Housing research continues to reinforce a familiar reality: The U.S. still faces a severe shortage of affordable rentals, particularly for the lowest-income households. What changed in 2025 was not the depth of the need but the toolkit available to address it.
Renter cost burdens reached their highest point on record, according to the Harvard Joint Center for Housing Studies, with nearly half of U.S. renters paying more than 30 percent of their income on housing, a trend echoed across major markets. The National Low-Income Housing Coalition’s 2025 Gap report further quantifies the strain, documenting a shortage of roughly 7.1 million affordable and available homes for the nation’s 10.9 million extremely low-income renter households.
Against this backdrop, federal and state policy shifts are beginning to reshape the affordable housing landscape. New federal legislation—including the One Big Beautiful Bill—and complementary state actions are expected to permanently increase 9 percent LIHTC allocations and lower the private-activity bond test for many 4 percent transactions starting in 2026. For developers, owners and lenders, these adjustments represent some of the most consequential changes to affordable housing finance in years.
The question for the industry now is whether these expanded tools can counterbalance elevated construction costs, constrained capital and increasingly tight operating margins, and how quickly they can translate into additional production and preservation.
Demand continues to outpace supply
Even with elevated levels of multifamily deliveries in recent years, new supply has not matched the depth of need at lower rent levels. A recent Harvard report highlights the widening gap: Between 2013 and 2023, the number of units renting for less than $1,000 per month—after adjusting for inflation—fell by more than one-third, while the number of higher-rent units increased sharply. As a result, many markets are seeing more cost-burdened renters even as new apartments are delivered.
With demand sky-high, operating performance at fully affordable properties has been steady. Doug Ressler, manager of business intelligence at Yardi Matrix, points to a “solid rise in income and decelerating expense growth” that supported net operating income over the past two years. According to Yardi’s analysis, NOI for fully affordable properties grew 7.4 percent in 2024 and 5.6 percent between January and August 2025.
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Yet these gains are tempered by persistent cost pressures. The same data provider shows construction costs are up more than 30 percent since 2020, while insurance premiums have increased by well over 100 percent in some affordable portfolios, which is particularly challenging for assets with regulated rents tied to HUD formulas. Consequently, these economic dynamics have slowed construction activity.
“Total multifamily housing starts dropped significantly in 2024 and that slowdown carried into 2025, even as the proportion of those starts that are fully affordable units rose,” said Tanya Eastwood, president of Greystone Affordable Housing Initiatives.
To manage rising costs, developers are leaning more heavily on public-private partnerships, exploring public land opportunities, and increasingly turning to modular and prefabricated construction methods, a trend Eastwood said has became more mainstream for affordable housing because they not only help reduce cost, but also speed up delivery and control quality.
Looking ahead, rental demand is expected to remain strong across income levels, driven by household formation, demographic shifts and limited for-sale options. But for extremely low-income households, Ressler notes that the gap between what they can afford and what it costs to develop and operate housing will remain the sector’s defining challenge.
Policy shifts meet a challenging capital environment
Industry professionals widely view the upcoming changes to LIHTC and bond financing as the most consequential developments shaping 2026. The new 25 percent bond test for 4 percent LIHTC transactions, in particular, is expected to unlock meaningful production. According to Yarojin Robinson, senior vice president for affordable and mixed-income housing at Gilbane Development Co., the adjustment will be “a game-changer.”
Improved program mechanics may help more deals reach closing. Eastwood notes that pricing has softened from earlier peaks and expects the legislative changes to support additional transactions. The return of 100 percent bonus depreciation will also strengthen deal feasibility. “It lowers taxable income for equity investors, effectively enhancing their after-tax yield,” she said, adding that the benefit can improve pricing in more complex capital stacks.
Likewise, Paul Salib, co-founder & managing principal of Castellan Real Estate Partners, sees significant opportunity heading into 2026. More projects should qualify for tax-exempt bonds and credits, but he cautions that soft funding sources will remain limited, and a larger volume of available credits could continue to depress equity pricing.
Municipal conditions add another layer of complexity to making deals. Many issuers accelerated bond issuance in 2025, Eastwood noted. Some analysts anticipate a moderation in 2026, which—if investor demand holds—could help strengthen pricing for new issues. In this environment, rate locks, call provisions and long-term revenue assumptions require especially close attention.
So far, to contend with capital constraints, developers have increasingly turned to flexible structuring to make deals viable. Castellan, for example, used a long-term ground lease with Safehold to lower land costs in several California projects and implemented a cash-back-forward model to increase basis and generate additional equity in multiple 4 percent LIHTC deals. Two of its developments—Banana Belt Apartments in Santa Cruz, an 83-unit project for large families, and Creekside Commons in Santa Clarita, a 128-unit project—are both expected to close in early 2026 using these approaches.
