Since the pandemic first emerged early this year, it has shown few signs of slowing. Just yesterday the total number of worldwide cases stood at an astonishing 16.5 million, with 282,000 new cases reported in just the previous 24 hours. At home, nearly 1 out of every 100 Americans has tested positive for the coronavirus, and we set a new single-day confirmed case record July 17th totaling 77,200 nationwide, a 22% increase from the 7-day average the previous week.
With bond yields near all-time lows, equity valuations near all-time highs, and uncertainty all around us, many investors are unsure where to turn for investment markets. Many are considering real estate for its relatively stable income, real asset collateral, and tax advantages. However, even the real estate industry is not immune from such uncertainty, so where should investors look for stability?
There are signs that affordable housing (Low Income Housing Tax Credit [LIHTC] and similar programs) properties may be an answer. This can seem a little counterintuitive—after all, affordable housing typically isn’t new, and it certainly isn’t sexy. The stability of affordable housing stems from two drivers: consistently high demand for constrained supply, and a “hold harmless” provision that does not require LIHTC landlords to decrease rents when local incomes decline. The fact that we were already living through an affordable housing crisis before the pandemic struck should be old news to most people who follow the real estate market, but what logically follows as a consequence is that tenants of affordable properties know they’re getting a good deal and will go out of their way to remain in their units.
The effects of consistently high demand and constrained supply reveal themselves in collections and occupancy figures. LIHTC properties have historically delivered higher rates of occupancy and collections than their market rate peers. As shown below, the second quarter collection rate in our Affordable Housing Impact Strategy was 96.1%, while at comparable market rate properties, the collection rates were just 95.2%. These are positive results for affordable properties but likely understate the true strength of affordable housing stability during the pandemic. To observe the full effect, one must incorporate the occupancy data that have widened considerably in favor of LIHTC properties during this period.
Additionally, the rent growth dynamics in affordable properties provide another layer of stability. LIHTC property rental rates are determined by HUD using a combination of one-year and five-year trailing income growth metrics. As such, LIHTC property rent growth is more stable.
The results of these niche market dynamics inherent in affordable properties can be seen in the graphic below. Average rent growth of LIHTC properties has outpaced market rate rent growth by 58 bps per year on average over the past 20 years. However, the more compelling aspect of the outperformance is that it is strongest during periods of economic contractions, when investors need it most. In previous crises and recessions, affordable housing rent growth has demonstrated a resilience and stability not seen in market rate housing. That resilience was apparent during the Great Recession and has thus far persisted through the early months of the Great Lockdown (COVID-19 pandemic).
In many ways the future has never felt more uncertain. By looking to the stability of affordable housing, investors may find some of the resilience they’re seeking in these unprecedented times.
The views and opinions expressed in this article are solely my own.
