Navigating Economic Uncertainty: Sustainable Investment Strategies in Affordable Housing

Ralston Towers: Acquired, rehabilitated and successfully exited by Infinity Real Estate

Share This Post

Sixteen months ago, we published an investor letter titled “A Good Time to Be in Affordable,” where we delved into our perspectives on the economy, real estate trends, and investment strategies. This follow-up piece aims to provide a nuanced reflection on the current economic and political landscape, highlighting our continued enthusiasm for investing in affordable housing and elaborating on the strategic advantages of this sector amidst ongoing uncertainties.


Key Takeaways

  • Affordable housing, including Project-Based Section 8 housing, has historically performed well in various economic environments.
  • The current state of severe shortage, while challenging, underscores the high demand and desirability of these assets among investors.
  • With ongoing government attention and strategic partnerships, the stability and predictability of cash flows in the affordable housing sector remain resilient.


Navigating Economic Challenges

The past year has been marked by a palpable sense of anticipation among investors, with many anxiously awaiting the much-predicted recession that never materialized. Instead, the economic landscape has been characterized by a cautious optimism tempered by concerns about inflationary pressures. The Federal Reserve’s historic interest rate hiking cycle, undertaken to combat inflation, has sparked discussions about potential rate cuts in response to easing Consumer Price Index (CPI) metrics. Simultaneously, the looming specter of the upcoming United States presidential election adds another layer of complexity, with media chaos and potential market volatility on the horizon. In the face of these uncertainties, our primary objective as alternative investment managers remains steadfast – to diligently safeguard and grow investor capital irrespective of the prevailing economic environment. 


Defensive Positioning of Affordable Housing

In navigating the intricacies of real estate investments, it is imperative to consider and mitigate various risk factors. These factors include vacancy rates, operating income projections, and pricing risks, all of which can significantly impact investment outcomes. Our fundamental thesis asserts that affordable housing assets exhibit a defensive positioning against economic and demographic variables that traditionally affect commercial real estate sectors. This defensive stance is underpinned by the essential nature of affordable housing, which maintains consistent demand regardless of broader economic fluctuations. During the height of the Great Financial Crisis, market-rate multifamily vacancies stood at 10.7%, whereas Low-Income Housing Tax Credit (LIHTC) vacancies were significantly lower at 3.7%. Consistently low vacancies are attributable to government-backed support, which we view as a crucial risk mitigator in stressed periods. The national median affordable housing physical occupancy rate typically falls within a 96.4% to 97.9% range. Additionally, we find significantly more rent growth upside in the affordable housing space compared to its market-rate multifamily counterpart, which has been oversaturated in recent years as developers consistently seek to attract the highest paying tenants in an inflationary environment.   

 

 

Affordability Challenges and Supply-Demand Mismatch

The persistent challenge of housing affordability continues to affect millions of Americans, particularly those belonging to Extremely Low-Income (ELI) households, defined as those with incomes at or below 30% of the Area Median Income. Escalating housing costs, exacerbated by inflationary pressures, have further exacerbated the shortage of affordable rental housing. Developers find it increasingly challenging to build new homes or apartments that align with today’s higher construction costs while simultaneously offering rents manageable for low-income renters. This disparity has created a stark supply-demand mismatch, with demand for affordable housing far outstripping available inventory, leading to lengthy waiting lists for rental properties. However, amidst these challenges, there is a silver lining in the form of robust governmental support, including subsidies and tax benefits, that bolsters the stability and predictability of affordable housing investments. To provide context, our investment program improves the quality of housing for the most vulnerable population, while aiming for an annual 8% preferred return and 17% net IRR.

 

 

Impact of Economic Variables on Real Estate Valuations

The intersection of economic variables with real estate valuations is a critical consideration for investors. While inflation can potentially benefit multifamily real estate by driving up rental incomes and property values, the implementation of restrictive monetary policies presents its own set of challenges. Notably, increases in interest rates translate to higher debt costs, triggering cap rate expansion and impacting overall property valuations. This phenomenon has been observable over the past year, with trillions of dollars in variable rate debt slated to roll over in the coming months and years, leading to potential refinancing challenges and higher debt servicing costs. Despite these headwinds, there is an underlying sense of optimism regarding potential distressed investment opportunities that may arise as this scenario continues to evolve. Moreover, the prospect of interest rate reductions in the near future presents a positive outlook for the real estate sector as a whole. 