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Going forward, Greystone’s specialists expect 4 percent LIHTC and tax-exempt bonds to remain foundational, supported by 9 percent LIHTC “pure equity” deals and hybrid structures that incorporate bonus depreciation. Layered capital stacks combining equity, bonds and state or local soft funds will continue to define affordable housing finance for the foreseeable future.
Preservation and operations move up the agenda
While new construction remains essential, many industry leaders expect preservation and operating stability to take on an even greater role in 2026. Harvard’s latest report underscores the urgency: Thousands of LIHTC units age out of their affordability requirements each year, and older affordable housing continues to be lost through demolition, conversion or rising rents.
Given these pressures, reinforcing the existing affordable stock has become a central priority. Preservation is often faster and more cost-effective than building new, and many organizations are advancing strategies to keep properties viable. Greystone recommends long-term recapitalization for aging communities, short-term subsidies or insurance relief to stabilize operations, and acquisition support for nonprofits or other mission-driven entities to prevent displacement and rent escalation.
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Some companies are already demonstrating what this approach looks like in practice. At Jonathan Rose Cos., several 2025 initiatives provide a blueprint for the coming year. In Georgia, the early phases of the North Downtown Athens redevelopment “demonstrate how public-private partnerships and ongoing operational support can come together to advance both affordability and long-term community impact,” according to Brandon Kearse, partner & co–chief investment officer. Local tools—including a special-purpose local option sales tax—helped close financing gaps while preserving existing affordable housing.
Operating support is becoming equally vital in high-cost markets. In Manhattan’s West Village, targeted rental assistance at Jonathan Rose’s 570 Washington is helping stabilize both residents and the building’s operating budget. This is similar to what the company is doing at the Oscar James Residences community in the Bay Area. Kearse notes that the throughline across both of these projects is smart public-private collaboration, paired with attention to long-term operational viability and a commitment to socially and environmentally responsible design.
Large-scale redevelopments are reinforcing these themes nationwide. Gilbane’s district-focused work includes Barnaby & 7th in Washington, D.C., a 518-unit, all-affordable redevelopment centered on deep income targeting, resident services and transit access. In Norfolk, Va., the transformation of Calvert Square and Young Terrace will deliver more than 1,000 mixed-income units within a broader neighborhood plan. And in Philadelphia, Blossom at Bartram, supported by HUD’s Choice Neighborhoods program, is replacing aging public housing with nearly 600 mixed-income, energy-efficient homes, including senior units and affordable homeownership opportunities.
“These kinds of district-scale efforts are where we can really move the needle,” Robinson said.
What will shape 2026
Industry experts point to several forces that will determine how much of today’s policy and financing momentum can translate into sustained affordability in 2026 and beyond.
Interest rates remain the dominant variable. Robinson is watching the Federal Reserve closely, noting that future cuts will flow into both construction and permanent financing over the coming year. Castellan is tracking the 10-year Treasury and key municipal benchmarks that directly influence bond pricing. Still, even with some rate relief, many expect a lag before development pipelines begin to rebuild.
Federal budget decisions will have significant implications, too. Harvard and NLIHC both highlight that only a fraction of income-eligible households currently receive rental assistance, and existing HUD programs are already under strain. Salib describes the unresolved HUD budget as a particular concern for project-based vouchers, which remain essential to many affordable housing capital stacks.
State and local actions will continue to shape feasibility on the ground. Kearse points to increased state capital commitments in New York and recent reforms to the California Environmental Quality Act that are accelerating approvals for certain infill developments. Local programs—including tax relief and targeted gap financing in Montgomery County, Md., and parts of the Carolinas—are also helping advance new production and preservation efforts.
Private-activity bond supply is another key uncertainty heading into 2026. “Congress has acted in the past to modify private activity bond rules in response to extraordinary events like hurricanes and 9/11,” noted Ken Rogozinski, CEO of Greystone Housing Impact Investors, who argues that a larger or dedicated multifamily allocation would address today’s “extraordinary need.”
Rising insurance costs and climate exposure round out the list of pressures. Harvard reports sharp premium increases, particularly in coastal and disaster-prone markets. Developers and owners are responding with more resilient design strategies—building hardening, site elevation, improved drainage and energy-efficient systems—but long-term insurance stability remains uncertain.
Taken together, these forces suggest that 2026 will be defined by both expanded opportunity and continued constraint. The sector enters the year with new and strengthened tax-credit tools, more flexible bond-financing pathways, and growing sophistication with layered capital structures and preservation strategies.
How much progress the industry can make in 2026 will depend on how quickly new programs take hold, how funding decisions unfold, and how effectively public- and private-sector partners can move projects from planning to long-term stability. In a year shaped by both momentum and risk, execution will matter as much as policy.
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