THE AFFORDABLE HOUSING ASSET CLASS E /16/2018 1

Transcription

1 THE AFFORDABLE HOUSING ASSET CLASS E /16/2018 1

2 Executive Summary Affordable Housing -- What is it? Housing (rental in this case) affordable to households earning less than 60% of median income Approximately half of the nation s 20.4M units of multifamily housing should be classified as affordable Half of the affordable housing is subsidized, by a wide variety of public policies/subsidies Half of our affordable housing is naturally-occurring, non-subsidized but in many places at risk of being improved to unaffordable Affordable housing is meaningfully driven by for-profit entities, with over half of owners, managers, and developers being for-profit. 2

3 Executive Summary Cont. Affordable Housing How does it perform as an investment? The asset class performance is strong -- especially in downturns -- driven primarily by its stability of income. Interest/appeal correctly driven by (1) consistently high occupancies (2) low turnover, and (3) lower and slower growing operating and capital expenses. Result -- Per-square-foot revenues and NOIs that are comparable to, if not higher than those at market-rate properties. Dramatic growth in transaction volume driven by influx of institutional capital Result -- Cap rates for subsidized assets have compressed to be on par with conventional properties, though volatility remains high. 3

4 Executive Summary Cont. What is the outlook for demand of affordable rental housing? Affordability of housing broadly under threat from value add investing and new development unusually focused on high cost locations Regularly expiring subsidy contracts will naturally constrain the supply of subsidized affordable housing. Historical and projected trends in housing costs and wage stagnation indicate a persistent and pervasive need for affordable housing 4

5 Methodology and Sources 6

6 Contents I. Size and Scope of the Asset Class HOUSING PRODUCT KEY PLAYERS TRANSACTIONS II. Performance of the Asset Class IN REAL MARKETS (OPERATIONS) IN CAPITAL MARKETS (PRICING) III. Fundamental drivers of the Asset Class EROSION OF SUPPLY GROWTH OF DEMAND 7

7 I. Size and Scope Affordable Rental Housing Supply Key Players Transactions

8 Size and segmentation of rental housing About 25% of rental housing is affordable multifamily 9

9 Class A/B a higher share of subsidized units LIHTC and IZ incentivize new and/or mixed-income construction Share of Units by Class, Subsidized vs. Market-Rate Market-Rate 100% 90% 80% 70% Subsidized 60% 50% 40% Class C Class B Class A Class A: 4% 15% 30% 20% 10% 0% Class A: 2% 9% Sources: CoStar; RCLCO 10

10 Number of Units (as surveyed by CoStar) Millions Affordable buildings: low-density, older Reflects lower construction costs and depreciation Distribution of Units in Subsidized Affordable Buildings, by Building Type Median Age of Affordable and Market-Rate Rental Homes 2017 Affordable Rental Homes Median Age: 54 years Market-Rate Rental Homes Median Age: 37 years High-rise Mid-rise Low-rise Garden Highrise Midrise Low-rise Garden 15+ stories, 1 or more buildings 4-14 stories, 1 or more buildings 1-3 stories, 1-3 buildings 1-3 stories, 4 or more buildings Based on Zillow research. Units surveyed include both multifamily and single-family. Median Age stated is the weighted mean of the median age across 100 largest metros. Sources: CoStar; Zillow; RCLCO 11

11 Most affordable housing players are for-profit Across ownership, management, and development roles 100% Profit Status of Owners of Actively Subsidized Units (# affordable units) 2017 Profit Status of Managers of Actively Subsidized Units (# affordable units) 2017 Profit Status of Top 50 Developers, by Construction Starts in 2016 (# affordable units) % 1,803 80% 70% 1,683,597 13,299 60% 50% 40% 12,407 30% 20% 1,828,452 22,502 10% 0% Owners Managers Developers For-Profit Non-Profit Sources: National Housing Preservation Database; Affordable Housing Finance; RCLCO 12

12 Key players mostly developer/owners Otherwise, institutional whose holdings have a higher PPU Rank Company Units Projects 1 The Michaels Organization 42, Dominium 27, Millennia Companies 22, Mercy Housing 22, Volunteers of America 20, National Church Residences 18, GHC Housing Partners 17, Southport Financial Services 17, Beacon Communities 15, Jonathan Rose Cos. 14, Herman & Kittle Properties 14, Retirement Housing Foundation 14, The NRP Group 13, The Cornerstone Group 13, Winn Companies 13, McCormack Baron Salazar 13, LIHC Investment Group 13, Omni NY 13, Conifer Realty 13, Gene B. Glick Co. 12, Capital Realty Group 12, Pennrose 12, Highridge Costa Cos. 12, American Community Developers 12, L-M Development Partners 11, Top 50 U.S. Investors in Subsidized Housing (by number of units held) Data Through 2017 Rank Company Units Projects 26 Bridge Housing Corp. 11, USA Properties Fund 10, Ledic Realty Co. 10, Woda Cooper Cos. 10, Vitus 10, The Pacific Cos. 10, The Community Builders 10, The Hallmark Cos. 10, Related California 9, Silver Street Development Corp 9, Preservation of Affordable Housing 9, The Nurock Cos. 8, Eden Housing 8, Wallick Communities 8, Security Properties 7, Jamboree Housing Corp 7, LDG Development 7, Standard Communities 7, Midpen Housing Corp 7, The Reliant Groupz 7, LHP Capital 7, Avanath Capital Management 6, TM Associates 6, Enterprise Homes 6, The Arker Cos. 6, Sources: Affordable Housing Finance; RCLCO 13

