Affordable housing remains a huge and growing problem in the United States, despite significant efforts to alleviate the situation. Inna Khidekel, a partner in capital markets at Bridge Investment Group, points out the lack of affordable housing, which now affects more than 60 percent of the population, is turning out to be a major investment opportunity, provided investors move beyond traditional approaches.
Why, despite significant efforts, has the U.S. affordable housing problem continued to grow?
The efforts have focused primarily on government subsidized programs, while the supply/demand mismatch is greatest among the population that does not qualify for those programs. Government subsidies are on the decline, tapped out by budget-constrained municipalities and less valuable post-tax reform, while structural supply issues cause developers to build almost exclusively class A luxury housing. Value-add players raise rents far above a corresponding rise in income, and we lose an additional 100,000 to 200,000 units annually to obsolescence and poor management.
How big has the problem become?
The problem is enormous and growing. One in two Americans is priced out of the market, and there are structural issues with building housing that is affordable to the largest segment of the U.S. workforce. Net of obsolescence, new renter demand reaches over 500,000 units annually, with the vast majority of those being low-income renters. The United States builds only 10,000 new class B/class C units annually, and less than one-in-10 deliveries today is affordable. Ninety-six percent of what is constructed in the urban core requires incomes of more than $75,000, yet 64 percent of U.S. households earn less than $50,000. Thus, the problem has expanded far beyond what the government can reasonably support.
Your organization has taken a new approach. Explain, please.
Bridge Investment Group preserves and rehabilitates housing for the nearly two-thirds of U.S. renters earning less than 80 percent area median income (AMI), without any government subsidies. Each of our properties mandates at least 51 percent of units are rented to those earning less than 80 percent AMI, which ensures teachers, policemen, firemen, public city workers and other Americans can afford their rent. We use the remaining 49 percent of units to help subsidize the 51 percent. Due to our affordable mandate, we received below-market, large-scale financing from Freddie Mac in the first-of-its-kind social impact facility. We subsidize out of our management fee an onsite dedicated social/community center at every property run by our nonprofit partner of 25 years, Project Access, enhancing social and economic mobility and providing a higher quality of life for residents at a lower cost of living beyond just affordable rent. Combined with hands-on, vertically integrated property management delivered by 2,700 people in 23 states, we drive net operating income growth and create thriving communities with high occupancy and low turnover.
Is the concept catching on with other investment managers?
Most investment managers historically equated affordable housing with government subsidies, naturally limiting their scalability and size. We see increasing recognition there is both a dire need and a strong investable opportunity to provide housing affordable to the broader U.S. workforce. Most of the players who have entered the space are regional and lack nationwide scope and scale to operate their own assets, but we know some of the largest managers are now getting involved, given the opportunity size and demand from investors. We have not come across any other owner-operators of our size and also do not know of others who voluntarily subsidize onsite programming, have a strict mandate that the majority of units are affordable to low-income renters, or that measure and communicate their impact.
How significant an opportunity is this for investors?
As soon as you expand the definition of affordable housing beyond government subsidies, the investment opportunity becomes massive. The problem is pervasive and growing as the United States becomes increasingly a renter population; private capital can step in and make a difference far beyond what the government can support. When you consider the extremely attractive operating characteristics of the asset class — recession-resistance, above-market occupancy, long-term demographic tailwinds, durable cash flows, low J-curve — it is no wonder we see tremendous investor interest. Furthermore, there is an increasing awareness of the possibility to generate a “double bottom line,” where returns and impact are not an either/or equation. The strategy has resonated because of the supportive living situation we provide residents, including onsite programming (such as Bridge Credit Plus, ESL, career/technical training and after-school programs) that actually helps us to deliver stronger returns.