Impact investing: Let’s ensure that we make room for everyone in our growing cities
Smart investments can preserve quality affordable housing options for low-income and elderly people — while also offering competitive returns
As we envision the future of American cities, we must acknowledge that the continued influx of people will only make housing costs rise, both for owners and renters. As city populations rise, neighborhoods gradually gentrify to appeal to the sensibilities of middle-class urban dwellers. This trend, helped along by investment capital that seeks lower-risk returns, continually drives up housing costs until there are few quality housing options for lower-income and elderly people.
No doubt, many of these individuals benefit from government housing programs: An estimated 2.5 million housing units in the U.S. have federal tax credit subsidies. However, more than one million of these subsidies are expected to expire over the next decade, according to a report by Harvard’s Joint Center for Housing Studies. Additionally, about 38 million households spend more than 30% of their income on rent, which squeezes every other aspect of the family budget. The number of cost-burdened households in the U.S. is estimated at 39 million;8 more than 19 million households spend over 50% of income on housing costs.9
One powerful solution to the diminishing supply of affordable urban housing is impact investing that’s aimed at preserving rent at affordable levels while refurbishing the housing stock to create livable communities. Conceptually, this means striving to preserve affordable housing for the long term, making safe, energy-efficient apartments and properties available to working families so that those communities can thrive today and in the future. In this context, impact investments involve investing in solutions that create and preserve safe, affordable and sustainable housing while generating material cash-on-cash and residual returns for investors.
These solutions include:
- Regulated or restricted affordable housing based on 40% – 80% AMI (HUD standards)
- Naturally Occurring Affordable Housing (NOAH)
- Mixed-income housing (affordable, workforce, market-rate)
- Other solutions appropriate for specific underserved or vulnerable populations (e.g., senior, student, military)
Impact investments in real estate offer the potential for steady, long-term income backed by strong market demand and high barriers to entry.
Nuveen’s work in the affordable housing arena constitutes investments in the properties themselves. The acquisitions process involves seeking out partnerships with developers or operators active in this asset class and whose views of its potential — in terms of being an attractive investment opportunity coupled with preserving affordability — align with ours. We look for properties that are already affordable and that have features that can be enhanced through such steps as making retrofits that optimize energy efficiency and improving common spaces.
We also seek opportunities to improve properties in ways that can improve the quality of life for residents. For example, we have discovered that many affordable housing properties have community rooms that are rarely used or are nonexistent, in some cases. If such a property is geared toward families with school-age children, we might redesign a space to accommodate after-school programs. If, on the other hand, a property primarily serves seniors, we would transform that space into a comfortable, interactive area where residents might want to participate in activities. Such a space could also be used by community service providers, such as hot-meal services or library programs that are geared toward seniors.
Our investments in affordable housing are strategic and often sizeable. One example of this is a recent investment of $50 million in a joint venture with Enterprise Homes, which is a nonprofit, affordable housing developer affiliated with Enterprise Community Partners. The joint venture will help ensure that more than 4,100 rental homes in Central Maryland, Southern Pennsylvania, Northern Virginia, and Washington, D.C., will stay affordable to lowincome residents in those regions. This investment opportunity was compelling because of the consistently high quality of the properties within the portfolio and their location in high-demand housing markets.
As with all of Nuveen’s impact investing, our strategy for affordable housing is to adhere to an intentional, disciplined process that focuses on generating specific, measurable outcomes over the long term. We understand that impact investors vary in what they expect in terms of risk and returns. My orientation is to pair a risk-adjusted financial return with a commitment to outcomes that will be evaluated over time. The data we collect as part of that evaluation is critical, both because we report it to stakeholders and capital providers, and because we use it to optimize how and where we invest in the future.
We do not view our investments as trading performance against achieving social aims. Both aspects of our investments are critical for success. By preserving existing affordable housing stock, our investments generate both rental income and financial returns, while also supporting the community and the vitality that drive a city’s economic performance over time. Everyone wins.
Rent burden lies heavy on many in U.S.
According to an April 2018 study by The Pew Charitable Trusts, the U.S. has seen an increasing share of income going toward paying rent, which can impact the stability of renter households as well as the overall economy.
The study found that in 2015:
- 38% of all renter households were rent-burdened, compared to about 19% in 2001.
- 17% of renter households were severely rent-burdened — spending 50% or more of their monthly income on rent.
- 46% of AfricanAmerican-led renter households were rent-burdened (versus 34% for white households).
- 50% of senior-headed (65+) renter households were rent-burdened.
- 64% of rent-burdened families had less than $400 cash in the bank.