By Paul Weissman, Senior Managing Director, Affordable Housing Finance
For many, the word “suburb” evokes images of large houses with perfectly manicured lawns and active neighborhood associations. However, in recent years, suburban demographics have changed nationwide. As Richard Florida wrote in a September 2017 op-ed in the New York Times, “The urban revival that swept across America over the past decade or two may be in danger. As it turns out, the much-ballyhooed new age of the city might be giving way to a great urban stall-out.” Gentrification in cities across the United States is causing many young people, especially those wishing to start families, to be priced out of urban centers. The suburbs, particularly those that have access to mass transit, are becoming an increasingly attractive option. While zoning regulations may pose certain barriers to developers wishing to capitalize on this need, persistent developers may reap rewards when addressing the demand of this growing population.
How Affordable Housing Became Anathema to the Suburbs
After World War II, the image of suburban life embodied the goals of many Americans. It was possible for families with a sole breadwinner to live in a comfortable home with a car and a reasonable work commute. Entire ecosystems developed around these communities. As these suburbs developed, many urban areas declined due to the outbound migration of wealthier inhabitants and rising crime rates. Most of the people who were financially able to live in the suburbs chose this path, because cities were perceived as unsafe and dirty.
The tides for urban revival began to turn in the new millennium. From 2000-2015, most cities in the U.S. grew faster than their surrounding suburbs, in large part because of large numbers of young adults moving to what were formerly low-income neighborhoods in part for economic reasons. This demographic shift has led to widespread gentrification in many cities. During this process, neighborhood businesses evolved to match the tastes of the newer arrivals, which attracted more comparatively wealthier people resulting in rising property values.
As neighborhoods gentrify, many original residents of these communities are displaced. Prices have continued to rise and even many of the newer residents are now unable to afford the rising rent or unable to purchase property where they have been renting. In fact, according to a 2015 Citizens Budget Commission report, the share of households that are “rent burdened,” meaning that more than 30% of income goes towards rent, grew to 42%. And while many of these households are severely low-income, more than 150,000 people in New York count themselves among those who are rent burdened.
Why Affordable Housing Must Return to the Suburbs
In light of the rising property values in cities, where are low- and even middle-income people to go? The suburbs are becoming an increasingly compelling option. Findings from the Brookings Institution indicate that from 2015-2017, based on census statistics, suburbs outgrew cities in two thirds of the largest metropolitan areas in the U.S. Some of the cities growing the most slowly are the ones that had experienced the most gentrification, including New York, Chicago, and Houston.
Unlike the initial suburban rise following World War II, much of the migration is a direct consequence of being priced out of cities. Millennials looking to start families are often forced to the suburbs, since those are the only areas where they can afford to purchase property. Other factors leading to the migration include the rising economy, a revival of the housing market and other demographic factors such as family formation.
In addition, while many cities now have an oversupply of Class A product for singles or couples with no kids, there is a dearth of adequate multifamily options for those looking to start family units of their own. In most U.S. cities, an income of $100,000 per year is not enough to buy a house, but individuals making that amount make too much to qualify for subsidized housing. And renting does not provide much of a respite for these people. According to data from YARDI Matrix, the average rent for an apartment in San Francisco in September 2017 was $3,440. Five of the top ten most expensive cities in this study had average rents of more than $3,000 per month. In many areas of Lower Manhattan, the median rent for 1,000 square feet exceeds $5,000 a month. These amounts go far beyond what middle and even upper-middle class families can pay.
How Suburban Affordable Housing Can Present Opportunities for Developers
Suburbs in many areas offer attractive alternatives not found in cities for developers. In addition to the availability of less expensive land, the office sector is also experiencing a suburban rebound, which could lead to the creation of thousands of jobs beyond the retail and services sector. Suburban office sales accounted for 63% of total transactions last year. Marcus & Millichap’s U.S. Office Investment Outlook reports that suburban properties can offer initial returns of about 100 basis points more than downtown urban assets. The reasons for the high return potential beyond more available land include the ability to charge lower rent for occupiers and the relative availability of public transit. Savvy developers can capitalize on this trend and provide affordable middle-income residences nearby.
