An affordable housing shortage is imminent, as the demand for multifamily affordable housing or workforce rental housing is outpacing supply. According to Freddie Mac Multifamily, approximately 440,000 additional apartments will be needed every year for the next 10 years to meet the coming demand for affordable housing. This foretells a coming affordable housing shortage as the historical average of new supply is around 300,000 units per year.
Freddie Mac appears to be taking the impending workforce and affordable housing shortage very seriously. At the 2014 Freddie Mac Multifamily Customer Conference, the company dedicated an entire session to exploring how various stakeholders in the multifamily affordable housing markets can manage the widening affordable housing shortage. The goal of the session “Workforce Housing: How Can the Market Meet the Need?” was organized to advance the conversation and engage multifamily industry professionals in seeking solutions.
Workforce housing is not a product that is absolutely defined, and it is often characterized very differently, depending on perspective. For discussion purposes, Freddie Mac is focusing on apartments that are affordable to households earning 50%-80% of local area median income, or slightly higher in high-cost locations. Workforce households often include people who work in the emergency response, retail, and service industries, among others, although these are also not hard and fast rules.
Industry Panel Seeks Solutions To Affordable Housing Shortage
There is agreement in that income stagnation since the recession began, along with rising rents, is putting more pressure on these renter households. Freddie Mac Multifamily is committed to serving this market segment. Around 75 percent of the apartment loans funded by Freddie Mac are affordable to households earning up to 80 percent of AMI.
The panel, moderated by Freddie Mac Multifamily 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 developed using LIHTC. It was clear that the panel is taking the challenge seriously, suggesting they reconvene in a few months to continue the discussion and gauge industry 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 the role of LIHTC in serving this market?
Congress created LIHTC in the 1980s to support the 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 scrutiny as federal budgetary pressure has increased. However, in light of its success, widespread support for LIHTC has developed to continue the program. Multifamily and affordable housing 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 role of the non-profit community in serving this market?
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 one third of renters in the 50-75% AMI range were pressured by the rising cost of housing, spending more than 30% of their income on rent and utilities. And the ranks of tenants subjected to this pressure has likely grown, since 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, the multifamily affordable housing industry needs to find the means to acquire, operate, and finance those units.
What is the role of the for-profit community in serving this market?
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, which 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, which will put additional pressure on the already widening gap between supply and demand.
What opportunities does the workforce housing market offer?
Many existing apartment communities are in need of new capital. 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, quite a few large properties built in the 1970s and 1980s that are affordable to workforce households are in need of capital investment, according to data from the US Department of Housing and Urban Development (HUD).
Given the high cost of new construction, most newly built apartment communities will not be affordable to workforce households. But increasing the supply, in general, helps raise vacancy rates and lower rents, thereby easing the economic pressure on workforce households.
Freddie Mac Multifamily
As a leader in this field, Freddie Mac Multifamily is dedicated to supporting affordable workforce housing and will continue to work with industry partners and their conservator, the FHFA, to design and implement new and enhanced ways to channel affordable housing financing to the workforce housing market segment to counteract the affordable housing shortage effectively.
Workforce Housing Shortage Key Takeaways
A shortage of workforce housing rental units has been forecast by Freddie Mac. A great many factors that are contributing to a perfect storm of real estate conditions that lead researchers to only one inevitable conclusion. The US is entering into a shortage of multifamily workforce housing units. The Federal Home Loan Mortgage Corporation (Freddie Mac) has studied the situation extensively and is forecasting an affordable housing shortage of more than 140,000 units per year for at least the next 10 years.
For a more complete description of the Low Income Housing Tax Credit program and LIHTC financing options we can provide to help you take advantage of opportunities arising due to workforce housing shortages, see LIHTC Program