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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2018

Grab onto Affordable-Housing Solutions

Multifamily developers should look to small-balance financing for a boost

Grab onto Affordable-Housing Solutions

A lack of affordable housing continues to plague the United States. There simply isn’t enough new construction in either the for-sale or rental categories to meet today’s needs.

Several factors — including increasingly stringent building codes, environmental mandates, rising construction costs, development fees and the anticipated downside of new international tariffs on steel and other materials — are dramatically affecting builders’ abilities to deliver new multifamily housing at less expensive price points. With these factors in play, where does the capital-markets sector fit into the equation?

The product builders struggle most to deliver is affordable housing for workers and first-time homebuyers. As a result, many of today’s potential buyers are priced out of the single-family home-purchase market. Combined with a current lack of supply, these factors place increasing pressure on the multi-family rental sphere, where rents also have been steadily climbing for many years.

Research from Reis Inc., a commercial real estate data provider, shows that middle-income renters are increasingly vulnerable to rising rents, as rates for nonluxury apartments have escalated 19 percent over the past five years. Millennials also are struggling with affordability. In a recent review of U.S. Census Bureau data, Zillow found that, among Americans ages 24 to 36, 14 percent lived with a parent in 2005. By 2016, that number had climbed to 23 percent, with the price of housing cited as the primary reason for living with a parent.

The Joint Center for Housing Studies at Harvard University also has explored affordability issues. In its “State of the Nation’s Housing 2018” report, the center found a serious shortage of affordable housing in the United States. Nationwide, median rent rose 20 percent faster than inflation from 1990 to 2016 and the median home price climbed 41 percent faster than inflation during the same period.

Capital-market struggles

The capital-markets arena has been a contributor to the country’s affordability crisis — intentionally or not. During the post-recession era, many banks have been strapped with regulations that limit their ability to lend, making it harder for many commercial real estate deals to get done.

The small-balance debt sector, which is roughly defined as transaction sizes of $1 million to $15 million, has the potential to greatly influence housing affordability and availability through the finance and refinance of workforce and affordable multifamily properties. Yet, this piece of the debt market continues to be underserved.

Generally speaking, banks aren’t offering small-balance lending programs on a national scale. For commercial mortgage brokers with many clients across multiple regions, this is an inefficient model.

To help fill the gap, some specialized private lenders have stepped in. Not all small-balance lenders are created equally, however. Some struggle with efficiency in their loan processes, which directly influences their loan-to-close timeline and, in turn, burdens brokers and their borrower clientele.

Acquisition loans grow

Although many banks can’t compete with small-balance lending on a national platform, smaller community and regional banks are actively lending in their respective regions, despite the ongoing impacts of regulations. Recent activities in some markets indicate a significant shift away from a deal pipeline centered on refinancing and toward more acquisition deals. This may be related to rising interest rates, which have slowed the rush of borrowers seeking to refinance.

Acquisition loans also may be in higher demand because there is money available for these investments. Additionally, even though rates have gone up, seller expectations regarding sales prices haven’t adjusted accordingly, making acquisitions more attractive.

There are many factors affecting the lack of quality affordable housing nationwide. In some places, such as California, which often leads the nation in proposing and adopting aggressive environmental measures, costs have risen so significantly for homebuilders that they can’t feasibly deliver new units at first-time homebuyer price points.

The resulting lack of supply pushes many would-be buyers into the rental pool. Likewise, many other cities across the country, despite knowing that they lack enough workforce housing, aren’t approving enough new rental projects to cover demand. This forces renters into older existing properties or housing too far from their workplaces to be ideal for daily living.

Some smaller investors located in larger coastal markets are increasingly coming into the interior states to invest in multifamily properties. Areas seeing an uptick include Midwest markets like Ohio, Michigan and Indiana, where investors can obtain a higher return on investment than if they purchased in their local markets.

The affordable-housing sector is a growing attraction for these investment dollars. With the real-world struggles that both homebuyers and renters face nationally to find quality housing in good locations near employment centers, the commercial real estate community has taken notice. Some players — although more are needed — are working on solutions or financing for affordable housing. Debt sources are integral in fueling this growing investment trend.

Small-balance transactions are the ones that support the housing that is currently in demand in the U.S.

Freddie Mac’s influence

A few years ago, Freddie Mac, which has long focused on affordable housing, launched its small-balance loan (SBL) program. This has been a largely successful endeavor aimed at maintaining affordable multifamily rentals near job centers in major metro areas across the country.

The SBL program has consistently demonstrated year-over-year growth in response to national needs. It serves Class B and C multi-family properties with significantly fewer amenities than their luxury counterparts, but ones that still offer quality homes for the working-class, middle-income market.

Freddie Mac is a key player in this equation as it provides liquidity in a market for renters within a lower-income range. In addition to the ongoing pipeline for the SBL program, mortgage brokers should become familiar with the Targeted Affordable Housing (TAH) Express program — the newest offering from Freddie Mac. There is tremendous interest in this program as a capital solution for loans of $10 million or less that meet regulatory requirements. Although it is not yet as established as the older SBL program, TAH Express provides financing for borrowers on properties with a subsidized-housing component.

Some properties may qualify under both of these Freddie Mac programs and, when this is the case, brokers should review deal specifics to determine which one is best for the borrower. Another important item to note is that Freddie Mac and Fannie Mae each offer incentives that borrowers may be unaware of. There are some affordable-housing discounts and rebates, for example, that can potentially add up to substantial savings, depending on what market your borrower is in.

These types of debt programs are crucial. Although there is a lot of capital available for larger loans, and a great deal of activity and attention paid to that sector, small-balance transactions are the ones that support the housing that is currently in demand in the U.S., versus the luxury product that has been overbuilt in recent years.

• • •

Many market factors constrain affordable-housing solutions and are difficult to resolve, but the capital-market sector can — and is — stepping in to assist. Programs like Freddie Mac’s SBL and TAH Express are incentivizing investors and landlords to keep existing property assets available to workforce populations near large metro areas and job centers. These debt solutions remain critical when the supply of affordable housing coming from new construction wanes or isn’t geared toward the people who need it most. 


 


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