Long before COVID-19 washed up on U.S. shores, a different kind of crisis plagued many Americans, the shortage of affordable housing. And long after the pandemic dissipates, the U.S. affordable housing crisis is expected to persist, if not worsen, creating ongoing opportunities for investors, provided property developers get it right.

“If we can figure out how to address this crisis in the United States, we can be a role model and a blueprint for other nations,” says Randy Norton, chairman of MultiGreen Properties, a real estate operating company that’s developing apartment communities priced for moderate-
income Americans. The company was co-founded in 2019 by Green Mesa Capital, a single-family office, and i(x) investments, an impact-investing firm with global family offices as shareholders.

HOW WE GOT HERE

The imbalance between affordable housing supply and demand is hardly a new problem, but it has grown considerably worse in recent years. Since the early 2000s, developers have largely focused on the upper end of the apartment market, or so-called class A luxury properties, because of the high costs of land, labor and materials. Meanwhile, value-add investors have snapped up class B and C apartment properties, shrinking the existing stock of affordable housing.

At the same time, demographic trends have contributed to a surge in apartment demand, particularly among higher-income households. Rising demand and constricted supply have thus reduced the stock of low- and moderate-cost rental units, a trend that’s hit nurses, firefighters, police officers and other so-called essential workers hard.

Nationwide, a growing number of renters with yearly incomes between $30,000 and $75,000 are cost-burdened, meaning that they’re spending more than 30 percent of their income on housing, according to a report released in January by the Harvard Joint Center for Housing Studies (JCHS). What’s more, most of the country’s lowest-income renters now spend more than half their monthly income on housing, leaving little money left for food, childcare and other necessities.

Local governments, hospitals and even some of the country’s biggest tech companies are trying to tackle the affordability crisis. And yet, only the federal government, according to JCHS, has “the scope and resources” to make a significant difference. Existing federal programs, such as housing-choice vouchers, serve just a small slice of the U.S. population — the lowest-income Americans — and haven’t been able to keep up with demand, at that.

A NEW ERA OF INNOVATION

President Biden has proposed a sweeping $640 billion, 10-year plan to address major housing issues, including affordability. In the meantime, some developers and investors have taken matters into their own hands, rolling out new models that pair affordable multifamily housing with social services and/or finding creative ways to reduce development costs, among other measures.

The huge demand for affordable housing has attracted such players as Bridge Investment Group, a Salt Lake City-based real estate private equity firm with more than $25 billion under management. Through its workforce and affordable housing strategy, Bridge preserves (acquires and rehabs) and selectively develops affordable apartment communities serving the so-called missing middle, moderate-income Americans who make too much to qualify for housing assistance but can’t afford luxury apartments.

Bridge, which owns and manages its properties, sets aside at least 51 percent of the units in each property for renters earning less than 80 percent of area median income (AMI). According to Bridge, such renters comprise a whopping two-thirds of all U.S. renters. The firm also caps rents to ensure that such tenants spend less than 30 percent of their monthly incomes on housing. The remaining 49 percent of apartment units help to subsidize the 51 percent. Currently, about 82 percent of Bridge residents earn less than 80 percent of AMI.

Bridge’s workforce and affordable housing strategy, which focuses on fast-growing U.S. secondary markets, already owns assets in 34 states and is raising a second round of capital to preserve, rehab and build about 25,000 apartment units. The strategy has two goals: to preserve affordable housing stock and generate attractive, risk-adjusted market returns and stable, secure cash flows for investors, all without any government subsidies.

“We recognized that where the need for affordable housing is the greatest is the part of the market that’s underserved by both investment managers and constricted supply,” says Inna Khidekel, a partner in the firm’s client solutions group.

TAKING A HOLISTIC APPROACH

Bridge provides tenants with more than just an affordable place to live. Each property offers tenants a wide range of social-impact programming, such as onsite childcare, career counseling, English-as-a-second language instruction and credit-score enhancement assistance. The programming is overseen by Bridge’s nonprofit partner, Project Access, and funded by a portion of the firm’s management fee.

When the pandemic struck last year, Bridge also raised nearly $3 million from its general partners for a COVID-19 relief fund that provided grants to many affected residents. The grants helped some hard-hit tenants avert tough choices, such as choosing between paying rent and buying food, says Khidekel.

What’s been good for tenants has apparently been good for Bridge as well. In a difficult environment for many landlords, the occupancy rate for Bridge’s affordable-apartment portfolio stood at an all-time high of about 96 percent in March. Turnover hit an all-time low, with renewals exceeding 75 percent.

“If you create a vibrant, thriving community for residents, you enhance the quality of their lives beyond just affordable rent. You build a community that’s empowered and where residents don’t want to leave because they’re getting a lot for their money,” says Khidekel.

A SUSTAINABLE BUSINESS MODEL

Pairing affordable housing with support services is a resource-intensive approach. But other investors who embrace the model are also finding that it’s well worth the effort.