13 Total Annual Transaction Volume Millions Transactions in institutional capital Growth in volume reflects both acceptance and appetite Institutional Investor* Subsidized Housing Transaction Volume by Total Value of Acquisitions and Sales $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 -$2, $4,000 -$6,000 -$8,000 Value Bought Value Sold *Note: RCA defines Institutional Investors to include equity funds, pension funds, insurance companies, banks, investment managers, sovereign wealth funds, open-ended funds, and other financial services firms. Sources: Real Capital Analytics; RCLCO 14

14 Billions Commercial brokers increasingly involved Brokerage world pushes transactional efficiency Total Brokerage Transaction Volume of Subsidized Properties $10 $9.38 Billion $8 $6 $4 $2 $0 $1.65 Billion Transactions of Subsidized Properties as a Share of Total Broker Business Year Brokered Transactions of Subsidized Properties as a Share of Total Transaction Volume 2.7% 8.7% Total Transacted Properties 1.9% 10.0% Total Brokerage Firms 8.7% 21.8% Sources: Real Capital Analytics; RCLCO 15

15 Acquisitions by institutional capital Have favored large, high-cost, and/or fast-growing states Subsidized Apartment Units Acquired and Price Per Unit Paid, By State FL NY 1 1 MD NJ DC CA MA TX CO VA $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Average Price per Unit Note: Size of bubble represents number of units within any fully or partially subsidized properties that were acquired. Sources: Real Capital Analytics; RCLCO 16

16 II. Performance Real Markets: Operations Real Markets: Operations Capital Markets: Pricing

17 Units Absorption has outpaced new deliveries In seven of the eight years since the great recession 120,000 Deliveries and Absorption of All Subsidized Affordable Housing, U.S ,000 80,000 60,000 40,000 20, Change in Inventory Net Absorption Sources: CoStar; RCLCO 18

18 Occupancy advantage over market-rate Subsidized: persistently higher occupancies & lower turnover Average Occupancy Rate of Market-Rate vs. Subsidized Properties, by Class Tenant Turnover Rate at Individually-Metered Market-rate and Subsidized Properties % 60% 96% 94% 50% 92% 90% 88% 40% 30% 86% 84% 20% 82% 80% 10% Class A Market Class B Market Class C Market Class A Subsidized Class B Subsidized Class C Subsidized 0% Market-rate Subsidized Sources: CoStar; National Apartment Association Income and Expenses Report; RCLCO 19

19 Rent growth lower, but still positive As is expected of low-income, rent-restricted units Rental Growth Rate of Market-rate and Subsidized Affordable Housing, by Class % 6.0% 4.0% 2.0% 0.0% % -4.0% -6.0% -8.0% Market Rate Class A Market Rate Class B Market Rate Class C Subsidized Class A Subsidized Class B Subsidized Class C Sources: CoStar; RCLCO 20

20 Annual Capital Expenses Per Square Foot Capital Expenses as a Share of Gross Potential Revenue Annual Operating Expenses Per Square Foot Capital and operating expenses lower And escalate more slowly, at subsidized properties PSF Capital Expenses and Capex as % of Gross Potential Revenue at Market-rate and Subsidized Properties $ % $8.00 Breakdown of Annual PSF Operating Expenses At Market-rate and Subsidized Properties 2013, 2017 $1.60 $ % $1.40 $6.00 $1.20 8% $5.00 $1.00 $0.80 6% $4.00 $0.60 4% $3.00 $0.40 2% $2.00 $0.20 $1.00 $0.00 0% Market-Rate Capex PSF Subsidized Capex PSF Market-Rate as % of GPR Subsidized as % of GPR $ Market-rate Subsidized Salaries and Personnel Insurance Taxes Utilities Management Fees Administrative Marketing Constract Services Repair and Maintenance Sources: National Apartment Association Income and Expenses Report; RCLCO 21

