Commercial Magazine

Solving the Rental Puzzle

Affordable housing units are most in demand, but the barriers are high

By Christopher Ptomey

The nation’s rental-housing market is broken. There’s a severe undersupply of both market-rate units for middle-income earners and subsidized housing for low-income households. Developers and investors aren’t financing and building enough new homes to meet the overwhelming demand, due in large part to restrictive laws at the local level.

The low- and middle-income rental market needs a fundamental realignment to make it easier for developers to build these units and for workers to rent them. This means a need to change zoning regulations, reduce development costs, expand housing aid, and reduce the segregation of neighborhoods based on income or race.

New housing that is affordable to moderate-income working households has the potential to be the biggest growth area within the multifamily sector. This is a sector of opportunity for commercial mortgage brokers and lenders, as they can play a large role in providing solutions. No city in the country has enough rental units at moderate and lower price points to meet the housing demands of the local workforce.

The lowest-income renters rely on federal vouchers or tax credits to secure housing. But since no state or city has an adequate supply of subsidized rental housing, even residents who qualify for vouchers often can’t find places to use them.

According to the National Low Income Housing Coalition, the U.S. lacks 6.8 million rental homes that would suit extremely low-income renters — those at or below 30% of the area median income. In the nation’s 50 largest metro areas, the number of available homes ranges from 16 units per 100 extremely low-income renter households in Las Vegas to 50 per 100 in Providence, Rhode Island. Nationally, the figure is 37 per 100.

No city in the country has enough rental units at moderate and lower price points to meet the housing demands of the local workforce.

Affordability crunch

With market-rate rental housing, few cities offer enough units at prices the local workforce can afford. Options for Americans making 80% of an area’s median income are sparse.

Nationally, a median of 98.42 attainable units are available per 100 households at this income level, according to the Urban Land Institute (ULI) 2021 Home Attainability Index. Smaller cities place this ratio at nearly one to one. Albany, New York; Ogden, Utah; Tucson, Arizona; and San Antonio are among the top-performing metros for affordability. In general, however, big cities have the least affordable rental stock for households making 80% of area median income. Los Angeles has only 56 rental units per 100 households at this income level while Miami has a paltry 49.

The supply crunch means that many Americans face severe cost burdens for housing in cities, especially the largest ones. Nationwide, a median of 6.2% of households making between $35,000 and $50,000 per year are severely cost burdened by housing. But nearly 30% of San Diego residents at this income level are severely cost-burdened, as are 28% in both Los Angeles and Washington, D.C. New York, Boston, San Francisco and Baltimore all have high levels of severely cost-burdened, low-income residents as well.

The COVID-19 pandemic made affordability even worse. Unemployment soared and remains higher than pre-pandemic levels. The problem is particularly stark for workers such as frontline teachers, nursing and home health aides, and retail and restaurant workers, who often already struggle to afford moderately priced rentals.

Rent moratoriums allowed tenants to defer payments and stay in their homes. But now, low-income households have accrued deferred rent obligations over the course of the pandemic to the tune of at least $70 billion. The full consequences of the rent backlog still aren’t clear. But as the U.S. opens up, a wave of evictions and an uptick in homelessness could follow.

Racial disparities in the rental-housing market existed prior to the pandemic. According to this year’s ULI and PwC Emerging Trends in Real Estate report, 31% of Black renter households were classified as severely cost burdened in 2018, compared to 21% of white renter households, and Black renter households often spent more money for inferior units. Having accrued a disproportionate level of deferred rent debt over the past year, Black households are at particular risk of eviction and homelessness.

Oversupplying luxury

According to the recent ULI/PwC report, the rental market will likely pick up in 2021 after hitting a low point in the pandemic-altered 2020. But current rules and regulations make luxury units the most viable type of new construction.

New rental supply is geared to so-called “renters by choice” who have higher incomes. This supply, however, is not suitable to all renters from a design perspective. One-third of all renters are families, but the average new apartment comes in at 900 square feet, hardly big enough for a household with kids.

