For years, the United States has been in the grip of an affordable housing crisis. There just aren’t enough units, especially in major cities, and there’s virtually nowhere in the country where an individual working a full-time, minimum wage job can afford a two-bedroom apartment. The issue is so critical that some think affordable housing may be a swing issue in the 2020 election.
Despite these concerns, however, investors may have a few tricks in their back pockets to support increased construction. Under the right conditions, affordable housing can be an ideal investment opportunity.
Affordability In Action
How can affordable housing act as an investment opportunity? It may seem strange at first, but a deep dive into the financial processes undergirding construction investments quickly reveals what’s possible.
The first thing that makes affordable housing an investment opportunity is the very scarcity that demands its construction. There’s such a significant need for affordable housing and so many good candidates for tenancy that these apartments can earn back their costs relatively quickly, especially if they take steps toward reducing construction costs. Yes, developers need to use quality materials, but there are more options available today than in the past, meaning there are strong, affordable, sustainable options available.
While cutting construction costs will help investors earn back their money more quickly, that’s not the most important element in the equation. What really serves investors is the opportunity to earn preferred equity on the investment. Preferred equity holders are paid first, before common equity holders. They also have a higher rate of return and they have a greater supervisory stake in the property, including over any potential bankruptcy proceedings.
It doesn’t take much for developers to offer preferred equity to top investors in return for their funding – and more developers are providing this option than ever before in order to boost the affordable housing supply. In both Los Angeles and New York City, two places facing a serious shortage of affordable housing, Pembrook Capital Management announced a $50 million preferred equity investment for workforce housing for Prana Investments, a group leading the rent-regulated multifamily market. Dwight Capital also announced a preferred equity investment in affordable senior housing.
Pushing Back Megadevelopment
While it’s important to incentivize affordable housing investment, that’s only possible if cities can push back megadevelopments and encourage investors to shift their funding to more meaningful opportunities. Across the country, cities have been opening remarkable and expansive spaces – think New York City’s Hudson Yards or Chicago’s Lincoln Yards – that are home to major, mixed-use construction. Part of what makes these developments possible, though, is that they typically involve buying up affordable, formerly industrial properties. That’s great for their profit margins, but not so great for those who need affordable housing, since that would be an ideal placement, fiscally speaking.
Megadevelopments appeal to the wealthy, but in today’s shrinking cities, they already have plenty of places to live and play. There are not, however, enough affordable apartments or even places to put them. If we can free up quality space for affordable housing, investors are ready to help make this type of new construction a reality.