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NIFA 2005 Affordable Housing ConferenceJanuary 25, 2005
Shekar NarasimhanManaging PartnerBeekman Advisors
“Affordable and Sustainable Housing: oxy-morons in today’s environment? Using market forces to drive sustainability”
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BEEKMAN ADVISORS
Overview of Affordable Multifamily Housing
What’s Multifamily Housing?
What’s the stock?
Regulators & Providers of Allocations/Subsidies
Issues to Consider
Perhaps easier said than done: Sustainability
What does this mean to Housing Policy in 2005?
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BEEKMAN ADVISORS
Housing Stock: Multifamily vs. Total U.S.
Total Housing Stock
16%
17%
67%
Single Family Rental
Multifamily Rental
Owner Occupied
Multifamily Rental Housing Stock
15%
22%
63%
5-19 units 20-49 units 50+ units
MultifamilyRental
Sources: Ann Schnare, Kent Colton et al. – adapted from the 1999 American Housing Survey
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BEEKMAN ADVISORS
Who lives in Multifamily Housing?
There are some surprises:
3.5 mm renters earn 150% of area median income
15% of renters remain 4+ years in same apartment
16% of renters are >65 years of age
The fastest growing segment makes >$50k per year
Average apartment size in square feet grew in the ‘90s by 8%
Households pay 13-15% of their income on transportation
However, those making minimum wage pay 36%
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BEEKMAN ADVISORS
What’s the Stock?
Age of Multifamily Rental Housing Stock
0
10
20
30
40
50
5-20 units >50 units
Av
era
ge
Ag
e (
Yrs
)
46years
28years
Source: Ann Schnare and 1996 Property Owners & Managers Survey
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BEEKMAN ADVISORS
What’s the Stock?Now let’s talk rural
Approximately 5.5 mm renter households: 24% of non-metro stock
Median household income for nonmetro renters is $20,500 (versus $36,800 for nonmetro owners)
We recently studied is the USDA Section 515 portfolio which encompassed 15,899 properties with 434,296 units (As of Nov. 1, 2003)
Existing tenant base is 58% Elderly or Disabled
Average property age is 23 years; 27 units per property
Average annual tenant income is $9,075
74% of the units have either RA or §8 assistance
92% of the properties require additional capital improvements funding
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BEEKMAN ADVISORS
What’s the Stock?Tax Credit Driven Units
Over the last 7 years, on average, we have been building 300,000 units of 5+ housing per year, however real new additions amount to 100,000 units per year.
Total Units Built 300,000
Less: Condos for Sale 50,000
Luxury Apartment Units 150,000
Tax Credit Driven 100,000
Less: Demolitions and Conversions 150,000
Real New Rental Additions 100,000
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BEEKMAN ADVISORS
What’s the Stock? Construction Cost per Unit
Cost of Construction varies a great deal: range is $65,000 to $300,000 per unit. The average is close to $100,000 per unit, approximately the same as tax credit deals .
In some markets (LA, SF, DC, NY) it can take up to four years and $1.5 mm to get from the date of land option to the date you can start leasing the property.
$0 100 200 300 400
Deal Range
per unit average
Tax credit per unit average
$65k $300k$100k
(000’s)
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BEEKMAN ADVISORS
Regulators and Providers/Allocators of SubsidiesRife with Conflict?
Regulators and Providers/Allocators of Subsidies include: HUD, USDA, GNMA, FHA, GSEs, FHLBB, State HFAs, and PHAs.
Typical support: Grants, tax-credit equity, tax-exempt bonds, insurance on debt, tenant or project-based income subsidies
Other forms of support: tax abatements, density bonuses etc
Is the result confusion and duplication?
Is there a built-in bias to spread the resources unrelated to need?
