An Insider’s Perspective on Affordable Housing

Affordable housing is an area that I have an interest in learning more about. To that end, I recently listened to a pair of leaders from an affordable housing development company offer their thoughts on the subject. Some of the topics discussed included the types of affordable housing, what they look for when considering projects, areas of concern, and suggestions for making affordable housing options more prevalent.

Types of Affordable Housing

The term “affordable housing” informally refers to situations where homeowners or tenants are not financially burdened by housing costs. Informally, this generally means that they’re likely spending less than 30% of their income on housing. By contrast, the more formal phrase “Affordable Housing”, with a capital A, refers to deed restricted housing that received supplemental funding through subsidies and/or other incentives such as tax credits.

“Workforce housing” describes households that generally would not qualify for subsidies, but that may still find housing expenses to be burdensome. These households typically make around 60-120% of the area median income. Area Median Incomes are frequently used as a basis for determining what a household (such as an individual, family, or group of roommates) can afford.

“Affordable by design” refers to housing that is less expensive because of the way that it’s built. This typically means more efficient or smaller housing. Along the same lines is “naturally occurring affordable housing” which is housing that is less expensive because of its condition. Generally, they are older properties with limited amenities and features.

Three Types of Affordable Development

“Market rate development” refers to development that occurs when it’s economically feasible. When the value of a completed building and/or the income it produces exceeds the costs of development, developers start building. When it’s not feasible, no development occurs.

In the case of Affordable Development developers cannot charge market level rents, or in other words the amount of rent they need to charge to make a profit, because they’re trying to keep rents down and affordable to tenants. There’s a gap then between what rents need to be to be affordable and what they need to be to be profitable.

Subsidies, credits, and lower interest rate loans provided by local and state governmental agencies and/or nonprofit organizations can serve to bridge that gap. This allows developers to be able to afford to develop sooner and offer projects at a lower cost to the public, since it effectively costs them less to build.

The third type is “inclusionary development”. In this case zoning and land use regulations dictate that a certain percentage of housing in an area must be reserved for below-market rental properties or below-market property sales. While there is no gap funding, inclusionary housing may include the provision of concessions and other benefits such as expedited entitlement processing, density bonuses, or leniency with parking requirements.

For Sale vs For Rent Development

According to the presenters, it’s easier to acquire support for for-sale properties. From the developers’ perspective this is because there’s less risk. Once you sell a house, condo, or other residence you take your profit and move on. When you lease out a property, there’s a risk that there may be vacancies or that you may not be able to obtain needed rent levels. Additionally, members of the community tend to be more receptive to single-family homes than to apartments which they may worry will bring property values down or bring lower-income people into their neighborhood.

This tendency towards for sale properties has a side effect of decreasing urban density. Less dense and more spread out housing tends to be more expensive. Heating and cooling, provision of utilities, and infrastructure must be carried a greater distance and features such as shared walls on apartments and condos do not exist in detached housing units. Additionally, apartment buildings and complexes can benefit from economies of scale, both in terms of purchasing materials as well as management efficiency and human capital.

Challenges to Affordable Housing

One of the biggest problems faced by affordable housing developers is the acquisition of land at an affordable rate. Unless they receive financial subsidies to assist in the purchase of land, affordable housing developers are shopping in the same market as all other developers, including those who can afford to pay more because they know they’ll be able to charge more upon completion of their project.

As a result, it’s common that affordable sites are those that market participants have deemed less desirable for one reason or another. For example, a site may be less expensive because its location is near a highway offramp, because it’s an oddly shaped lot, or because there’s environmental contamination.

An interesting, but unfortunate argument was also made by the speakers with respect to how well-intentioned policies associated with the sustainability movement can sometimes be in conflict with affordable housing objectives.

Electrification of buildings is part of the environmental sustainability movement because as we move away from fossil fuels and toward renewable energy sources, the power grid can easily switch to being powered by these renewable sources. But using electricity for all the building systems (as opposed to natural gas for example) is currently more expensive.

Along the same lines, as more people begin to drive electric vehicles they’ll want and need EV parking spaces. But those parking spots require larger transformers to provide enough power to charge a car. Those larger transformers and the power they generate cost more money.

Further, smaller sites that have a smaller environmental impact may make surface parking unrealistic. There may simply not be enough land to put up a building and account for the necessary number of parking spaces without using a parking garage, which can easily cost four times as much as surface lots.

Obviously, we don’t want a situation where two positive movements (affordability and sustainability) are in conflict with one another. This could lead to a situation where only higher income neighborhoods would be able to afford more sustainable and healthier buildings. But at the present moment, this is what we’re seeing. Most sustainable developments are in higher end neighborhoods.

While this may be the case today, the market is beginning to see how sustainable development can actually provide financial benefits. This can come in the form of lower insurance rates associated with more resilient buildings (e.g. a building that is prepared for sea level rise is less prone to submit a claim for flooding). Sustainable buildings are also more energy efficient which means that utility costs and other operating expenses are lower. Third, parking requirements should not be as great where there’s increased density and a greater use of public transit. But perhaps the largest financial benefit is the fact that the value upon resale tends to be greater because of the decreased risks associated with a more resilient building.

Ideas for Moving Forward

A common approach is to combine affordable and market rate rentals in one development. The market rate rentals help to support the project by bringing in more income and making it financially feasible, particularly in the case of inclusionary or workforce housing where subsidies may not be available. Typically, subsidies are reserved for much lower income housing developments, those projects that simply could not happen without them, because the gap between market rates and what’s considered affordable for a given group of people is so large.

By incorporating some market rate rentals or sales, a development increases its overall income and is in a better position to be able to allow some of its other units to sell or rent for lower prices. Of course, this can also be viewed as another form of subsidizing rents in that the market rate units are more expensive in order to compensate for the less expensive units.

Having a greater number of qualifying sites to develop (those that are financially feasible, legally permissible, and physical possible) is also important. There is also a need to identify more higher quality sites, such as those that do not require costly expenditures to make development possible, as would be the case in a brownfield site that would require environmental remediation.

Affordable housing developers would also like to see more communities welcoming and inviting affordable housing into their neighborhoods and a wider array of financial and non-financial incentives from government agencies and nonprofit organizations.

Additionally, developers themselves need to be willing to be creative and flexible. In addition to looking for low cost land to purchase and pursuing financial subsidies, they need to also consider affordability by design. For example, they could convert an old motel into microunits as opposed to starting with an empty plot of land.

Many people, myself included, have wondered if modular and manufactured homes can help to address the affordability need. It was explained that one of the problems is that of scaling and experience. There are simply fewer builders and contractors out there with this skill set and type of experience.

Additionally, there’s the issue of novelty. While people are certainly exploring modular and manufactured homes, we have yet to reach a tipping point where all of the kinks, issues, and uncertainties have been worked out. Eventually, this should be a more commonly applied option. But change is often slow.

Real estate development is expensive and we know that the status quo works. This means that developers, contractors, lenders, and others tend to be reluctant to try something new and different. So unless you can self-fund your deals and can find a team of architects, planners, contractors, engineers, and other professionals who are all onboard with modular and manufactured development, traditional construction methods will likely continue to be the primary method used.