Investor Update: Desired Asset
By Mark Fogarty
6 min read
Values Jump for Conventional, Section 8 Affordable Housing
Affordable housing values are rising, both in the conventional and Section 8 segments of the business, helped by strong economic fundamentals and increasing rental demand.
Jeff Kunitz, executive vice president at CBRE Affordable Housing, Seattle, said AH values are getting hot because, “Ours are pretty solid investments. You might not make millions and millions of dollars, but real estate is pretty stable.”
And he sees demand rising for affordable and workforce housing, giving an example from the Emerald City. “A firefighter in Seattle can’t afford to live in downtown Seattle, where a single bedroom is $2,000 a month. So there’s a huge need. We’re heading for more development like that.”
The call for workforce housing “is growing and growing,” he said. “In many markets, rent growth is high. There’s a scarcity of housing as people spend 50 to 60 percent of income on rent. Workforce housing rents are attainable at 60 or 80 percent of area median incomes.”
Kunitz, whose firm specializes in conventional tax credit deals, said CBRE did a robust 190 deals last year in a busy acquisition market. About 70 percent of these occurred between years 11 and 15 of tax credit deals as investors, having gotten all their credits out, sought to exit.
Were these projects going to be converted to market rates? “Not necessarily,” he said. Instead, a lot of investors were “chasing yield.”
Especially hot markets include Maryland, northern Virginia, Florida, Austin and Dallas of the Texas markets, California, the Mid Atlantic and Georgia.
He estimated values in hot markets were up 25 to 30 percent over values five years ago.
Why the big demand? For one thing, Kunitz said, “Millennials aren’t buying houses – at least not yet. The demand for apartments is growing. The economy has strong fundamentals. Workforce housing creates a demand for this type of investment.”
Investors with more money to spend are a factor as well. Where previously funds for affordable housing might be in the $30 million range, he is seeing ones in the $100 million and higher range.
Fannie Mae and Freddie Mac also are part of the picture, with debt financing available through the GSEs.
“They have a huge desire,” he said. “They can’t get enough. Freddie and Fannie are huge advocates of affordable housing.”
CRE Drives Section 8
The values story on the Section 8 side is also quite positive. “HUD-associated properties, as well as conventional apartment complexes, have gone up in value in recent years. Demand has grown, just as they have for conventional apartments, and the values have grown, just as they have for conventional apartments,” said Paul D. Davis, founder and chief executive of Affordable Housing Advisors of Marcus & Millichap in Southfield, MI, which specializes in Section 8 deals.
“There is more demand. But there are other factors involved,” he said. “One driving factor is banks satisfying their Community Reinvestment Act investment requirement by acquiring Section 8 properties or buying the credit associated with a Section 8 property.”
Davis, whose firm does $1 billion in volume a year, sees big cities as hot markets. “Yes, just as with conventional apartments the great metropolises are highly sought after,” he said. “New York, Chicago, Los Angeles, San Francisco, Seattle and Miami are very sought after.” And demand is high “even in the parts of the country that aren’t normally sought after,” he said.
New investors are creating more demand, as well.
“Often they are conventional real estate people who in the old days would never consider owning a HUD property and now they’ve learned that it’s a different paradigm so they come in,” he said. “Some are purely financial investors who align themselves with Section 8 owner-operators, providing equity.”
International Capital
And some are from overseas. “Sometimes there’s international capital backing an American citizen who is the managing general partner. There is significant international capital coming in. They like owning American real estate as limited partners and they like the government rent subsidy program because it virtually ensures rent collection,” Davis said.
“It’s a hybrid investment, an investment in American real estate and also a fairly low risk investment because Section 8 projects tend to be fully occupied and much of the rent comes through the subsidy contract instead of having to rely fully on the tenant.”
Davis also credited Congress and the Department of Housing and Urban Development for positive influences on the legislative and regulatory sides.
He said the 2008 Housing and Economic Recovery Act (HERA) bolstered Section 8 fundamentals.
“It changed the ten-year rule as it pertains to properties with project-based rental assistance,” he said. “That allowed sophisticated buyers to acquire Section 8 properties and warehouse them and then obtain a reservation of credits after they bought the property. That completely changed the business.”
And, he said, HUD “has made owning and operating Section 8 properties much more desirable than it was years ago. They have enacted policies that allow elimination of the limited distribution provisions that used to be set either in the mortgage or the Section 8 contract. There were specific limitations on how much surplus cash could be distributed to the ownership.”
There also have been fewer opt-outs in recent years.
“HUD has also allowed rent increases to allow the rents that are paid under the Section 8 program to be more consistent with the market in which they’re located. Rents were often held down by HUD only allowing rent increases based on a budget. HUD constrained rent increases to the point that owners of properties where the rent was constrained would opt out of the Section 8 contract in order to achieve market rents,” he said.
“HUD recognized that led to affordable housing being taken out of the HUD programs and displacing the tenants and in the better locations, eliminating affordable housing. HUD responded to that by implementing policies that removed the incentive to opt out of the Section 8 program.”
The HUD changes made these properties more attractive to investors. “HUD also, in general, is not adversarial with ownership. Ownership that takes good care of Section 8 properties enjoys a symbiotic relationship with HUD rather than an adversarial one,” Davis concluded.
Story Contacts:
Jeffrey Kunitz
EVP, CBRE Affordable Housing, Seattle
Direct in Dial: (206) 826-5778. Mobile: (206) 331-2776
Office Email: jeffrey.kunitz@cbre.com
Paul Dennis Davis
Founder & CEO, Affordable Housing Advisors of Marcus & Millichap, Southfield, MI
Direct in Dial: (248) 415-2630
Office Email: pdavis@marcusmillichap.com
