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Real estate

Affordable housing: The need for affordability preservation

Pamela West
Senior Portfolio Manager, Impact Investing, Nuveen Real Estate
Daniel Manware
Director
Bottom view of building

Affordable housing has become less accessible across the United States as rent inflation outpaces income growth for mid- to low-income earners and as the housing supply deficit continues into its second decade. These trends have created significant demand for all rental housing, but most acutely, affordable housing. Nearly half of U.S. renters are rent-burdened, meaning they are paying more than 30% of their income toward rent. Within this rent-burdened demographic, one in four renters are severely rent-burdened, meaning they pay more than 50% of their income toward rent. Outsized demand from tenants has sparked investor awareness and ultimately presented favorable impact investment opportunities.

Given that the greatest household expenditures are housing related, the underlying mission of these impact investments is to provide tenants with affordable rent, supportive services and an opportunity to spend their income toward more essential items such as improving health outcomes and increasing educational advancement and financial security. There have been numerous benefits from institutional investment into the affordable housing sector, including: 1) enhanced tenant satisfaction as a result of improved living conditions, ultimately resulting in lower tenant turnover; 2) an emphasis on health and wellness programs giving seniors an option to age in place ; 3) integrated sustainability plans that lower utility bills for tenants, ultimately creating more room in the budget for other essentials; and 4) addition of free Wi-Fi for tenants to access telehealth and to work/learn remotely. The preservation of affordable housing endeavors to provide safe, quality housing for underserved populations and also maintain the supply of below-market rental units in high-growth areas.

Rent growth across single-family rentals and apartments, having already pulled ahead of household income growth in the early 2000s, has consistently proven to be a challenge for the most disadvantaged for the four bottom income quintiles (representing average annual earnings between $15k and $110k). In fact, the highest income quintile has been the biggest beneficiary of wage growth. These wages have grown 132% since 1995, compared to 75% growth for the lowest income quintile, according to the U.S. Census Bureau. The current inflationary environment has further challenged lower-income renter households, pronouncing the issues of income inequality within the U.S. population and exacerbating the racial wealth divide. The COVID-19 pandemic further challenged lower-income households as service and low-wage jobs were among the first eliminated. Throughout the economic recovery, the low-wage job cohort has lagged in recuperating. Opportunity Insights’ Economic Tracker indicates high-wage employment was fully recovered by November 2020, while low-wage employment was still 23% below pre-pandemic levels.

Risks associated with TOB trusts
Risks associated with TOB trusts

The share of lower-income renters with cost-burdens remains high and has not improved over time. Across all income cohorts, renters’ cost-burden rates are near or above rates experienced two decades ago. There is a rising share of Americans experiencing housing instability. According to Pew Research, about half (49%) of Americans say that availability of affordable housing is a major problem in their community. This is up 10 percentage points from their 2018 survey. The extent of this problem is more pronounced in urban areas. About six in ten U.S. adults living in urban areas (63%) say that the supply of affordable housing in their community is a major problem, compared with 46% of suburban residents and 40% of those living in rural areas. While these metrics improve farther away from the urban core, they are still representative of nearly half of local communities.

Risks associated with TOB trusts

The need for affordable housing is not a new theme. The Low-Income Housing Tax Credit (LIHTC) program was created in 1986 to encourage the development and rehabilitation of affordable rental housing through public-private partnerships. However, renter households in lower incomes are outpacing the available supply of affordable rental homes. Extremely low-income renters must compete with higher-income households for the limited number of rental homes affordable to them. According to a National Low Income Housing Coalition’s analysis, 10.8 million extremely low-income renter households occupy or have access to only 4 million affordable and available units, leaving a shortage of 6.8 million rental homes. For renter households earning up to 50% of area median income there is an incremental increase of 6.9 million households, but the number of affordable and available rental homes increases only by 6.6 million units. Not only are units not available today to meet the existing demand, over 1 million units are at risk of losing their income, with rent restrictions over the next decade ultimately exposing those communities to unrestricted rental increases and displacement. As such, there is a critical need to expand access to affordable housing across the United States.

Risks associated with TOB trusts

Affordable housing investments support a greater need in society and boast a stable core cash flow profile for investors. Historically, affordable housing investments have demonstrated greater stability and higher occupancy than traditional apartments. Throughout previous downturns, affordable housing rent growth and occupancy growth (“RevPAF growth”) outperformed traditional apartments. In the initial COVID-19 downturn, for example, year-over-year RevPAF growth for apartments turned negative for four consecutive quarters, while affordable housing remained consistently positive. Affordable housing investors face marginal supply risk relative to traditional apartment investors as affordable housing supply growth has decelerated over the last two decades. Since the Global Financial Crisis, supply growth for traditional apartments has steadily outpaced affordable housing. We believe there are attractive opportunities for impact investors to preserve access to safe, sustainable affordable housing through their intentional investment in low-income communities. The implementation of social and environmental impact will create more resilient, inclusive and thriving communities for generations to come.

Risks associated with TOB trusts
Risks associated with TOB trusts
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