For-profit investors continue buying up apartment properties with relatively low rents, including those originally built through government-subsidized affordable housing programs.
"There is growing investor interest in lower-price-point product, whether the properties are part of an affordable housing program or are just market-rate projects at the lower end of the price spectrum,” says Greg Willett, chief economist with RealPage, a provider of property management software.
Some of these investors are hoping to raise the rents, but many are satisfied to keep these apartments relatively affordable. That’s because affordable housing properties tend to produce consistent, steady income from rents. In many markets, they are fully-occupied, dependable performers and can often be safer investments than conventional, class-A apartment buildings.
“Given where we are in the current cycle, with pricing pushed so high for top-tier product, especially in coastal markets, return for those premium properties now isn’t necessarily greater than is achievable in the affordable-product niche," says Willett.
Demand won’t drop for affordable housing
Multifamily investors have become more interested in affordable housing in recent years.
“There are an increasing number of for-profit buyers,” says Jeff Arrowsmith, senior director of affordable housing with real estate services firm CBRE. Apartment properties that have formal restrictions on how high their rents can rise because they are in affordable housing programs now account for roughly 20 to 25 percent of the apartment properties with more than 20 units that are bought and sold, according to CBRE data.
Lower-rent properties are attractive in part because demand for these apartments is very strong.
“The need for this more affordable housing has grown, partly because income growth has been so slow in this economic cycle, but also because some households who previously could afford middle-market product have been priced out of those communities as rents have climbed,” says Willett.
These has led to fully occupancies at these types of properties even in metropolitan areas where cheaper apartments have historically suffered from higher vacancies.
For example, the average percentage of occupied apartments at class-C properties is now around 95 percent in Dallas, up from the historical norm between 91 and 92 percent. In Atlanta, the percentage of occupied apartments at class-C market-rate properties averaged around 94 percent, up from a historical norm of about 90 percent, according to RealPage.
That’s partly because these apartments don’t have much competition. Development costs are now too high for builders to create new apartments with relatively low rents without help from the government’s affordable housing programs, and those programs have limits on how much new housing they can afford to build.
"The obvious appeal of investing in affordable housing is that future revenue growth should be very stable and predictable,” says Willett. “While you’re unlikely to hit a home run in return for an individual deal, risk is fairly low because resident demand is so strong and reliable.”
Affordable housing properties typically sold at cap rates averaging around 6.6 percent over the last year, according to CBRE. That’s only slightly higher than the current cap rate of 6.5 percent recorded for class-B and class-C apartment properties in 2017.
Affordable units lost in high-cost markets
Affordable housing advocates often worry that private investors may seek to sharply raise the rents once they buy these buildings. For example, many properties originally built with federal low-income housing tax credits (LIHTC) are now coming the end of their original 30-year agreement to keep the rents low.
What happens to these properties will largely depend on where they are located.
In many smaller markets, the highest rents that landlords are able to charge for renovated older apartments are often relatively low. So property owners have much less temptation to take the property out of the affordable housing programs, renovate it and raise the rents. “In tertiary markets, the affordable housing program rents are probably at market,” says Arrowsmith.
The situation is very different in the primary markets, where rents are often much higher. “In higher rent areas we are at risk of losing more units of affordable housing,” says Arrowsmith. “Owners are going to be incentivized where the market rates are higher to raise the rents and get the return.”