CREJ - Multifamily Properties Quarterly - May 2017
The U.S. housing and multifamily market has been on an eight-year run that has seen values and rents exceed their prerecession peaks in most markets. The increase in single-family home values and the regulatory and lending practices that made it harder for Americans to qualify for financing, combined with demographic trends and a shift to renting versus homeownership, have fueled the rapid rise in multifamily rents. While that has been great for multifamily investors, it has created a squeeze on workforce housing as incomes, despite strong employment growth, have failed to keep pace. This disparity between rent growth and income growth has led to an increasing concern over the availability of workforce housing across the country. There are few areas in the country in which this is more evident than in metro Denver, a clear leader in home appreciation and multifamily rents growth. Combine that with the metro’s strong population growth, particularly with millennials, and the shortage of workforce housing becomes a real issue – potentially dampening future employment growth. Compounding matters is the severe lack of new condominium development, which typically helps to fill the gap between single-family homes and apartments, due to the state’s stringent construction defects law. All of these factors have led the apartment market to provide the bulk of the metro’s workforce housing. Workforce housing is loosely defined as housing that is affordable to households earning 80 percent of the area median income, though most observers qualify workforce housing as affordable at 60 to 100 percent of AMI (see the affordable rent analysis chart for calculation). With multifamily rents skyrocketing in Denver, most projects now garner rents in excess of these thresholds. A review of the metro multifamily housing stock, as shown on the permits chart, reveals that the largest portion of multifamily housing was constructed during the 1970s, with modest new development taking place until the recent construction boom, which consists almost exclusively of high-end, highly amenitized projects with rents not affordable to renters earning between 60 to 100 percent of AMI. With much of the vintage product of the 1980s and 1990s having undergone substantial rehab and landlords pushing post-rehab rents, the bulk of the area’s workforce housing stock now is found in the vintage assets of the 1970s. Freddie Mac and Fannie Mae, commonly referred to as government sponsored enterprises, are keenly focused on this issue. One of the GSE’s primary missions is to provide financing for affordable housing, including workforce housing. To that end, both have rolled out new products in the past couple of years that can help communities, like Denver, deal with the increasing shortage of workforce housing. These programs are aimed at preserving and enhancing workforce housing by providing more efficient capital to spur investment and capital investment into older multifamily assets. As shown on the acquisition-financing chart, both GSEs have been very active in financing new acquisitions in metro Denver – accounting for over 75 percent of new acquisition financing of properties over 100 units in 2016. For properties in metro Denver with units that are affordable at 60 percent of AMI, both GSEs offer reduced interest rates based on the percentage of units deemed affordable at 60 percent of AMI. The rate benefit typically ranges from 15 to 30 basis points, depending on the percentage of units deemed affordable. For assets that do not have units affordable at 60 percent of AMI, but still are considered workforce housing with rents affordable at 80 percent or even up to 100 percent of AMI, both GSEs will provide improved pricing for those assets versus an asset commanding much higher rents. In addition, both GSEs have developed “green” products that are designed to incentivize investment in older assets that generate utility/ energy savings. These programs target capital improvements that generate minimum energy savings in the 15 to 20 percent range. Typically, the older the asset, the easier/less expensive it is to capture the required energy savings, making these products great options for investors and owners of older multifamily assets. The GSEs incentivize owners to “go green” through improved rates and pricing, typically ranging from 20 to 30 bps. Finally, both GSEs have developed value-add products designed to provide investors and owners of older multifamily assets short- and long-term, cost-effective financing options for moderate and extensive property upgrades, providing updated housing and extending the remaining useful life of the asset. These programs are competitively priced and designed either to compete with the more traditional bridge lenders via short-term financing or to provide immediate mid- to long-term financing for assets that typically would require a bridge loan during the rehab stage. While the GSEs continue to focus on affordable housing and housing for low-income families, their expanded product line will help maintain and increase investment in workforce housing across the country. Freddie Mac, for example, is working to develop a mezzanine product as well as a construction product for workforce housing that it hopes to launch this year. For a city like Denver, with an aging multifamily stock, and strong population and employment growth, these products could prove instrumental in maintaining and facilitating additional capital investments into the older assets – and who knows, perhaps lead to construction of new workforce housing.