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As we find ourselves in this cycle’s late innings, it is sobering to reflect on just how much the market for rental housing in the United States has evolved in recent years. For those of us privileged to be working in multifamily, this has undoubtedly been an exciting time. It is, however, important to recognize that our industry’s gains have not come without a cost.
“Workforce renters,” which we define as households earning between 60% and 120% of the local area median income (AMI), have been caught in a decade-long affordability squeeze. The post-recession rise in renter demand has dwarfed the ability of developers to add new affordable supply, creating significant pricing pressure on apartment rents. The erosion of affordability is an issue that has gone unchecked for far too long, and now those who are responsible for maintaining the functionality and cultural vibrancy of our greatest cities are finding it impossible to afford to live in them.
Prices Rising As Options Fall
In a little over a decade, there has been a dramatic rise in the number of renter households in this country. Estimates indicate that an additional 7.6 million renter households have emerged between 2006 and 2016, growing from 34.6 million in 2006 to 43.3 million in 2016, according to the Pew Research Center’s analysis of Census Bureau data. Spanning the same time frame, the number of homeowner households declined from 76.1 million to 75 million.
While much has been made about millennials’ contribution to apartment demand and their preference for downtown high-rise renting, workforce renters have quietly become more and more prevalent. By year-end 2016, the workforce renter segment rose to account for 13 million households, according to a Federal Housing Finance Agency (FHFA) report, or approximately a third of all renter households.
As this renter segment grows, however, it is increasingly facing a lack of housing affordability — a multifaceted issue. Between 2001 and 2015, gross rents nationally increased 3% per year, while income remained virtually flat, meaning that renting costs have begun to eat up larger portions of household income, according to the Pew Charitable Trusts. Traditionally, an overly expensive rental market would see relief in the form of households transitioning over to homeownership.
Unfortunately for would-be-buyers, the risk aversion adopted by mortgage lenders in the aftermath of the financial crisis has barely budged. To top it off, rising interest rates are making the cost of home financing more expensive, further impeding the ability of workforce renters to make the ownership jump. Workforce renters are in a position where their housing prospects have dwindled as their rent bills have climbed. Simply put, they have been stuck.
Small Buildings, Large Role
Through our firm’s sponsored research and ground-level engagement, we have become acutely aware of the nature of the cost burdens these workforce renters face, as well as what it takes to affect positive change. We have observed the critically important role of smaller apartment buildings providing affordable housing stock, and maintain that preservation and promotion of these types of properties are the keys to providing workforce renters the support they need.
For real estate professionals who subscribe to the notion of “doing well by doing good,” Freddie Mac and Fannie Mae, in coordination with their overseer, the FHFA, have designed a menu of products tailored to help investors preserve affordable housing. (Full disclosure: Arbor is a designated Fannie Mae DUS Lender and Freddie Mac Servicer/Seller.) Freddie Mac’s Small Balance Loan program and Fannie Mae’s Multifamily Small Loans program have been paramount in creating liquidity to support the types of smaller multifamily buildings at the intersection of workforce rental demand.
In addition, both agencies offer attractive financing programs for market-rate affordable housing projects in cost-burdened areas, as well for housing that implements energy efficiency upgrades. The former works to preserve existing affordable inventory through upgrades, repairs and maintenance. The latter is designed to create a higher standard of energy efficiency in newly constructed buildings, allowing for cost savings to pass through to renters. In concert, these programs form the backbone of the Government Sponsored Enterprises’ (GSEs) two-pronged workforce strategy in which the use of incentives allows for the workforce housing stock to be both preserved and improved.
The ability to improve workforce affordability is central to the quality of life for millions of Americans. The GSEs have led by introducing practical solutions, but more needs to be done to support their overall efforts on federal, state and local levels to cohesively address this issue head-on. Strategic investments in local transportation and infrastructure are necessary to bridge accessibility between affordable market-rate supply and job opportunities.
Furthermore, a combination of increased public funding support across all levels of government and an easing of municipal regulatory restrictions would go a long way in promoting the production of affordable supply. By aligning the incentives of private-industry with the public good, over time, we can employ upstream solutions — addressing the root causes of housing inequities and not just their symptoms.
Continued progress in achieving workforce rental affordability necessitates the close collaboration between the public and private sector. Our industry still has considerable work to do, but between the agencies’ continued support and the evolving institutional market surrounding small apartment properties, we are beginning to see a long sought-after turning of the tides.