Typically, June 30 is the biggest day for affordable housing deals in New York City. It’s the end of the fiscal year, so developers race to close deals to get funding approval and get started building, says Rafael Cestero, president and chief executive officer of the New York-based Community Preservation Corporation. One of the nation’s largest financial backers of affordable housing, the nonprofit he leads has a $3.5 billion portfolio of active construction loans and mortgages.
But this year, Cestero says, no deals closed that day — something he’s never seen in his 30 years in the business.
Like many in the housing world, Cestero is concerned about the wave of evictions that could be coming, and what might happen if Congress can’t provide additional support or extend enhanced unemployment benefits. But he’s also afraid of a longer-term threat: Affordable housing production and upkeep could be hamstrung for a generation. “We may have a different crisis,” he says.
While housing advocates have been calling attention to the imminent danger of evictions and homelessness amid a pandemic and economic downturn, the Covid-19 crisis also stands to exacerbate the nation’s sizable affordable housing shortage, thanks to a brutal convergence of factors. Budget shortfalls mean city and state programs to subsidize housing have been gutted, or may be cut, across the nation, in Salt Lake City, Los Angeles County, New York City and elsewhere. Covid construction slowdowns and materials shortages have made ongoing projects more expensive. If a wave of renters can’t pay, a significant number will likely be living in existing affordable housing, putting financial pressure on the landlords or nonprofits operating such buildings. The funding provided by rent-subsidized units will shrink if apartment rents soften. Some experts even say the value of the Low-Income Housing Tax Credit — one of the primary funding sources for low-cost housing in the country — is decreasing, meaning less funding.
“Anything that could make it unattractive or difficult to build affordable housing is happening right now,” says Jenny Schuetz, a housing policy expert at the Brookings Institution. “As best as I can tell, banks aren’t especially eager to lend to new projects at this uncertain moment. And it’s not like any level of government has cash on hand for affordable housing.”
The nation is short more than 7 million homes for extremely low-income renters, per the National Low Income Housing Coalition (NLIHC). That gap between the affordable housing we have and what we need is poised to grow, through a slowdown of new housing production and the loss of existing homes and apartments, just as it’s needed most.
Cestero has already seen warning signs for existing properties. The delinquency rate of properties in the Community Preservation Corporation’s portfolio jumped from 1 to 7 percent between March and July due to the pandemic, mostly the smaller, older properties that form the bulk of the nation’s affordable stock. Once these buildings deteriorate, or are sold, they become more expensive to fix or likely won’t be affordable anymore. And building new supply was challenging before Covid.
“The cost of building affordable housing is at crisis levels in this country,” says Bay Area housing advocate Randy Shaw. “It already costs $700,000 to build a home for a single family in some Bay Area communities, and the numbers are going up. Where do you get the money? And even if the Democrats win big in the fall and their first budget gives housing advocates every dollar they need, it’ll be years before that houses anybody.”
It’s an issue that long predates the pandemic, says Andrew Aurand, vice president of research at the NLIHC. “We’ve never put enough resources into our affordable housing rental programs,” he says. “Only 1 in 4 eligible households were receiving federal housing assistance, and the need has grown. We have this immediate need for $100 billion in rental assistance just to keep people housed now. And that doesn’t address the need for permanent affordable housing.”
Any new affordable housing initiatives would need to address a tangle of challenges. Costs are rising for all types of construction, according to Caitlin Walter, vice president of research for the National Multifamily Housing Council. The organization began surveying builders in March around Covid-related challenges. By July 15, 36% said they’ve been impacted by lack of materials and 57% reported construction delays, half of which were attributed to lack of financing.
In addition, as Brookings’s Schuetz notes, recent inclusionary zoning initiatives meant to help spur new affordable construction only work if there are new market rate units being built.
The slowdown of new production can already be seen in New York City, where the drying up of city and state budgets has had a “chilling effect,” Cestero says. According to a report released this month by the Partnership for New York City, the shortage of affordable units in the city is projected to jump from 650,000 to 760,000 units within one year of the pandemic. The Covid crisis has severely disrupted the funding sources for housing in the city, says Kathryn Wylde, the organization’s president and CEO — and “it’ll get worse before it gets better.”
“The formula that’s been used for the last 15 to 20 years is not gonna work in this circumstance, and for the foreseeable future,” she says. “It’s going to make it almost impossible to deliver new units to the extent needed by all this economic distress.”
But wait: What about that much-talked-about “exodus” of affluent New Yorkers? That was supposed to soften the city’s real estate market — some even spoke of “pandemic pricing” — and open up cheaper land for affordable developers. Wylde believes that won’t work, especially like it did in the 1980s, when the city was able to fund significant new housing stock on vacant lots and foreclosed property. With so much “patient capital” — long-term, big-pocketed investors — in New York City now, it would take a significant drop in prices to open up low-income options.
The severe economic pain will also impact the Low-Income Housing Tax Credit, which supports an average of 110,000 new units a year. In short, corporations buy the tax credits to offset their taxable income to lower their tax bills, with the proceeds going toward equity for affordable housing projects. In a downturn, businesses feeling the pinch have less income to offset, making the credits less attractive. (The Trump tax cuts, which cut the corporate rate from 37 to 21 percent, diluted the program’s effectiveness.)
“The economic impact of Covid and future revenue projections have changed their appetite for the credit,” says Cestero. “Investors are still active, but they’re not paying the same price they used to.”
Despite the huge challenges, some see, if not upsides, at least opportunities. Wylde believes the pressure to build affordable housing, coupled with the lack of available funding from the local level, may accelerate and encourage more liberal zoning policies. If cities don’t have cash, they can at least lower the cost of building by allowing denser projects in more places and on cheaper land. Ending single-family zoning may not be a complete solution, but it’s a start.
“It’s the easy, regulatory, low-hanging fruit,” says Salim Furth, director of the Urbanity Project at the Mercatus Center at George Mason University. “Also, sometimes a crisis broadens or heightens awareness of the constituency that’ll benefit. People who never thought they’d be in a position where they need help paying rent, or can’t afford market rent, will suddenly be in that position, and the politics might change.”
In a perfect world, Furth says, this crisis could push cities to consider converting commercial buildings to residential projects, a relatively cheap way to provide new housing that also addresses an expected glut in vacant commercial real estate.
Brookings’ Schuetz says that cities should also be looking at buying and converting existing properties, to add more affordable stock. In theory, municipalities should be issuing bonds, or tapping into housing production trust funds to convert and create needed units now. But that requires foresight and focus that may currently be lacking.
Local government also simply don’t have enough financial muscle to fend off the Covid housing crisis, according to Sarah Saadian, vice president of public policy for NLIHC. Of the 200 state and local rental assistance programs created in response to the pandemic, 30 percent of those programs have already closed, due to lack of funding. And federal help may not be coming, Saadian says.
“Even in the face of this pandemic, all evidence points to the fact that the Republican proposal may not have any money for housing or a pittance,” she says. More than 150 Democrats in the house and 42 in the Senate back the NLIHC’s $100 billion ask, while the recently unveiled Republican HEALS Act only provides $3 billion in aid, and doesn’t extend the eviction moratorium. “If this moment doesn’t motivate you to support housing, what will?”
It’s clear that, as out-of-work Americans get displaced, the need for affordable housing will only go up in the short term. The long-term question is, can government action find a way to address the growing gap?
“People think the unemployment crisis is bad now,” says Cestero. “But if you marry it with a massive housing crisis, it’s potentially devastating.”
Source: Read Full Article