As the affordable housing sector is set to reap the benefits of an increase in LIHTC allocation and Opportunity Zone overhaul, efficient capital deployment becomes paramount. One key optimization relates to location, where factors such as demand and competition from market-rate properties may dictate affordable housing feasibility.
This competitiveness is the focal point of a new Yardi Matrix study. The phenomenon occurs when the average market-rate and income-restricted rents are affordable to households earning similar incomes, with the difference being no greater than 10 percent of the area median income. Based on government standards, rents are affordable if they do not exceed 30 percent of gross household income.
The study of Yardi Matrix’s national database—which consists of 23 million units, including 3.5 million affordable apartments—found that one-third of top 30 U.S. metros were highly contested, where at least 50 percent of conventional apartments vied with their affordable counterparts. Another third was moderately matched, having 25 to 50 percent of market-rate units in competition, while the figure for the remaining third was below 25 percent.
Rents, supply and vintage affect competitiveness
Several factors influenced the level of friction, including absolute average market rents, supply and the age of stock. In markets where the average advertised rents surpassed $2,500, such as New York City, San Francisco, Los Angeles and Miami, contention was scarce. Conversely, metros where rents dipped below $1,500, including Las Vegas, Columbus, Houston and Detroit, portrayed moderate to high levels of competitiveness.
A market’s level of supply growth appeared directly proportional to its rental parity. For instance, Austin’s market-rate communities, barring the highest-end luxury properties, were highly competitive with its affordable stock. Inventory age also tipped the scales of rivalry. Metros with newer stock, which tends to concentrate around luxury product, were found to be less competitive. Conversely, markets with an aging housing supply, such as Baltimore or Detroit, showcased more rental overlap.
While overall competitiveness varies at a macro level, the same distinction could be observed within metros, on a submarket-by-submarket basis. Take Denver, for example, a middle-of-the-pack competitive market. Its downtown and outer suburbs, where higher-end product commanded average advertised rents exceeding $2,500, drove less parity.
Competitiveness is closely tied to the demand for affordable housing. Most of the top 30 markets with low competition and high rents recorded affordable occupancies of 95 percent and above. The reverse is likewise true, as Austin’s highly competitive market resulted in an affordable occupancy of 88 percent.
Affordable housing developers should account for all variables, especially the competitive aspect, before committing to a project, therefore ensuring that the complex capital stack is deployed purposefully and efficiently, according to Yardi Matrix Director of Research Paul Fiorilla and Senior Research Analyst Jacob Gonzalez.
Read the full Yardi Matrix affordable housing report.
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