The U.S. Department of Housing and Urban Development has seen an alarming drop in funding applications for affordable housing projects. In the two quarters ending in March, HUD issued only $6.3 billion in Federal Housing Administration multifamily loans, Bisnow reported, laying the groundwork for a massive housing shortage across the country after 2025.
Due to high interest rates and escalating construction costs, affordable housing developers are experiencing delays. Some of them are even cancelling their new development plans because the challenges in securing financing are making it difficult for projects to pencil out. This will lead to an even deeper supply-demand imbalance further down the line, many in the industry agree.
What are the long-term implications of this situation? Multi-Housing News spoke with Aaron Pechota, executive vice president of development with The NRP Group—one of the largest affordable housing developers in the country—about the deep-rooted impact of today’s high-cost environment.
What strategies are you applying to get rental apartment projects out of the ground in this economic climate?
Pechota: It’s been difficult to secure the larger financing with more stringent credit standards. Because we stay true to our core at NRP, we have a formula with a proven track record with our long-term financial partners. However, the main execution that is allowing affordable deals to pencil out is working with cities and states that are providing substantial resources to fill financing gaps. Financial partners are still eager to provide capital but haven’t changed their expectations on underwriting.
At NRP, we remain extremely nimble and creative with every potential project we approach, both affordable and market rate. Internally, we have fine-tuned our executive and investment committee processes, requiring projects to undergo additional layers of checks and balances with each committee review to ensure we are identifying obstacles early, mitigating risk and ultimately building the highest quality apartment communities.
What are the long-term implications of the massive decline in funding applications for affordable housing?
Pechota: Elevated interest rates, construction price volatility, and rising operational expenses such as insurance costs are collectively causing delays and even cancellations of new construction projects for affordable housing units.
In the current landscape, all categories of affordable housing financing necessitate some form of supplemental funding from state, local, philanthropic, or federal sources. Due to the scarcity of these resources, fewer new construction initiatives are advancing toward the construction phase. As a result, applications for financing through HUD have experienced a decrease compared to previous years. This scenario’s ultimate consequence is a reduction in the availability of affordable housing units within this demanding environment. The situation is poised to worsen, particularly in states like Texas, which is witnessing a daily population increase of 1,000 people, further amplifying the demand.
How should this expected massive housing shortage be addressed? What would incentivize developers to build more today for the renters of tomorrow?
Pechota: The worsening shortage of affordable housing in the U.S. can be tackled through stronger collaborations between public and private sectors. By strategically leveraging existing programs with private investments at local, state, and federal levels, we can effectively boost affordable housing stock. Continuing support for financing programs like the Low-Income Housing Tax Credit and HUD’s gap funding programs remains crucial.
Encouraging state-level housing credit programs and dedicated revenue sources would contribute to more affordable housing production. Local governments can also play a role by streamlining development regulations without imposing excessive costs and creating local funding sources through bonds and funds.
Treating private developers as essential partners rather than vilifying them is another key incentive. To prevent displacement and homelessness, collective efforts are vital in addressing this pressing issue across the country.
At the beginning of the year, you told MHN that approximately 200 of the nearly 1,900 affordable units planned by NRP at the start of 2022 were postponed due to a gap in financing. Have other projects been delayed, canceled, or impacted in any other way in the meantime?
Pechota: In terms of our planned projects, all projects in our pipeline have continued to move forward but some have experienced slight delays. The cause for delay is a mix of interest rates, state and local governments that aren’t moving quickly enough, and cost inflation that has impacted the closings of these deals. In some instances, we have worked with local municipalities through securing additional soft money and creating new programs on the financing side to fill in any gaps to prevent future delays.
How exactly do you collaborate with local communities and government entities to gain support and expedite the development process when working on affordable projects?
Pechota: Continuous communication, collaboration within the community, and maintaining flexibility are crucial in the realm of affordable housing. NRP has consistently achieved success by cultivating relationships with local stakeholders and policymakers in every community it works within. Our approach involves engaging with local entities to ascertain the priorities and requirements of municipalities and local subdivisions before proposing housing developments. Throughout the predevelopment phase, we remain committed to working on entitlement, design and amenities that harmonize with the surrounding neighborhoods and cater to our residents’ needs.
NRP has earned a reputation for responsible management of public funds and adeptly leveraging both public and private investments. This approach optimizes the utilization of public funds, resulting in increased housing creation within local communities. Additionally, we have been trailblazers in introducing innovative concepts and sharing industry best practices, which we’ve successfully implemented nationwide. Collaborating closely with our partners, we maintain agility and foster the generation of creative ideas.
Besides financing, are there any other challenges to moving your affordable housing development projects forward?
Pechota: Every affordable apartment deal that is currently closing right now has endured 30 percent cost increases since we initially started working on it. The additional resources have caused all timelines to extend and come with additional requirements that continue to drive costs up. Every aspect is getting a lot longer and more expensive for us.
The supply chain continues to be an issue for some products, like electric switchgears, requiring order placements a year or even 18 months in advance before our construction teams need them for installation. We are also experiencing labor shortages given the volume of apartments currently under construction as well as the increase in infrastructure projects. While it’s not what we were managing through a year ago, the supply chain remains one component in continuing to extend our overall timelines.
The supply-demand imbalance is only worsening. What does this mean for potential renters, particularly those in the very low-income segment?
Pechota: When affordable housing developments are put on hold, the shortage only worsens, as a development can take two to three years from groundbreaking to completion. Additionally, housing stock across the country is aging and even though we are seeing some new construction in areas such as the Sun Belt, there are just not enough new homes to meet the increasing demand.
This lack of housing being built at every income level is also contributing to the less availability of naturally occurring affordable housing, as well, meaning that those that are impacted the most are those at the lowest income levels. Unfortunately, what happens in these supply-demand imbalance situations is an increase in displaced families and homelessness, which we know is already a reality in many of our cities.
Gillian Executive Search is a leader in Affordable Housing Development, Financing, Design and Construction recruiting. www.gessearch.com