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New York City has an immediate need for 230,000 new residential units to accommodate the significant growth in its population and jobs between 2010 and 2020, and a projected need for 560,000 new units by 2030, according to a recent Real Estate Board of New York commissioned study.
With the demand of housing far outstripping the supply, New York City is seeing an upward pressure on rents to pre-pandemic levels for unregulated rental units, which make up 43 percent of the City’s 2.2 million units of rental housing. Still, the current construction pipeline of around 80,000 units only meets 14 percent of the projected need, the REBNY-commissioned study shows.
Graphic by Ariel Property Advisors
Ariel Property Advisors
Consequently, there is a critical need to create more affordable housing, which is only economically feasible in New York City when developers utilize government incentives and engage in social impact or ESG (Environmental, Social, and Governance) investing.
“For affordable housing to be attractive, many stakeholders have to work together to make the ‘numbers work’ otherwise, there’s no economic incentive,” says Victor Sozio, a Founding Partner at Ariel Property Advisors. “Therefore, cities and states play a critical role in competing for and retaining affordable housing private capital.”
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Investing in affordable housing is a longer-term focused strategy where collected rents are typically lower, and the properties demand continued investment; the trade-off is a higher anticipated yield, or capitalization rate, and/or cash on cash return. In other words, affordable housing investors expect current, stable, and growing dividends to somewhat compensate for the future loss in revenue and growth. In contrast, luxury and free market apartment buildings in growth cities present an opportunity for a lower current yield but the prospect of substantial rent increases over time.
Recently, affordable housing developers and operators have played a critical role in rejuvenating neighborhoods in New York City. With that investment has come an increasingly double-bottom line approach taken by developers, meaning success is not only measured in financial returns but also by the positive impacts made in the communities they serve. Developers see this not only as beneficial for long-term business goals, but also for the communities where they build. At the same time, they understand the appeal of such work for ESG-minded financial partners. It’s a win for all sides.
L+M Development Partners, one of the oldest and largest developers, owners, and managers of affordable housing in New York City, is an example of a firm that has leveraged its mission driven capital with private equity and economic incentives to improve the City’s affordable housing stock and provided support to a wide range of community groups and nonprofits – while also working closely with those groups to learn about the population they are serving. The firm has implemented a Community Investment strategy across the city to achieve these goals.
Recently, L+M partnered with the New York City Housing Authority on the rehabilitation and preservation of 722 units of public housing at Baychester Houses in the Bronx. Through NYCHA’s Permanent Affordability Commitment Together, or PACT, Baychester Houses were converted to Project-based Section 8, which unlocked funding for comprehensive repairs and community investment initiatives while ensuring homes remain permanently affordable and residents have the same rights they possessed in the public housing program.
However, L+M is not alone. Fairstead, a national real estate development and preservation company, is partnering with New York City and the non-profit Project FIND to bring affordable housing for seniors with on-site support to the Upper West Side. At Fairstead’s development, Park 79, Project FIND will have two social workers on-site providing services and programming. Through a variety of grants, social programs and workforce development initiatives, these companies believe their mission is about improving the quality of life for residents in their buildings, which can only be accomplished when affordable housing is combined with important social services designed to provide upward social mobility.
Additionally, last year Phoenix Realty Group (PRG) purchased Academy Gardens, a 469-unit, eight-building Project-based Section 8 complex in the Bronx, a $91 million transaction arranged by Ariel Property Advisors. Project-based Section 8 (PBS8) housing provides a stable cash flow with a consistent tenant base due to rates being guaranteed by the Department of Housing and Urban Development (HUD). The attractiveness of investing in these assets heavily depends on economic incentives at both the state and federal level. Under HUD’s Real Estate Assessment Center’s guidelines, landlords are required to maintain strict and regular upkeep of the assets, in addition to limits on specific rental income for tenants for a minimum of five years.
Moreover, when it comes to PBS8, there are several programs and variations that call for city and state involvement when it comes to preserving affordability to benefit tenants. As a result, the PBS8 transactions that have taken place in the last few years have been complicated, nuanced and required much governmental cooperation and intervention to provide private capital and equity the ability to work alongside mission-driven capital.
“Affordable housing development goes hand in hand with social responsibility,” said Gingi Pica, Director of Community Investment at L+M Development Partners. “Through our community investment focused approach, we work with residents and other community stakeholders to determine specific needs and partner with local organizations to address these gaps – both for our residents and for the community. By coupling quality affordable housing with community and social service programs, we are not only able to maximize our impact on a local level, but we can ensure communities and residents have an improved quality of life long-term.”
The type of leadership displayed by these developers demonstrates the importance of the private sector and mission-driven capital to affordable housing and goes beyond allocating capital; it requires investors to take an interest in the well-being of these communities and their ability to thrive. But in these specific cases, that would not be possible without both the City and State of New York’s continued support and sponsorship of affordable housing. As affordable housing becomes more of a ‘mainstream’ investment, cities and states will be competing on behalf of their constituents. As more ESG funds become available over the next fiscal year, the growth of social investing will continue, further developing multifamily communities.