The onset of the COVID-19 pandemic impacted nearly every sector of commercial real estate (CRE). Among CRE sectors, the direct beneficiary of stay-at-home orders and social distancing was the industrial and warehouse sector – buoyed by increased demand for online ordering and product delivery.
Amid all the turmoil in the CRE class, one sector showed surprising resiliency: multifamily housing – especially in the Class B and C segments. Many of these Class B and C properties include units qualified as affordable housing subsidized by a federal Low-Income Housing Tax Credit (LIHTC), which limits renters to incomes below 60 percent of AMI (area median income).
While multifamily as a whole weathered the pandemic, particularly well relative to other CRE segments, the Class B and C segments proved particularly resilient. In the multifamily sector, in the ten years before the pandemic, there was significant development activity in the Class A segment – especially in urban areas – to the point some gateway markets were on the verge of oversupply. When the pandemic hit and the economy took a turn, Class A properties immediately experienced significant demand and rent declines. Gateway markets like San Francisco and New York City saw close to 20% reductions in rent.
As occupancies dropped significantly in the Class A segment, Class B and C communities benefited, with workers no longer needing to be close to work. While occupancy rates, rent collection rates, and overall rental rates dipped among Class A properties, Class B and C properties were barely impacted.
Data from the National Multifamily Housing Council (NMHC) shows that from April 2020 to February 2021, monthly rent collections in Class B multifamily units were off only 0.1 to 3.1 percent compared to the prior year’s collections. Even when CARES Act government stimulus payments to families ended, rent collections for Class B housing barely dipped.
Since multifamily has rebounded from the pandemic, Class B and C investors are facing new choices. With inflation and rocketing housing prices, some Class B and C investors may be tempted to convert many of their affordable housing units to non-subsidized market units – foregoing government subsidies for the promise of collecting higher rents. In the face of this choice to charge market rates, many investors are sticking with affordable housing for commonsensical reasons.
Many investors are sticking to the affordable housing segment for the same reasons they were drawn to it in the first place: steady, dependable, recession-resistant, and inflation-proof income. Even with the carrot of market rates dangling in front of investors’ eyes, many are sticking with the affordable housing model as a hedge against recession and inflation, where affordable housing holds an edge over other multifamily segments.
“Affordable housing assets have a strong track record of performance within the multi-housing segment,” says Angela Kelcher, senior managing director in the Dallas office of JLL Capital Markets.
Anderson, Bendix, “Many Investors Remain Satisfied with Steady Income from Affordable Housing,” wealthmanagement.com (Jun 22, 2022).
”Well-operated properties with affordable rents stay highly occupied and offer a reduced risk profile that is attractive to investors as a buffer against market volatility,” says Kelcher. “Just 0.13 percent of all Fannie Mae loans to affordable properties were seriously delinquent in the first quarter of 2022. That’s below Fannie’s overall serious delinquency rate of 0.38 percent.”
The country has been in the midst of an affordable housing crisis since the Financial Crisis. The crisis may worsen with many investors pressured to get out of the affordable housing segment to take advantage of rising rents.
While demand for Class B and C properties is currently constraining cap rates, we will be back in the affordable housing market once the situation improves.
Affordable multifamily properties and mobile home communities that retain strong occupancy rates even as rents are raised are ideal buffers against recessions and inflation. That’s why affordable housing has always been a part of a diversified portfolio – among small and midsize operators and institutional ones.
CONTACT US TODAY to put your name on the waiting list as opportunities in the affordable housing space arise with the chance to partner with an experienced operator to generate consistent recession-resistant income.