With annual rent growth persisting, many apartment executives brought up the issue of rising rents’ effect on rental housing affordability during the 2014 NMHC Apartment Strategies/Finance Conference. Incomes have remained flat while rents have increased, creating a disconnect that underscores the growing need for affordable housing.
Michael Cohen, director of advisory services with CoStar, said, “The ability to pay 40-plus percent of your monthly income on rent-there’s only so far that rubber band can stretch.”
He added, “In Boston, we are going through a wave of construction and we’re seeing asking rents of $4,000 a month for these highly amenitized units. I don’t know many 25-, 26-, 27-year-olds who can pay $4,000 a month. So we’ll see how this plays out.”
However, Greg Willet, vice president of MPF Research, said that some of the affordability concerns could be a bit overblown. “The big picture numbers are skewed a little bit,” he said. “For the people in this room and in your portfolio, you aren’t qualifying people on 3o to 40 percent of their income; you’re more like 20 to 25 percent. So, the typical household isn’t that dramatically stretched on affordability.”
Jay Lybik, vice president of market research with Equity Residential, agreed, saying, “The majority of our residents who are living in our urban portfolio are in their early 30s and are very established professionals. We typically don’t have 25-year-olds in there. It’s mostly people with professional degrees-lawyers, doctors, not kids out of college.”
Bob DeWitt, vice chairman, president and CEO of GID, echoed that comment. “The average age of our renter has gone up to just about 34 years old,” he said.
Even as many of the apartment industry’s leading players are targeting the upper end of the market, the fact remains that income growth has not been able to keep up with rent growth. As Cohen explained, “We haven’t seen strong income gains. Those of us with bachelor degrees are doing just fine, but the rest of America hasn’t benefitted from the wage gains.”
But affordable housing is a different animal than market rate apartments, from the financing to the development to the operation.
Executives noted that new affordable housing communities were particularly difficult to effectuate because of the basic costs of new construction. Many of the elements that make a community attractive and responsive to residents’ needs-structured parking or tot lots, for example-can end up making the community too expensive to develop, noted Larry Curtis, president and managing director for WinnDevelopment.
For this reason, many affordable housing leaders focus also on rehab and preservation opportunities, said Curtis. “From a business perspective, one of the reasons we’ve been in the acquisition and rehab and preservation business is that we’ve been able to access non-housing subsidies,” he explained. “And that becomes a significant write down, if I may, to the total development cost.
A number of executives indicated strong support for affordable housing programs, but financing is still the most critical issue. The Low Income Housing Tax Credit (LIHTC), which leverages federal dollars with private investment to produce affordable rental housing and stimulate new economic development, remains a tremendously important program for financing affordable housing.
Todd Crow, executive vice president of PNC Real Estate, said, “The landscape is actually pretty favorable [for affordable housing]. There are a lot of industry stakeholders that have done some awfully good work making the case for affordable housing. But the biggest risk to the program seems to be tax reform. That’s the sort of process that could threaten programs like LIHTC. ... But at the moment, I think the program is in pretty good shape-and personally, I would like to see the program expanded.”
Manning added that the Community Reinvestment Act, which requires banks to invest in socially responsible programs, has helped capital flow to the space.
“There were radical changes after President Clinton signed it into law,” said Manning. “At least three-quarters of the marketplace of equity investors are banks that are pushed to invest in socially responsible causes. There’s been a tremendous swing from it being something they are forced to do to something they are excited to do.
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