Connecting Capital
to the Built

ULI informs capital providers of opportunities in real estate and explains the underlying dynamics affecting real estate value. Is it possible to preserve housing for lower-income renters and still generate competitive returns to investors? A report published by the ULI Terwilliger Center for Housing in FY 2016 spotlights a new cast of players in affordable and workforce housing finance—below-market debt funds, private equity investors, and real estate investment trusts (REITs) that are seizing on this market-based opportunity while creating social impact.

preserving_workhouseIn cities across the United States, the housing stock that serves low- and middle-income renters is disappearing. Whether through conversions to luxury and market-rate rentals or the expiration of income restrictions, housing that is affordable today may not be within reach next year.

The Terwilliger Center’s report, Preserving Multifamily Workforce and Affordable Housing: New Approaches for Investing in a Vital National Asset, breaks new ground in terms of identifying a demographic with unmet housing needs—households that earn too much to qualify for public assistance but pay more than 50 percent of their monthly income on rent. These are the public sector workers who serve and protect our communities every day. Investors are increasingly showing interest in bringing institutional capital and greater efficiencies to bear on housing for middle-income households.

“The report is the best I’ve seen in defining workforce housing as a distinct asset class,” says Rick Pederson, senior vice president with Newmark Grubb Frank & Knight. “This is not about serving the lower-end of the income spectrum, but about keeping key members of the workforce—policemen, teachers, and other essential workers—within a community.”

Daryl Carter, an equity investor in workforce housing communities.
Daryl Carter, Terwilliger Center board member and immediate past chairman of the National Multifamily Council, leads Avanath Capital Management, an equity investor in workforce housing communities and one of the firms profiled in the report.

The report, produced in partnership with NeighborWorks America, profiles 16 financing vehicles that take innovative approaches in creating investor value while preserving long-term affordability. Some are institutional investors focused on improving energy performance and operational efficiencies within an asset, while others quickly deploy capital before market forces convert a Class B or C property into a luxury product. Still others have formed innovative partnerships with philanthropies and housing nonprofit organizations to acquire and manage real estate assets while offering on-site programming and resident services. Regardless of the approach, each vehicle is serving renters who increasingly find market-rate housing out their price range.

“Collectively, the entities leading these efforts have raised or plan to raise more than $3 billion and have acquired, rehabilitated, and developed nearly 60,000 housing units for lower- and middle-income renters,” notes report author Stockton Williams, executive director of the Terwilliger Center. “They are meeting a pressing social need while delivering cash-on-cash returns to equity investors ranging from 6 to 12 percent.”

An apartment community owned and managed by Avanath.
An affordable/workforce apartment community owned and managed by Avanath Capital Management.

Avanath Capital Management, one of the firms profiled, expects a healthy return on its investment portfolio, composed of properties targeted to households earning between 40 and 80 percent of area median income. Avanath’s approach seems to be paying off. Two funds it has closed on each yielded a 6 to 10 percent cash return.

“We do this to make money,” says Daryl Carter, founder and chief executive officer. “Because there is such a demand for affordable and workforce housing, we think our portfolio offers better risk-adjusted returns than traditional multifamily funds. We’re not sacrificing yield to our investors. Our returns are competitive.”

Download a copy of Preserving Multifamily Workforce and Affordable Housing: New Approaches for Investing in this Vital National Asset. Learn more about the ULI Terwilliger Center for Housing