Since the housing industry began to recover from the Great Recession, most developers, builders, and architects have focused on market-rate and luxury properties. These segments helped them reap healthy profits by charging what a market would bear. Now, many regions have peaked and are starting to see increasing inventory, softening prices, and squeezing profits due to higher costs for land, labor, materials, and government compliance fees. But at the opposite end of the spectrum, affordable and workforce housing sales have climbed, and more industry professionals are noticing the huge lack of inventory and the pent-up demand.
“About 80 percent of all new multifamily construction in the urban core has been luxury, which doesn’t help those who earn 60 percent to 120 percent of the area median income,” says Elie Rieder, founder and CEO of Castle Lanterra Properties in Suffern, N.Y., an investment firm focused on the multifamily workforce market. “These people are our police officers, firefighters, teachers, nurses, and other middle-income professionals who serve our community and deserve quality rental housing at an affordable price point.”
Until recently, many developers shied from affordable housing because margins associated with these properties were slimmer due to escalating building costs. Income or government regulations also restricted what prices could be charged, and the category of affordable housing had a negative connotation due to the stereotype of crime-ridden, dilapidated public housing, such as Pruitt-Igoe in St. Louis and Cabrini-Green in Chicago, which have both been demolished.
Despite the challenges, more developers now are jumping in to help—at a much-needed time, too. The overall affordable supply continues to diminish as more than 100,000 units are lost annually due to obsolescence, substandard conditions, or conversion to market-rate apartments, according to Multi-Housing News.
One reason for its resurgence is that many municipalities now require that a percentage of new multifamily, market-rate construction projects be set aside for affordable and workforce units—giving rise to the term “inclusionary housing.”
Another reason affordable housing is back on the table is that many real estate professionals are producing successful results. Better-looking, functional products are helping change the perception of what affordable and workforce housing looks like. Most new properties are quickly leased or purchased, resulting in long waitlists. Plus, studies are finding that the housing diversity improves neighborhoods. “The mix produces a more organic, sustainable solution that’s viable over the long term,” says Aaron Pechota, senior vice president for development with The NRP Group in Cleveland, a multifamily developer.
The hope is that the affordable housing momentum that’s growing across the country—along with local building incentives—will spur more real estate professionals to take on the challenge, says attorney Jeffrey G. Frank with the law firm Buchalter in Seattle.
Whether you’re interested in developing affordable housing or you’re guiding an investor client, here are examples of housing products and sales strategies that may work in your market.
Acquire and Rehab
The country is littered with buildings that have fallen into disrepair or been abandoned. Developers and acquisition firms are buying them and prudently adding value by building new amenities, renovating units, and adding safety features. The approach offers the potential for greater profit versus building from scratch, says Rieder, as long as the improvements are kept in check. His firm successfully used this approach after it acquired the 425-unit Class C+ Midpointe Apartments in Chicago in 2014, which was 80 percent occupied at the time of acquisition. By reconfiguring, renovating, and adding amenities, they raised it to Class B/B– status and increased it to full occupancy. The average rent also increased to about $715 a month for a studio, $908 for a one-bedroom, and $1,135 for a two-bedroom.
Michael H. Zaransky’s MZ Capital Partners, based in Northbrook, Ill., outside Chicago, uses a similar approach but targets suburban markets with good school districts. The company recently renovated the tired 1987, 130-unit British Woods Apartments in suburban Knoxville, Tenn., and increased its lagging occupancy to 99 percent. Units are priced at $795 for a one-bedroom and $950 for a two-bedroom.
Standard Companies, a nationally focused firm based in Los Angeles, has also worked to preserve affordable housing stock—rather than see it go to market rate—by partnering with local and federal housing agencies, says Scott Alter, co-founder and principal. The company did so after it bought the 549-unit Fort Chaplin property in Washington, D.C., because it was near a metro stop. Public partners secured tax exemptions, and Standard built a new clubhouse, pool, daycare center, and community facility. Rents range from $1,100 for a one-bedroom unit to $1,500 for a three-bedroom townhouse. Rent levels ensure that all units are affordable to households earning 60 percent of the area median income. The building is 99.5 percent occupied with a long waitlist. It has also helped transform the area into a vibrant walkable hub.