Stability Amid Economic Headwinds

While economic headwinds pose challenges for various investment sectors, affordable housing exhibits a unique resilience. This resilience is attributable to several factors, chief among them being the stable cash flows derived from government-supported programs and subsidies. For instance, many of the affordable housing assets we invest in are Project-Based Section 8 (“PBS8”) apartments, where tenants pay a percentage of their income in rent, and the government subsidy covers the remaining portion. When acquiring a PBS8 asset, we enter into a contract with the U.S. Department of Housing and Urban Development (HUD). This contract outlines rent increases, which often commence from day one, as well as annual Operating Cost Adjustment Factor (OCAF) rent increases that account for inflationary factors. This setup ensures a stable and predictable income stream even in the event of tenant job losses or economic downturns, making these investments highly attractive from a risk mitigation perspective. Furthermore, the inelastic demand for affordable housing, driven by enduring sociodemographic factors, ensures that demand remains robust irrespective of broader economic fluctuations. This stability stands in stark contrast to traditional multifamily real estate, further solidifying our conviction in the attractiveness of affordable housing investments.


Risk considerations

Investing in PBS8 housing presents attractive opportunities, but it also requires diligent risk management. A notable risk in PBS8 housing is the potential for tenants to not treat the property with the same care as traditional renters. Therefore, meticulous asset management is crucial for the seamless operation of this program. Further, Section 8 properties are subject to rigorous regulations and inspections by housing authorities. Any failure to comply with these standards can result in financial penalties or the termination of Section 8 contracts. The administrative workload associated with managing Section 8 properties, including paperwork, certifications, and communication with housing authorities, is substantial. Consequently, having a seasoned team capable of managing both the administrative and physical aspects of these properties is essential for successful Project-Based Section 8 investing. In response to these challenges, we have significantly expanded our team and implemented strategic measures to address these risks effectively. Our proactive approach has enabled us to navigate the complexities of Section 8 housing, maintain compliance, and optimize returns on our investments. We believe that our team’s adeptness in sourcing, underwriting, and managing this specific sector of the real estate market is our competitive advantage.

In summary, the inelastic demand for affordable housing, rooted in enduring sociodemographic factors, will continue unabated until adequate supply measures are implemented to meet this demand. As we navigate through these economic uncertainties, our commitment to protecting and growing investor capital remains unwavering. We are confident that by leveraging the unique advantages and defensive positioning of affordable housing investments, we can weather any economic storm and continue to deliver sustainable returns while making a positive impact on communities across the nation. 

 

References:

https://www.nuveen.com/global/insights/real-estate/resiliency-of-affordable-housing-investments?type=us

https://nlihc.org/gap

https://www.cohnreznick.com/insights/cohnreznick-publishes-2023-affordable-housing-credit-study 

https://www.cbre.com/insights/briefs/affordable-housing-mirrors-overall-multifamily-investment-performance 

DISCLAIMER 

THIS INFORMATION IS INTENDED ONLY FOR THE PERSON TO WHOM IT HAS BEEN DISTRIBUTED. THIS SUMMARY INFORMATION IS NOT AN OFFER OR SOLICITATION WITH RESPECT TO THE PURCHASE OR SALE OF ANY SECURITY. 

This document is confidential and is intended solely for the recipient. No part of this document may be copied or distributed in any manner without the express consent of Infinity Real Estate Advisors, LLC, Infinity Real Estate Advisors II, LLC, Infinity Capital Partners, LLC or one of their Managing Members. 

3475 PIEDMONT RD NE • SUITE 1525 • ATLANTA, GEORGIA • 30305 PHONE: 404-458-4448 • FAX: 404-549-9080