21 Per-square-foot revenues and NOI similar And revenue as a share of the gross potential is much higher PSF Revenues and Revenues as a % of Gross Potential Revenue at Market-Rate and Subsidized Properties $ % $10.00 PSF NOI as % of Gross Potential Revenue of Market-rate and Subsidized Housing % $14.00 $ % 93% $9.00 $ % $ % $ % $8.00 $6.00 $4.00 $2.00 $ % 90% 89% 88% 87% $6.00 $5.00 $4.00 $3.00 $2.00 $ % 30% 20% 10% Market-Rate Revenue Collected PSF Subsidized Revenue Collected PSF $ % Market-Rate as % of GPR Market-rate NOI Subsidized NOI Subsidized as % of GPR Market-Rate as % of GPR Subsidized as % of GPR Sources: National Apartment Association Income and Expenses Report; RCLCO 22

22 Foreclosure rates dramatically lower For LIHTC properties compared to conventional Annual LIHTC Foreclosure Rate vs. Conventional Multifamily Delinquency Rate Source: CohnReznick

23 Cap rate spread has tightened Cap rate volatility still higher (due to smaller sample) Cap Rates by Product Type Annual Change in Cap Rates by Product % 0.80% 8.50% 0.60% 8.00% 0.40% 7.50% 0.20% 7.00% 0.00% 6.50% -0.20% 6.00% -0.40% 5.50% -0.60% 5.00% -0.80% 4.50% -1.00% 4.00% -1.20% Subsidized Conventional Subsidized Conventional Sources: Real Capital Analytics; RCLCO 24

24 III. Fundamental Drivers Eroding Supply Growing Demand

25 Changing dynamics of rental housing more broadly Housing being added disproportionately in high cost locations 40% Distribution of New and Total Rental Apartment Inventory by Urban Neighborhood Type, ; Top 50 MSAs 35% 37% 30% 32% 25% 25% 25% 26% 20% 20% 22% 22% 23% 23% 15% 10% 5% 0% 19% 18% 16% 15% 12% 12% 10% 9% 9% 8% 8% 6% 4% 0% Economic Center Emerging Economic Center Mixed-Use District High-End Neighborhood Stable Neighborhood Challenged Neighborhood Total Inventory (2000) Total Inventory (2010) Total Inventory (2017) New Units ( ) Sources: National Housing Preservation Database; RCLCO Sources: RCLCO; Axiometrics 26

26 Lifespan of subsidies has become shorter Impending rate of subsidy expiration will be unprecedented Duration of Housing Subsidy Contracts Over Time Subsidy contracts have clearly trended towards being shorter: In 1970, no contract was to last fewer than 40 years; in 2017, no contract was to last more than 40 years. Contract Duration (Years) Date of Contract/Subsidy Start Other Section 8 LIHTC HOME Sources: National Housing Preservation Database; RCLCO 26

27 Number of Units Existing supply is eroding Units funded by tax credits set to expire most rapidly Cumulative Units with Expiring Affordability Periods (Millions) Source: Joint Center for Housing Studies 2017 tabulation of National Housing Preservation Database data, as of January 1,

28 Homeownership not an option for many Low-income renters are increasingly cost-burdened Home Price to Rent Ratios Share of Cost-Burdened Renter Households CoreLogic National HPI FHFA HPI (Purchase Only) Source: Bureau of Labor Statistics; Joint Center for Housing Studies 2015 tabulation of U.S. Census and ACS data; RCLCO 28

29 Cumulative Percent Change since 1948 Hourly wages have stagnated Meanwhile, development costs rising pushing rents Percentage Increase in Labor Productivity and Hourly Wages Development Costs PSF for Building Type (estimate) 300% $ % $ % $ % 100% $100 50% $50 0% $0 1-3 stories 4-7 stories 8-24 stories Hourly compensation Productivity (estimated) Sources: Bureau of Labor Statistics; Fannie Mae account of RSMeans data; RCLCO 29

30 Inflation-adjusted percent change Gross rents outpace household incomes Reflecting costs of development and wage stagnation Percent Change in Median Gross Rent and Median Household Income Source: Center on Budget and Policy Priorities analysis of Census ACS data 30

31 Percent change, projected Most new demand from low-income renters Fastest-growing jobs over next decade earn ~$22,000 Ten Fastest-Growing Occupations (Occupation, Number of New Employees in Thousands) % 80% Home health aides Solar PV installers 11.9 Wind turbine service technicians 5.5 Software developers, applications % In the workforce, barbell growth in employment at low and high incomes exacerbates existing inequality. Physical assistants % Statisticians 12.4 Nurse practitioners, 56 20% Personal care aides 754 Physical therapist assistants 27.2 Mathematicians 0.9 0% $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Median Annual Wages, May 2016 Sources: Bureau of Labor Statistics; RCLCO 31

32 Report prepared by RCLCO For Urban Land Institute Terwilliger Center for Housing