The Modern Multi-Family Challenge: Finding Apartments for America’s Workforce

October 2020

The Modern Multi-Family Challenge: Finding Apartments for America’s Workforce

America’s workforce – people such as retail and hospitality employees, manufacturing and maintenance workers, teachers, health aides and civil servants – keep our communities and economy running. Now, the COVID-19 pandemic has underscored how essential these workers are to our society. Yet even before the economic slowdown and public health crisis in 2020, America’s workforce was facing another crisis: the lack of affordable rental housing.

Many Americans fall into the wide gap between officially subsidized affordable housing and luxury rentals or homeownership. They are the face of the real estate sub-category known as workforce housing. The past decade of multifamily development has focused on market-rate, Class A buildings, leaving residents who are earning lower-to-middle wages without many options. This critical gap has become even more dire as real estate investors and commercial developers face the economic downturn that was hastened by the pandemic.

Key Learning Points:

  • Many Americans are caught in the gap between qualifying for affordable housing and being able to afford market-rate rentals.
  • The economic downturn and impacts COVID-19 are creating an even more critical problem.
  • While the federal agencies have programs that address affordable housing, fewer programs address workforce housing.
  • Programs such as the Green Multifamily Loan Program, Low Income Housing Tax Credits, and the Naturally Occurring Affordable Housing (“NOAH”) Preservation Loan are geared toward making properties sustainable and viable options for lower-income renters.
  • Solving the affordable and workforce housing shortage is going to take a combined effort from the private and public sector, particularly as we begin to rebuild post-pandemic.

Multifamily Deal Pace Slows, but GSEs Providing Stability

After a record-breaking year in 2019, which saw commercial and multifamily mortgage bankers close a record $600.6 billion of loans1, the downturn paired with uncertainty about post-pandemic economic recovery have considerably slowed the pace of multifamily deal-making.

According to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, commercial and multifamily mortgage loan originations were 48% lower in the second quarter compared to a year ago, and declined 31% from the first quarter of 2020.2

However, the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, remain committed to their mission to address the housing shortage by keeping liquidity in the marketplace. The Federal Housing Finance Agency (FHFA) overhauled its system of multifamily caps in September 2019, setting caps for Fannie Mae and Freddie Mac of $100 billion each for the next five quarters.3 Now, nearly a year later, Freddie Mac’s Rich Martinez says the agency is “on a steady pace toward the FHFA-set volume cap by year end, including targeted affordable housing.” 4

Understanding Where the Players in Multifamily Stand Today

In general, Class A multifamily projects in primary markets have been the purview of life insurance companies, private equity, and banks, while GSEs have been active in workforce housing in secondary and tertiary markets. However, in recent years, overlap between lenders has increased. As borrowers and lenders alike chased risk-adjusted deals, GSEs, banks, and insurance companies competed more often for the same project.

According to the MBA, commercial bank portfolios were the leading capital source for originated loans in 2019, responsible for $179.8 billion of the total. The GSEs had the second highest volume at $139.1 billion, followed by commercial mortgage-backed securities issuers (CMBS), life insurance companies and pension funds, and then REITS, mortgage REITS and investment funds.5

Though the record pace has halted in 2020, multifamily is still faring better than other commercial real estate types that have been more directly impacted by shutdowns or shelter-in-place orders during COVID-19, including retail, hospitality and major market office buildings. According to the Newmark Knight Frank United States Multifamily Capital Markets Report in August 2020, “While transactions slowed considerably as a result of the COVID-19 pandemic, multifamily has been the top recipient of capital year-to-date.”6

The GSEs have also stepped up by both injecting liquidity into the market and rolling out forbearance programs. As of July 28, the low percentage of borrowers enrolling in the forbearance program, coupled with strong occupancy and collections, demonstrated the resilience of the multifamily sector.7

The Workforce Housing Conundrum

Workforce housing is generally understood to be rental units priced below market-rate, but that do not meet the definition of affordable housing.8 While the FHA and GSEs have programs for affordable housing that provide options for borrowers, fewer programs address the need for more workforce housing. And together, the programs that have been implemented are insufficient to meet the vast and mounting need –1 in 4 Americans nationwide pay more than 50% of their income on rent, according to the Joint Center for Housing Studies of Harvard University.9

“Over the past decade much of the supply entering the market was market-rate or luxury product because developers needed returns to cover rising construction costs. Meanwhile, in addition to affordable housing scarcity, we also saw little development or redevelopment addressing the vast swath of renters in the middle,” said Rob Likes, KeyBank National Director for Community Development Lending & Investment.

Likes says a number of converging factors put pressure on the availability of workforce housing, including:

  • Price per square foot of living is rising: Single-family supply of so-called “starter homes” in particular is down, and home values are up in many areas, leading to further delays in moving from renting to owning.
  • Time is money for developers: New construction is too costly and time intensive to get through zoning approval to occupancy.
  • Raising rents through improvements: The below-Class A stock that used to serve as workforce housing was acquired by investors, rehabilitated, and repositioned at higher rents, making it unaffordable for a greater proportion of renters.

Likes goes on to state, “The problem is not a lack of capital, but a lack of supply – and the motivation to provide it. The challenge for policymakers, the GSEs and affordable housing lenders alike is how to incentivize investors to put capital toward this problem, especially in light of the current economic downturn. However, the more positive news is that the fundamentals for rental housing – demand and occupancy – have remained strong despite historically challenging conditions.”

Some agency-backed value-add, moderate rehab programs and the Lower Income Housing Tax Credit program are options for borrowers. But, they will only alleviate the housing gap if they’re geared toward making properties sustainable and viable options for lower-income renters, not “flipping” properties to garner higher rents. To truly make a dent, federal, state and local agencies and the private sector must come together and develop programs that either add supply or focus on the preservation of units.

For example, deals can be structured to provide appealing financing terms in combination with liquidity from the agencies and faster zoning approvals to developers who agree to preserve the units at an affordable or below-market rate for the term of the loan.

Some municipalities may also look at innovative ways to bring more density, such as micro-unit buildings, or co-living or shared living buildings. In some cases, these settings can be created by retrofitting existing housing stock to make buildings accommodate more people; in other cases, new housing options will need to be repurposed and redesigned with more units.

Freddie Mac’s NOAH Preservation Loan product provides reduced transaction costs and interest rates, as well as reduced debt coverage criteria (in certain situations) for properties that have at least 50% of the units affordable at 60% / 80% / 100% / 120% of area median income (“AMI”) based on market at the time of origination. In concert, Fannie Mae has expanded its definition of Special Public Purpose “Affordable Housing” to include properties with similar characteristics. Qualifying projects receive reduced debt coverage criteria and reduced pricing when rents are affordable to the cohorts mentioned above.

The government agencies are committed to their mission of delivering more multifamily housing for America’s lower-income communities and working families. To do so, they will need to work in concert with designated lenders, local governments, and the private sector to develop workable solutions that begin to fill the gap. KeyBank Real Estate Capital and their Community Development Lending and Investment sector helps communities across the country thrive by bringing together affordable housing owner-operators and developers with complex financing in partnership with for-profit, nonprofit and government entities.

To learn more and discuss your next project, contact Al Beaumariage, KeyBank Senior Vice President of Affordable Housing at 214-540-9129 and Rob Likes, KeyBank’s Community Development Lending & Investment National Director at 801-297-5811.

This is designed to provide general information only and is not comprehensive nor is it legal, accounting, or tax advice. Banking products and services are offered by KeyBank N.A. Equal Housing Lender. All credit products are subject to collateral and/or credit approval, terms, conditions, and availability and subject to change. is a federally registered service mark of KeyCorp.

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