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BEEKMAN ADVISORS
Regulators and Providers/Allocators of Subsidies
Administrator Competitor Regulator
OFHEO
HUD
FHA
GNMA
PHAs
GSEs
FANNIE &FREDDIE
Bond Issuer &Debt Provider
PrivateMortgagees
HFAs
OtherUnits
CDBGHOMESec 8LIHTC
FHFB
FHLBBsPartnershipPrograms
IRS
Sec 42LIHTC
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BEEKMAN ADVISORS
Regulators and Providers/Allocators of Subsidies
Is this system inefficient and confusing? YES
What does it cost? A LOT
Could it be more rational? PROBABLY NOT
Does it lead to resource allocations unrelated to need? YES
While certain high-growth markets have gone begging, others are getting over-built
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BEEKMAN ADVISORS
Issues to consider in Affordable HousingSec 42 LIHTC, the only real affordable rental housing production program of the last 17 years is working but is it serving all the need? Can it distort smaller markets?
Prices for Sec 42 credits have gone up as capital has entered the market but there is still a lack of buyers for small and rural projects: can consortia work?
What really happens in year 15 (2002 onwards) and what is the long-term impact of 30-40 year affordability restrictions and 100% targeted projects?
From prior experience we know you cannot adequately reserve for year 10/15/20 capital improvements from project cash flow.
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BEEKMAN ADVISORS
Issues to consider in Affordable Housing (continued)
Should every subsidy production program have an automatic extension or expect new subsidies for replenishment?
What are viable exit or recapitalization strategies that can be built in up-front?
Is there a built in non-profit bias and is that good?
Subsidy/unit: Comparing single family and multifamily. Do we lose the consensus at $150k/unit?
Goal is Sustainability: Affordable in perpetuity
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Perhaps easier said than done: SUSTAINABILITY
There are real 'discipline' advantages to a mixed-income deal (the market or close-to-market units have to be competitive and stay competitive), but it's also easy to delude yourself about feasibility. Everyone gets excited about how much better their deal will make the existing marginal neighborhood, and thus convinces themselves that unlikely good things will occur because of it. On balance, introducing mixed-income does not dramatically improves the odds that the deal will be sustainable but it is one way to approach the problem.
Let’s try all the usual answers out
Mixed-incomeMixed-useResident Ownership
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Perhaps easier said than done: SUSTAINABILITY
A mixed-use deal is higher risk in the first place, if only because two market judgments have to be right, instead of just one. Moreover, the residential component usually
needs to be in place before the retail or office component becomes viable. So it's not typical that you can do both residential and commercial at the same time and have it succeed. Mixed-use is not a panacea for sustainability.
Let’s try all the usual answers out
Mixed-income
Mixed-useResident Ownership
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Perhaps easier said than done: SUSTAINABILITY
Resident ownership, if you look at the history of converting rental to ownership, is possibly one of the worst possible ideas. If you want to do affordable ownership, do it from the get-go, with an appropriate physical product (detached, duplex, townhouse) and with a community land trust (or equivalent).
"The American Dream is not a limited-equity co-op."
Let’s try all the usual answers out
Mixed-incomeMixed-use
Resident Ownership
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BEEKMAN ADVISORS
What does this mean to Housing Policy in 2005 and beyond?
We need more supply, particularly for those in the middle (60-120% of median income): working families with modest incomes.
This supply cannot be built without some subsidy because of cost.
In urban markets, we should focus on in-fill locations to lower transportation costs.
We MUST focus on rehabilitation and revitalization because of the aging of the current stock.
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BEEKMAN ADVISORS
Short & Long-term Ideas on Affordability & Sustainability
Create a liquid market for the ownership and management of small projects
Allow for a broader band of tax credit allocations per project from 4-13%
Provide set-asides for rural and for preservation
Increase usage of FHA 221(d)4 and RHS 538 by financial institutions
More local/State control but less built-in conflict
More discipline overall.
USE MARKET FORCES
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BEEKMAN ADVISORS
Sources
Joint Center for Housing Studies at Harvard University
National Multi Housing Council
Kent Colton, Kate Mulligan, Ann Schnare, Denise DiPasquale, Larry Dale
Freddie Mac
Federal Reserve Board
American Housing Survey 1999 and 2001 data
2000 Census of Population and Housing
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BEEKMAN ADVISORS
Conclusion
“Fundamental things apply as time goes by.”
-pianist in the film “Casablanca”
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NIFA 2005 Affordable Housing Conference
Shekar Narasimhan,Managing PartnerBeekman AdvisorsJanuary 25, 2005
“Affordable and Sustainable Housing: oxy-morons in today’s environment? Using market forces to drive sustainability”