Affordable housing is another area where developers can profit by building in the suburbs. As rents in cities stretch beyond the incomes of many middle-income families, well-maintained affordable housing helps keep these people living near their jobs. Creating this housing often doesn’t have to require new construction. Some companies have been purchasing and renovating Class C properties in primary and secondary metropolitan areas using low income housing and tax exempt bonds with affordable housing set asides. Others acquire properties with low-income restrictions in expensive markets with the goal of holding them to generate solid cash-on-cash returns. These projects can win buy-in and investments from social impact funds, foundations, and public pension funds, whose very beneficiaries often cannot afford housing in their own communities. This partnership between pension funds and developers can prove to bring real benefits to the neighborhoods that these buildings will serve.
Fannie Mae and Freddie Mac also both have a commitment, as part of their overall mandate, to support the expansion and preservation of workforce housing. Because of this mandate, they actively seek opportunities to finance in this space. As such, they offer attractive financing incentives for borrowers investing in this type of housing, with rates ranging anywhere from 20 to 30 basis points below their standard interest rates. These beneficial lending terms can present major opportunities for developers and investors, who can upgrade a property and obtain longer term financing at a lower cost of funds.
How Exclusionary Zoning Keeps Affordable Housing Out of the Suburbs
Many suburbs oppose building affordable housing in their communities. Reasons for this resistance include a long-standing belief that property values will decline if this type of housing is built in their neighborhood, spawning the phrase, “Not in my backyard.” As such, town councils enact restrictions, impose excessive subdivision controls, and establish delaying tactics for project approvals. These barriers act as a disincentive to developers from building in these towns. Even in suburbs that aren’t explicitly opposed to this type of development, permitting and approval processes for new construction can take years.
Exclusionary zoning is a widespread problem throughout the U.S. While the Fair Housing Act prohibits discrimination based on race, color, national origin, religion, sex, ability, and familial status, it doesn’t restrict class-based discrimination, a loophole that the Supreme Court institutionalized in 1977 in Village of Arlington Heights v. Metropolitan Housing Development Corp.Such class-based practices include minimum lot size requirements, single residence per lot requirements, minimum square footage requirements, and costly building codes. Large lot sizes, in particular, reduce the supply of available land, and drive up housing costs, further restricting housing possibilities for lower-income families. Such regulations create missed opportunities for developers, who are in a position to supply housing that would respond to increasing demand. Legislation in metropolitan areas such as Boston, Los Angeles, and Denver is addressing these unfair zoning practices, and progressive city councils are proposing measures to allow developers to supply this much-needed housing.
How Hunt Meets the Needs of Affordable Housing Developers in the Suburbs
When it comes to building affordable housing in the suburbs, Hunt Mortgage Group is a leader in the space. We offer a broad range of financing solutions to affordable multifamily owners and developers. Loans range from $3 million to $300 million. We have valued relationships with large property management and development firms, as well as with nonprofit housing organizations and public housing authorities.
Our professionals have financed a number of affordable housing properties in suburban areas. Earlier this year, we arranged a Freddie Mac loan of $5.2 million for the refinancing of an existing debt for Candlewood Apartments, a 43-unit affordable community in Whittier, California. The property offers access to Interstate 5, with downtown Los Angeles being within a 25-minute drive. Tenants with Section 8 vouchers occupy 12 of the 43 units, and the building has 63 parking spaces. Housing like Candlewood Apartments helps provide low- and middle-income people decent, safe, sanitary apartments with good access to jobs, schools, and transit.
The federal Low-Income Housing Tax Credit (LIHTC) program is available to properties that are restricted as affordable to renters earning up to 60% of the area median income (AMI).