Steel shipping containers have gained attention for use in cutting-edge market-rate homes, but they also work for affordable shelter. In Los Angeles, CRATE Modular president Lisa Sharpe sees them as a solution to her state’s housing crisis where median home value has increased by 80 percent to $544,900 since 2011. Recycling the containers into housing takes half the time of typical construction, and the cost on a per-square-foot basis is about half the cost of typical stick-built construction in California. Because of California’s tough building regulations, the homes are energy-efficient and earthquake-resistant. Sharpe also makes exteriors attractive to avoid “not in my backyard” fears. Sharpe sells them to developers who work with supportive housing agencies, and her company plans to develop 100,000 square feet of product this year and 200,000 next year.
Build New Multifamily Affordable Units
Companies use different strategies to control construction costs when they build new. The family-owned Lockwood Companies, a builder and operator based in Southfield, Mich., adds amenities that provide benefits without great cost, such as pet-friendly properties with dog parks, says Mark Lockwood, president and CEO. The result is that he leases the units faster than he can build them, which is the case with his Lake Shore Village Apartments in Genoa Township, Mich., outside Detroit. There, two-bedroom apartments rent in the $900s per month, depending on the specific layout and location in the development, says Lockwood.
The NRP Group in Cleveland also cuts development costs with a mix of strategies. It looks for undervalued sites in suburban and urban sites that have strong asset bases, such as jobs, parks, and mass transit, then works with municipal leaders who rezone locations for greater density. They construct using wood frames rather than more expensive concrete or steel buildings and reduce unit footprints by 5 to 10 percent, barely noticeable except at the bottom line. The company’s 58-unit Residences at Career Gateway building in Columbus, Ohio, represents a partnership with Nationwide Children’s Hospital, which adds a healthcare benefit for residents and neighbors. The waiting list extends out 6 to 12 months. A typical two-bedroom, one-bathroom unit of 851 square feet runs between $850 and $930. There’s a job training center on site, and many of the programs are targeted at improving basic career and life skills for residents and community members so they can gain employment and retain jobs.
Creativity played a big role in the solution from architects at New York–based RKTB. The firm developed an infill prototype that it can duplicate more cost-effectively in New York than it can with modular designs, “though modular construction may be a possibility in the future,” says Carmi Bee, president. The four-story prototype includes a glass-enclosed stairway at the center to create a visual focus and enhance safety by illuminating the property as well as the street. Building only stairs (foregoing an elevator) also cuts costs and adds to occupants’ healthfulness. The firm is focused on using the design on medium-density Brooklyn lots. For example, the 64 units at the Barretta Apartments are split evenly between one- and two-bedroom apartments, and rents range from $494 to $860 per month. Eight units are held by tenants with Section 8 rent subsidies, which means they earn at or below 60 percent AMI, per HUD regulations. Bee’s ultimate hope for these units is “they will help bring income balance back to New York’s boroughs and eventually elsewhere.”
Architects at DiMella Shaffer of Boston also used a modernist aesthetic to design affordable and inclusionary housing. In nearby Cambridge, their Vivo building sets aside the city’s required 20 percent of units for workforce residents and offers a surfeit of amenities for all—from car and bicycle parking to a gym, lounge, co-working space, and green-roof deck with views. A studio at 60 to 80 percent of AMI rents for between $1,073 and $2,180 a month. At the firm’s affordable 181 Washington Street building in nearby Somerville, the architects used expensive, chic cement, metal panels, and a curtain wall on the exterior to make the building indistinguishable from market-rate dwellings, then cut back on some interior choices. A studio here at 60 percent of AMI rents for about $1,132. The building achieved LEED Silver certification and has a waitlist of 1,000 renters.