Demand for owner-occupied units also affects the rental market. Young families with moderate incomes often rent first, then save up to later climb a rung of the so-called “housing ladder” when they own a starter home. Eventually, they might move to a larger property before finally downsizing when their needs change as empty nesters.

The system works when every time someone moves up a rung, someone else gets on the ladder. When a family with a young child buys a starter home, it vacates a rental unit, creating new supply without the construction of any new rental units. But families often can’t save enough for a downpayment and don’t move out of their rental units. They stay put and so do vacancy rates.

And even if they had savings, many renters would struggle to buy a home due to soaring prices. The for-sale single-family housing market is booming, with price-to- income ratios on home sales hitting new highs in one-third of large U.S. cities.

Supply and demand pressures don’t operate in a vacuum but within a framework of rules and regulations that can create inefficiencies and even market failures — as is the case here. A working rental-housing market would have developers building lower-cost units for lower-income tenants, aligning the supply side with pent-up demand. But that’s not happening and it can’t until the framework shifts.

Multifamily units could play a role in homeownership. Townhomes, duplexes and condominiums can be perfect starter homes.

Getting on track

There are some obvious rule changes that would create a rental market that works for people at all income levels. Consider zoning. Major cities typically lack enough rental units to meet demand because neighborhoods simply say “no.” So, as the population and workforce grow, rents go up.

It will take political will from city councils to implement zoning-based solutions. These policies could unleash a wave of new supply, providing market-based rent relief nationwide.

By shifting zoning policies away from restrictions on use and density, and by allowing for greater definition regarding the scale and form of buildings, cities could enable more townhomes, low-rise apartments and duplexes to be added to historically single-family home neighborhoods. As a result, cities could rapidly increase their rental supplies. Accessory dwelling units in backyards or driveways, sometimes called “granny flats,” could add significantly to the rental stock in Washington, D.C., and other major cities.

Multifamily units could play a role in homeownership. Townhomes, duplexes and condominiums can be perfect starter homes. Greater density can enhance available ownership options for moderate-income renters for whom a traditional, detached single-family home is just out of reach. This also would reduce pressure on older rental stock, a process known as filtering, that helps to lower median rents.

Longer-term fixes also are clear. Discrimination based on source of income should be prohibited, making more units available to those with housing vouchers. Governments at the local, state and federal levels should expand voucher programs to include more than the 40% of eligible households served through the Section 8 and low-income housing tax credit programs.

These changes would improve racial and economic integration, too. Banning housing-voucher discrimination would enable more lower-income and minority households to access high-performing neighborhoods with better schools, health care services and the like.

Cities have, thankfully, started to address redlining legacies that create de facto segregation. In Kansas City, Missouri, for example, leaders want to improve the parks and open spaces in predominantly Black neighborhoods while ensuring that residents of multifamily housing have access to these parks and natural resources. The resulting neighborhoods could provide attainable rental options in previously low-density areas.

The pandemic may have shown that serving middle-income renters is a good business bet. While rents for luxury properties in large coastal cities have declined during the pandemic, vacancy rates have stayed low and rents stable among properties that serve moderate-income households — those earning at or slightly below the area median income.

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Likewise, in the future, developers that serve the middle class — and the commercial mortgage brokers and lenders that finance their projects — will find a market robust enough to provide a steady supply of reliable renters over the long term. Rental housing can work for everyone as long as developers, lenders, brokers, and local and federal policymakers create the conditions for a building boom. ●


  • Christopher Ptomey

    Christopher Ptomey is the executive director of the Urban Land Institute (ULI) Terwilliger Center for Housing. The Terwilliger Center leverages the vast knowledge and experience of ULI’s membership to advance residential development and housing affordability through research, local and national convenings, and consultation. Prior to joining ULI in 2018, Ptomey led Habitat for Humanity International’s U.S. government relations and advocacy team for more than a decade. Ptomey holds degrees from Haverford College and George Mason University’s Antonin Scalia Law School, as well as a law license in his native Tennessee.

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