Creating Affordable Housing at Market Rate Properties

Authored by Jonathan Needell, President and Chief Investment Officer

November 7, 2022

Affordable housing, defined as housing that a resident can pay for using no more than 30 percent of their income after taxes, continues to be undersupplied. There is simply not enough product to support ongoing demand—and the consequences can be dire as individuals and families experience a lack of access to this basic need.

The good news is that real estate investment firms and government agencies are addressing this issue in a multitude of meaningful ways.

While preservation can be important, even if all existing housing is successfully maintained, there would still be a lack of supply based on current needs. Further, there are benefits to both residents and investors when the focus is on new development and conversion of market-rate units to affordable—especially when the result is mixed-income communities.

Below, we discuss why, as a firm that purchases, owns, and manages affordable housing communities—including LIHTC and self-regulated market-rate—we believe the creation of affordable housing must remain the top priority.

1. Meets Continuously Rising Needs

In 2011, approximately 39% of Americans acknowledged housing affordability as a major problem in their area. Ten years later, it was 49%. So, while this is not a new issue, it has become significantly more prevalent in recent years.

Further, home prices rose in 2022 and rents in multifamily units at professionally managed properties were up 12% in the first quarter compared to 2021. We anticipate that the demand for affordable housing will continue to outpace available supply for the foreseeable future, especially as inflation continues to rise and impact cost of living.

2. Leverages Conversion Opportunities

We have found that one of the most effective solutions to the current housing and affordability crisis is the conversion of market-rate units to affordable.

Nationally, market-rate apartment units are approximately 93-94% occupied. Imagine if all those vacant units, whether through official designation or owner self-regulation, were offered at affordable rates. They would then meet a pent-up demand from those in need—while solving nearly half the current shortage.

Some examples of existing programs that are successfully incentivizing conversion to affordable or attainable housing include those in the city of Seattle and the state of Texas.

Additionally, in some markets, there is opportunity to repurpose hotels and even office buildings—many of which have been casualties of the pandemic—to affordable housing, alleviating some of the costs facing ground-up development.  This could be an especially effective way to deliver affordable housing to downtown districts rich in employment and resources for residents.

3. Ensures Higher Quality and More Enriching Communities

Budget-friendly units for lower-income individuals and families do not have to equal low-quality living arrangements—nor should they. When the focus is on what has been termed NOAH (Naturally Occurring Affordable Housing) product, residents often experience a lack of property quality and amenities.

Further, affordable housing has traditionally been relegated to certain neighborhoods, which could mean a continued limitation of access and resources. At Kairos, we believe that there are many benefits to residents, communities, and investors when more affordable housing is available in markets and submarkets throughout the country and cities with varying levels of affluence.

Taking it a step further, we have found that some of the most successful executions of affordable housing are mixed-income communities.

For example, we have one property that is 60% affordable units and 40% market-rate units. This property operates very well and has had strong returns. We believe it benefits from both the stability offered by the affordable component (supported by the supply imbalance and fact that residents in these units are often paying a lower percentage of their incomes on rent) and strong resident role models, access to better schools, and ability to upgrade the property driven by the market-rate component.

Through recognizing the dire need to address housing affordability throughout the U.S., being open to conversion opportunities, and creating more affordable units within a variety of markets and mixed-income communities, investors and government agencies will drive real change for individuals and families facing cost burdens and housing insecurity. Strategies driving the creation of quality affordable units are the key to a long-term solution.

* This content is meant for informational purposes only and should not be construed as a recommendation, an offer of services, or an offer to sell, or solicitation of an offer to buy a particular security or investment strategy. There are no guarantees that any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. The views and opinions expressed in this article are solely my own.

For questions, contact investor relations at investorreporting@kimc.com or 949-800-8500.