housing, it’s harder to find debt, however. “I think the agencies are focusing on it, but they haven’t quite solved that issue yet,” Garland says.