During last year’s Covid pandemic the question facing investors in CRE concerned the robustness of 2021’s “great reopening.” Data from Q3 gives every reason to be optimistic about the future of CRE, in general, and multifamily, in particular.
While some sectors of CRE, such as hotels, still hover slightly below their pre-pandemic 2019 numbers—national occupancy recently hit 68% for hotels, putting them at roughly 90% of their 2019 average—multifamily properties have fared better.
A 10% growth in multifamily property values over the past 12 months demonstrates the resiliency of this sector. Surging demand for multifamily has, in turn, induced the Federal Housing Finance Agency (FHFA) to increase their multifamily loan purchase caps for 2022.
The caps for Freddie and Fannie will be $78 billion for each enterprise in 2022, making a combined $156 billion (a total increase of $16 billion compared to 2021). Most surprising, perhaps, is the commitment by the FHFA not to reduce the caps even if the 2022 market is smaller than projected. This commitment by the FHFA attests to the strength of industry fundamentals in multifamily.
The FHFA’s Mission-Driven Affordable Housing Solutions
At the same time as the FHFA raises the caps on multifamily, they will be increasing the amount of mission-driven affordable housing. The FHFA will require that 50% of each Agency’s business be mission-driven affordable housing—defined as housing affordable to residents at 80% of the area’s median income (AMI)—in 2022. They will also require that 25% of the Enterprises’ multifamily business be affordable to residents at 60% of the AMI, which is a 20% increase from last year.
We can answer the question: what is affordable housing? As defined by FHFA, affordable housing for 2022 will be split into housing affordable to residents at 80% and 60% of the AMI respectively. At Armada, we want investors in multifamily to take affordable housing solutions and the imperatives of the Agencies in this regard seriously. As we pointed out in a companion piece earlier this year, the affordable housing crisis is a national crisis that is doing immense harm to civic life in this country.
And, importantly, we shouldn’t think of affordable housing as necessarily confined to low-income or Section 8 housing. The FHFA will also be making changes to the cost-burdened renter as an integral part of their mission-driven affordable housing agenda. In 2022, they will rely on data to spur the underwriting of multifamily units for cost-burdened renters in major markets (NY, LA, Chi, etc.) at up to 120% AMI.
In this piece, we will examine two areas in need of affordable housing solutions: Ashburn, Virginia and San Francisco, California to show how multifaceted and misunderstood the problem of affordable housing and housing affordability is.
Affordable Housing in Virginia
While national trends point to an overall dire picture of housing options for low-income (and even middle-income) families, we focus on Virgina, in particular Ashburn, VA, precisely because it is not at the epicenter of affordable housing policy debates. Rather, Ashburn, located in the Dulles Technology Corridor, which has been dubbed “The Silicon Valley of the East,” is typical of many cities of the Washington, DC exurbs.
The median home price in Ashburn is north of 600k, which prices most of the city’s diverse population out of ownership. At the same time, Loudoun County, which houses Ashburn, lacks enough affordable housing units for the restaurant and retail workers, the school bus drivers and custodians, who serve as the bedrock of the community.
As was raised by the Housing Trust Fund at a recent public budget hearing, Loudoun County and Ashburn desperately need more affordable housing.
The benefits of investing in affordable housing in a place such as Loudoun County are numerous: not only would they provide this area much needed stability, and improve civic life for all residents, but investing in low-income multifamily can be profitable.
That said, to achieve the correct balance of business goals and community betterment, investors and developers must listen to the community and build their renting process around the feedback they receive. Target rents should not be the highest ROI in all cases, particularly in low-income housing, but should be focused on serving the interests of long-term, even life-time, renters.
Affordable Housing in San Francisco
Moving from the “Silicon Valley of the East” to the actual Silicon Valley, from a relatively unnoticed housing crisis to the housing affordability crisis in Technicolor, San Francisco presents itself as a case study of the problems endemic in American housing.
San Francisco’s housing crisis is so bad that it has earned its own Wikipedia page: San Francisco housing shortage. A major part of the problem in San Francisco has to do with zoning restrictions: nearly 75% of residential neighborhoods in the city are restricted to single-family dwellings—sometimes allowing duplexes and sometimes not. And that is in the city proper: the suburbs are even more restrictive when it comes to the building of multifamily dwellings.
Despite ample evidence that the introduction of lower-income multifamily properties do not drive down housing prices in any meaningful way, many pieces of legislation that would allow for the building of multifamily properties fail in city councils across California, as well as the California State Senate.
The lack of housing stock, in turn, drives up the price of housing in San Francisco to exorbitant heights.
How much money do you actually need to make to live in San Francisco?
With the price of an average studio apartment at more than $2,500 per month, a HUD report in 2018 considered a family of four bringing in less than $117,000 per year to be low-income.
For readers living outside expensive urban areas that is not a typo.
San Francisco is suffering from a homeless problem, a low-income housing problem, and a cost-burdened renter problem simultaneously. Building more affordable multifamily apartments in the city and suburbs is the key to solving all three of these crises.
Our Imperative to Invest in Affordable Housing
California and Virginia, as we wrote earlier, are indicative of a larger trend in housing: while multifamily is up across the board, which is good for investors, for the betterment of America, socially and civically, we need greater investment in affordable multifamily housing.
We at Armada, standing with the FHFA imperatives to the Agencies, think this is something that is both necessary and achievable. We encourage all of our clients to make a commitment to invest some portion of their portfolio to affordable multifamily properties beginning in 2022.