Developers are likely to finish work on more than 100,000 new or renovated apartments affordable to low-income families in 2019. It will not be enough to satisfy existing market demand.
According to Michael Gaber, president of the Affordable Housing Tax Credit Coalition (AHTCC), based in Washington, D.C., more than 10 million households nationwide pay more than half of their income on rent. That leaves too little money for other expenses, including health care, transportation and nutritious food, he says.
To create more affordable housing, lawmakers in Congress propose to expand the federal low-income housing tax credit (LIHTC), the leading program to finance affordable housing. Local officials in municipalities throughout U.S. have also relied on program like inclusionary zoning, which asks apartment developers in certain locations to include affordable units in their projects in exchange for the right to build.
“We typically finance 100,000-plus units annually with LIHTCs,” says Jennifer Schwartz, director of tax and housing advocacy for the National Council of State Housing Agencies (NCSHA), based in Washington, D.C.
For example, state and local housing agencies financed 110,246 units of affordable housing in 2017 through the LIHTC program, according to NCSHA. The bulk of those units are likely to be finished in 2019. The LIHTC is the most important U.S. affordable housing program. With few exceptions, if a new affordable apartment is built from the ground up or an older affordable apartment is saved from eventual demolition, the development probably received some of its financing from LIHTCs.
Developers of all types started construction on a total of 342,700 new units of multifamily housing in 2017, according to the U.S. Census data. Of those, roughly one-in-seven will be affordable to low-income residents under the rules of the LIHTC program. However, because of the high cost of new construction, “Luxury apartments without income restrictions… have taken up the bulk of the development in recent years, burying the growth in affordable units,” says Tara Jeffcoat, senior research analyst with data provider Yardi Matrix.
Still, multifamily developers are very interested in building affordable housing with LIHTCs. Most states distribute tax credits to developers through a point-scored competition. Often, developers apply for three times as many tax credits as state housing officials have to reserve.
High demand for affordable apartments
The average vacancy rate for affordable apartment dropped slightly to 2.3 percent in the second quarter of 2019, according to Reis Real Estate Solutions by Moody’s Analytics. Most experts consider a project fully-occupied with a vacancy rate of 5.0 percent or less.
“The vacancy rate has remained within the 1.9 percent to 2.2 percent range since early 2016," says Mary Le, associate director with Reis. “Reis forecasts the vacancy rate to remain at this level over the next five years.”
In hot real estate markets, affordable housing is especially hard to find. For example, in the Pacific Northwest and Southern California, the occupancy rate for workforce housing has run almost 2.25 percent higher than the occupancy rate at market-rate properties, according to Yardi Matrix.
Advocates press for more money to build affordable housing
In June 2019, bipartisan lawmakers in Congress introduced the Affordable Housing Credit Improvement Act (S. 1703 and H.R. 3077). Among other things, the bill would increase the amount of LIHTCs available to developers by 50 percent, phased in over five years.
"Congress has the opportunity to provide more than 450,000 sorely needed affordable homes over the next decade," says Emily Cadik, executive director of AHTCC. That works out to an additional 45,000 units of affordable housing a year.