“It’s a very novel approach, but I think it’s extremely compelling. I think you’re going to see more and more of it over the years because it’s a sustainable business model,” says Antonio Marquez, managing partner at Comunidad Partners, a minority- and women-owned real estate investment firm specializing in workforce and affordable multifamily housing in underserved Sun Belt communities.

The Austin-based firm acquires subsidized and unsubsidized apartment communities and typically makes improvements to the properties. Through its nonprofit partner, Veritas Impact Partners, it also offers programs and services to renters that are aimed at promoting economic advancement, health and wellness and education. During 2020, for instance, it began offering free app-based telehealth services to its renters (many of which have been hit hard by the pandemic) through a contract with a Fortune 500 health care provider.

Such programs clearly have social benefits, but how do they impact the bottom line? Marquez says his firm has found that investing in people, not just properties, actually enhances returns. When residents are healthy and economically resilient, they’re more likely to stay employed and pay rent on time, which ultimately benefits Comunidad’s bottom line, he says.

“We dismiss the notion that social-impact investing is concessionary, at least in the context of workforce housing. In fact, we’ve found the opposite to be true,” says Marquez. “We’re generating market returns — in many cases, above-market returns — and we’re not getting top-of-market rents. We don’t have to. We’re making it up through higher occupancy levels, lower delinquencies, lower evictions and lower turnover costs. All of that drops to the bottom line.”

MAKING THE MATH PENCIL

While high costs have led many developers to focus on the luxury apartment market, some are finding creative ways to make the economics of affordable housing work, and doing so without taking advantage of federal programs that can add complexity and costs to projects.

Charlotte, N.C.-based Grubb Properties, for instance, is getting around the high cost of land in many urban markets by acquiring value-add office properties with land, typically large surface parking lots. On the land, the company develops moderately priced apartment properties and parking garages, typically used by office workers during the day and residents at night. The shared-parking model allows Grubb Properties to limit the number of parking spaces it develops and generate revenue (from parking fees paid by office users) that helps offset apartment rents.

To find attractively priced acquisitions, Grubb Properties takes a somewhat contrarian approach. During the pandemic, it has focused on Los Angeles, San Francisco and New York, hard-hit urban markets that, despite the recent downturn, remain unaffordable to many renters. Prior to the pandemic, the firm was expanding aggressively in Raleigh and Charlotte, N.C., and Atlanta, cities that have seen an influx of new residents and investors over the past year.

“The reality is: we can’t pay market rate for land and make our deals work because we’re not trying to be the sexiest new thing on the block and charge high rents,” says Clay Grubb, CEO of Grubb Properties and author of Creating the Urban Dream: Tackling the Affordable Housing Crisis with Compassion.

Whenever possible, Grubb Properties makes cycling-infrastructure improvements in and around its apartment projects, rather than allocating resources and land to building expensive structured parking. Doing so allows the company to develop higher-density properties and thus hold down its per-unit costs, which translates into lower rents. Of course, cycling has also environmental benefits and allows renters to save on the costs of car ownership. According to AAA, the average cost to own and operate a new car in 2020 was more than $9,500.

“When we work with municipalities, we always push not to do road improvements, but rather cycling-infrastructure improvements,” says Clay Grubb, whose company also caps rent increases (to inflation) for residents who live at its properties for at least five years. “The car really is the number one enemy to affordable housing in America,” he adds.

NOT JUST ATTAINABLE BUT SUSTAINABLE

For its part, MultiGreen Properties is pursuing what it calls a market-driven Workforce Plus strategy. The Henderson, Nev.-based firm has embarked on a plan to develop 40,000 multifamily units by 2030 in parts of the Western U.S. and Sun Belt where moderate-income Americans are increasingly cost-burdened when it comes to housing. Its target market is consumers making 80 percent to 120 percent of AMI.

“We’re building attainable, sustainable, tech-enabled properties for the workforce,” says Norton, a real estate industry veteran.

Doing so isn’t necessarily easy or cheap, but MultiGreen is finding ways to hold down some development costs, such as sourcing land at below-market prices, while taking a long-term approach to its investments. It plans to hold properties indefinitely, although it’s underwriting deals for a terminal value of 10 years.

By taking a long-term approach, the company will spread out the costs of building apartment communities to LEED- or Green Globe-certification levels. It’s also amortizing the costs of outfitting its buildings with features that can be found in many luxury properties, from cybersecurity technology to systems that monitor indoor air quality.

According to Norton, much of the existing apartment stock for moderate-income Americans is functionally obsolete. MultiGreen, he says, is building the kind of housing that most consumers would want to occupy, regardless of their income levels.

“We have a longer investment horizon than the typical multifamily developer and are constructing these communities so that you or I or any one of our family members would prefer to live there,” he says.

Anna Robaton is a freelance business journalist based in Portland, Ore.