Partner to Improve Housing for All Ages and Neighborhoods
An important market segment—seniors—is also benefiting from the affordable housing sea change. For example, an interagency partnership among Chicago-based Evergreen Real Estate Group, the city of Chicago, the Chicago Housing Authority, and the Chicago Public Library, led to two new 44-unit buildings—Independence Apartments and Northtown Apartments—constructed atop new public library branches. Rent amounts for the residents of Evergreen’s affordable apartments vary based on housing authority assistance. “We’re proud to play a role in this innovative public-private partnership that provides much-needed affordable housing for seniors as well as a modern library that benefits the entire community,” says David Block, Evergreen’s director of development.
Rethink the Katrina-Style Cottage
Back in 2005, after Hurricane Katrina struck Louisiana, Marianne Cusato designed a cottage that was viewed as a lifeline to quick, affordable, and safe housing for area residents—better than the trailers that FEMA provided. Since then, Cusato’s Cypress Community Development Corp., based in South Bend, Ind., has offered more iterations, naming them for the disaster area, such as Sonoma Wildfire Cottage after the California area where fires raged. Cusato, also an author, thinks the cottages are most viable when a private-public partnership is formed, or a local group donates land. They can be used for short-term shelter or long-term community needs.
Reposition the Perception of the Manufactured House
Manufactured housing is, by far, the best technical option for well-built, highly-affordable housing, according to Fernando Pages Ruiz, author of Building an Affordable House, and Andres Duany, architect and designer of Seaside, one of the first master-planned New Urbanism communities in Florida. However, this housing segment suffers from an association with poverty, which makes the project approval process difficult at the local level. Duany proposes that mid-century modern designs based on the container aesthetic—which is currently popular—will dispel that mindset. “When designed to look like site-built housing, manufactured housing looks inferior, but when designed to look like containers, they are in comparison very superior,” Duany says. Prices depend on size, factory, and shipping distance, but plans are underway to unveil two luxury models under the DPZ CoDesign brand at the 2020 International Building Show.
Know What’s Happening Globally
The search for affordable housing is far from limited to the U.S., says Alfredo Munoz, founder of ABIBOO Studio, which works on different kinds of affordable units globally with headquarters in Spain, India, and the U.S. Very-low-income people who reside in cities in some of these areas have traditionally lived in urban slums and shantytowns, which the firm is designing as “social housing.” There’s also a need for temporal housing accommodations for specific groups, such as refugees and homeless. Affordable housing for the new middle class is another great need since more people worldwide have less access to housing due to median prices increasing faster than median incomes, says Munoz.
Q. Who qualifies for affordable housing?
A. A region’s area median income, calculated by the U.S. Department of Housing and Urban Development and adjusted by family size, is the key determinant. The test for affordable housing is usually 30 percent of income, whether for sale or rent, so there’s less risk of being “cost-burdened,” or not able to afford other expenses, says Elie Rieder, founder and CEO of CLP. For workforce housing, the level rises to between 60 and 120 percent of AMI, according to the Urban Land Institute. Yet, this segment faces a greater housing shortage since developers don’t receive the same low-income tax credits and incentives to build for it. Certain qualifications such as being a veteran or disabled may also help someone qualify for either type of housing, says attorney Matthew Hall with New York–based Goldstein Hall PLLC.
A knowledgeable real estate professional should be able help clients wade through the process and understand the time lines. For example, once completed, many buildings limit how long affordability restrictions are in place, and only after that period can they be converted to market-rate, says Hall. Many state agencies list affordable developments. The website rentalhousingaction.org is another useful source of information about how affordable housing supports communities nationwide, says Elaine Magil, a director at TCAM, a software company headquartered in Boston. Magil adds that in areas with higher median incomes, the maximum allowed income levels for low income housing tax credits and other deed-restricted housing are correspondingly higher. And, many faith-based organizations are converting vacant or underdeveloped space, fulfilling their social missions through affordable housing, Hall says.