Affordable Apartments Shortage Underscores Importance of Finance Availability for Properties

By Graham Dozier

Housing affordability in the United States continues to challenge many consumers, in both the for-sale and for-rent sectors. Current interest rate volatility, along with lackluster supply, has driven many would-be homebuyers back into renting. Of the most severely impacted by the cost of housing today are Americans with lower incomes.

In its recently released The Gap: A Shortage of Affordable Rental Homes, the National Low Income Housing Coalition reports that no state has an adequate supply of affordable rental housing for consumers with the lowest incomes. NLIHC defines these consumers as those with incomes at, or below, either the federal poverty line or 30% of their area median income, whichever is lower. The U.S. overall faces a shortage of 7.3 million affordable rental homes. Nevada ranks highest for statewide shortages with merely 17 affordable and available rental homes per every 100 renter households with extremely low incomes. South Dakota is in the best position of the states, yet the discrepancy is still severe, with just 58 affordable and available rentals per every 100 households in need.[i]

These shortages underscore the importance of solutions in the affordable housing sector. New supply is drastically needed, but so is the maintenance of existing affordable rentals. In order to ensure the current supply of rentals serving Americans with lower incomes remains affordable stock, the industry must provide finance solutions and incentives to the owners of these properties.

Finance Availability

As increased interest rates continue to drive uncertainty in the commercial real estate finance arena, multifamily is impacted. Buyers, sellers, borrowers and lenders are all facing a different reality than the economic landscape of just one year ago. Both 2022 fourth quarter numbers and 2023 annual projections indicate a decline in finance activity for apartments. The good news is that finance availability for affordable and workforce properties specifically is less impacted than it is for market rate apartments.

A recent report by the Mortgage Bankers Association (MBA) evaluated commercial and multifamily lending in 2022’s fourth quarter and found financing for the sector at-large declined 52% from 2021 fourth quarter activity. However, the GSEs Fannie Mae and Freddie Mac activity only declined 13% in the same comparison. Likewise, 2022 annual lending for multifamily at-large was down 11% compared to 2021’s total annual activity, yet GSE lending was only down 4%.[ii] These numbers showcase the commitment of Fannie Mae and Freddie Mac to provide liquidity in the sector, no matter the economic conditions.

Yet MBA is projecting a 16% decline in 2023 finance activity for multifamily, including affordable, workforce and market-rate product combined.[iii] Thus, many are concerned about the ability to finance, or refinance, affordable and workforce properties this year.

The good news for owners of affordable and workforce rental communities is they are better positioned to access financing today than their market-rate peers, in large part because Fannie Mae and Freddie Mac still firmly support the sector. In fact, with the GSEs, the deeper the rental affordability, the deeper the pricing discount on the loan.

Guidance for Borrowers

If you’re a borrower seeking a finance solution for your affordable apartment community, be sure to consult with a trusted agency lender and explore all choices. Research the finance incentives available for your property and, if it’s an option for you, find out how your deal might price more efficiently if you add, increase, or extend affordable restrictions. Consider looking into the benefits of upping the percentage of units with affordable restrictions from 10% to 20%. You may find that an, in doing so, you’ll achieve a tightened spread on a permanent loan, or may garner additional finance incentives, benefitting you in the long run.

If you’re a borrower looking to finance a conventional property, know that the agencies always want to know if any units of your apartment units are affordable. Additionally, deals that preserve existing affordable units, as well as those that convert market-rate apartments to affordable units, will benefit via the way Fannie Mae and Freddie Mac price the spread.

It’s true there are dynamics occurring in the market that will require our patience as they work themselves out. The Federal Reserve’s ability to quell inflation is one. Another is the discrepancy between the price sellers expect and what buyers can pay for apartment assets today. Until interest rates stabilize, financing challenges as well as the current logjam in transactions will continue.

About the Author

Graham Dozier is managing director of Regions Real Estate Capital Markets, a leader in affordable and workforce rental housing finance. Visit https://www.regions.com/commercial-banking/real-estate-banking/real-estate-capital-markets .

This information is general education or marketing in nature and is not intended to be accounting, legal, tax, investment or financial advice. Although Regions believes this information to be accurate as of the date written, it cannot ensure that it will remain up to date. Statements of individuals are their own—not Regions'.

[i] National Low Income Housing Coalition, The Gap: A Shortage of Affordable Rental Homes, March 2023, https://nlihc.org/gap

[ii] Mortgage Bankers Association, Commercial/Multifamily Borrowing Down 54% in the Fourth Quarter of 2022, February 13, 2023,?https://www.mba.org/news-and-research/newsroom/news/2023/02/13/commercial-multifamily-borrowing-down-54-in-the-fourth-quarter-of-2022

[iii] Mortgage Bankers Association, Total Commercial and Multifamily Borrowing and Lending Expected to Fall to $684 Billion in 2023, February 13, 2023, https://www.mba.org/news-and-research/newsroom/news/2023/02/13/total-commercial-and-multifamily-borrowing-and-lending-expected-to-fall-to-684-billion-in-2023