Closing the Workforce Housing Gap
The demand for affordable workforce rental housing is outpacing supply. Our research shows that around 440,000 additional apartments will be needed each year for the next 10 years to meet coming demand; the historical average is around 300,000 a year. At the 2014 Freddie Mac Multifamily® Customer Conference, we dedicated a session – “Workforce Housing: How Can the Market Meet the Need?” – to exploring how various stakeholders in the multifamily market can attack the widening gap. Our goal was to move the conversation forward and engage the industry in seeking solutions.
The definition of “workforce housing” is somewhat in the eye of the beholder. For discussion purposes, we focused on apartments that are affordable to households earning 50-80 percent of local area median income (AMI) – or a little higher in high-cost locations. Workforce households often include people who work in the emergency response, retail, and service industries, among others. Income stagnation since the Great Recession, along with rising rents, is putting more and more of a squeeze on these renter households. Freddie Mac Multifamily is committed to serving this market segment. Around 75 percent of the apartments we fund are affordable to households earning up to 80 percent of AMI.
The panel, moderated by Freddie Mac Multifamily’s senior director of Targeted Affordable Production, Shaun Smith, included industry leaders in Low Income Housing Tax Credit (LIHTC) asset management and in the investment and preservation of affordable housing that was developed using LIHTC:
- Jeff Arrowsmith – chief operating officer of the Tax Credit Group at Marcus & Millichap
- Daryl Carter – founder, chairman, and chief executive officer (CEO) of Avanath Capital Management, LLC, and chairman of the National Multifamily Housing Council (NMHC)
- Bill Kelly – co-founder of Stewards of Affordable Housing for the Future (SAHF)
- Charlie Werhane – president and CEO of Enterprise Community Partners, Inc.
From my perspective, the most positive outcome was that panel members suggested we get back together in a few months to continue the discussion and gauge the industry’s progress in dealing with the growing need in this market segment. Without seeking immediate answers, we began thinking about a number of questions, including the following.
What is LIHTC’s role in serving this market?
Current situation: Congress created LIHTC in the 1980s to support the new construction and rehabilitation of housing affordable to households earning 60% of AMI or less. In the 25 years that it’s been in effect, LIHTC has financed the production and preservation of more than two million apartments and achieved a foreclosure rate of less than 1%. Like all other income tax expenditures, the LIHTC program has come under extreme scrutiny as federal budget pressures have increased. However, in light of its success, widespread support has developed to continue the program. Industry leaders now ask whether the program might be modified to increase the number of allocated credits or perhaps to raise the 60% AMI limit. Certainly this is not a complete solution, but one of a few that might help.
What is the non-profit community’s role in serving this market?
Current situation: Non-profits have historically helped preserve affordable housing through LIHTC. This approach is consistent with their mission. But some are now asking whether the mission should be expanded to include owning and operating rental housing affordable to households earning more than 60% of AMI.
Between 2009 and 2011, more than a third of renters in the 50-75% AMI range were cost-burdened (spending more than 30% of their income on rent and utilities). These ranks likely have grown, considering that rents have been rising faster than incomes since 2012. For those households earning more than 60% AMI, fewer subsidies are available. To enable service workers to live near their jobs, we need to find means to acquire, operate, and finance those units.
What is the for-profit community’s role in serving this market?
Current situation: Two segments are at play here. First, a substantial number of properties that were developed with LIHTC in the mid- to late-1990s have reached the end of the tax-credit compliance period (that is, 15 years after being placed in service). Many of those properties have extended-use agreements, requiring them to maintain affordability for at least another 15 years. Some for-profit property owners see this as a significant market opportunity. They buy these properties and run them effectively to provide both quality housing and an economic return to their investors. These for-profit owners serve as an example for other for-profit owners as well as for non-profit owners and sponsors that operate in this market.
The second segment that could offer opportunities to the for-profit community encompasses properties that were developed in the 1970s and ‘80s and now need a capital injection to extend their useful lives. We need to find a means to preserve those units, or they’ll become uninhabitable – further widening the gap between supply and demand.
What opportunities does the workforce housing market offer?
Current situation: Many existing apartment communities are in need of new capital. The data compiled by Marcus & Millichap and others show a large number of LIHTC properties built 15 or more years ago and reaching the end of their compliance periods. In addition to those 1990-vintage properties, according to data from the U.S. Department of Housing and Urban Development (HUD), quite a few large properties built in the 1970s and ‘80s that are affordable to workforce households are in need of capital investment.
Given the high cost of new construction, most newly built apartment communities will be unaffordable to workforce households. But increasing supply in general helps raise vacancy rates and lower rents, thereby easing the economic pressure on workforce households.
Freddie Mac Multifamily is dedicated to supporting affordable workforce housing. As a leader in this field, we will continue to work in partnership with our industry colleagues and our conservator, FHFA, to design and implement new and enhanced ways to channel financing to this market segment effectively. We look forward to collaborating with you to carry out this important mission.
Discussions on owning or renting a home, the housing market and housing finance.