Affordable Housing Gap Spells Opportunity

Institutional investors have grown more interested in US affordable housing – as have the government- sponsored finance agencies and state and local governments – as the undersupply in the country has grown.

The impact of environmental and social initiatives can also be measured on both the project and community level, says Carl Chang, chief executive of Kairos Investment Management, a real estate investment company based in Irvine, California. For Kairos, return on cost is tracked for some ESG initiatives to show investors how ESG generates economic returns. For example, ESG initiatives that save water or energy can accrue property value, he says.

Adapting to Interest Rates

So far this year, rising interest rates and bank failures have disrupted capital markets and slowed dealflow for affordable housing projects, but Chang expects transaction volume in the space to rebound in the second half of 2023 and into 2024.

Buyers are attracted by the opportunity – both the resilient returns for the sector and the continuing shortage of affordable housing throughout the US. The high cost of capital, inflation and shortages of construction labor have also conspired to limited new construction of affordable housing, which boosts long-term investment strategies in affordable housing.

“People are beginning to understand that we want that healthy society, and they are able to provide for this very important need of putting roofs over people’s heads and providing affordability, and not just Class A multifamily and high-priced development,” Chang says.