Authored by Jonathan Needell, President and Chief Investment Officer August 25, 2021 As John Paul Jones memorably put it,...
Part One: A Case for Affordable Housing
Seeking Investment Stability During a Recession
Authored by Trevor Schuesler, CFA, Associate Investment Director
February 22, 2021
Since the pandemic first emerged in 2020, it has shown few signs of slowing. As of February 2021, the total number of worldwide cases were over 100 million, with more than 2 million in total deaths. At home, more than 25 million Americans have tested positive for the coronavirus, and new single-day confirmed cases remain above 100,000 nationwide.
During this period, segments of the financial markets have come under stress and left investors wondering where to deploy capital in the face of uncertainty. Compounding this conundrum, is a lack of investment opportunity in traditional assets headlined by record low bond yields and elevated equity valuations. With the proverbial “60/40 portfolio” unlikely to deliver the returns necessary to justify the associated risks, where can investors turn? One area investors are contemplating is the real estate market – citing its relatively stable income, real asset collateral, and tax advantages as a safe haven during times of uncertainty. However, investors should recognize not all areas of real estate are equal when it comes to stability and safety. So where should investors look for stability in real estate?
There are signs that affordable housing (Low Income Housing Tax Credit [LIHTC] and similar programs) may be an answer. The stability of affordable housing stems from two drivers: consistently high demand and constrained supply. The fact that we are already living through an affordable housing crisis before the pandemic struck is known 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, particularly during periods of economic contraction. During the pandemic, both collections and occupancy rates at affordable properties outperformed market rate properties, and occupancy rates actually increased throughout the pandemic at affordable properties. Just how well has affordable housing fared relative to the national averages?
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.
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*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.
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