Record Levels Of Investment Have Barely Dented The Need For Affordable Housing In Dallas

Where population flows, money tends to follow. That is certainly true for the Dallas area’s affordable housing industry, where millions of dollars have been funneled into new and existing properties.

Yet the metro’s shortage of affordable housing grows direr each year, a frustrating dichotomy that has prompted advocates to demand swift action from the public sector. Those on the frontlines say that not only is population growth outpacing investment, the cost of development has risen to the point where it is extremely difficult to deliver projects at scale.

“The demand is excruciatingly big,” said Roger Arriaga, executive director of the Texas Affiliation of Affordable Housing Providers. “We haven’t really even dented what the true need is for affordable housing.” 

The Dallas area is short about 33,600 rental homes affordable to its lowest-income households, according to a 2023 report from the Child Poverty Action Lab. Without intervention, the gap is projected to grow to 83,500 rental units by 2030.

The prospect of homeownership is similarly grim, with a shortage of about 60,000 for-sale homes priced at levels affordable to middle-income earners, such as teachers and bus drivers, KERA reported.

Affordable housing investors have recognized the need and are flocking to North Texas in droves. The Dallas area was the No. 1 spot for subsidized affordable housing investment at the mid-point of 2023, with nearly $600M added over the previous four quarters, according to CBRE.

“There is a significant amount of investor interest in Dallas-Fort Worth as a whole, so a lot of that dives into affordable housing,” said Chris Deuillet, a senior vice president in CBRE’s Dallas multifamily team. “Dallas has so much going for it. It’s in the top 10 list of almost any top 10 list you’ve got.” 

Texas is the second-largest beneficiary of the federal government’s Low-Income Housing tax credit program due to its population. The availability of subsidies is one of the primary reasons why DFW has seen an influx of affordable housing developers and investors, especially from out of state, TAAHP Communications Director Naomi Bludworth said. 

“This is where the money is, so they’re going to invest here,” she said.

Minnesota-based Dominium is among the affordable housing developers that began investing in Texas after clocking both the immediate and future need. The Minnesota-based company, which began working in North Texas in 2021, is taking the same approach in other fast-growing markets, including Atlanta, Scottsdale and Nashville.

“The economics of affordable housing make sense in areas that are rapidly losing their affordability,” Dominium Development Associate Austin Holmes said. “That’s the reason why we chose those markets.”

Once considered one of the more affordable metros in the nation, housing prices and rents in the Dallas area have skyrocketed over the past decade.

The median price of a single-family home in DFW grew 236% to $285K between 2011 and 2023, per the Texas A&M Real Estate Research Center, with the lowest-income neighborhoods seeing the biggest jumps in appreciation. 

The increase has a lot to do with the lack of new supply, which is making existing homes more expensive and pushing affordability further out of reach, said Angela Kelcher, senior managing director in the Dallas office of JLL Capital Markets. 

“We’re not putting enough units on the ground, any way you look at it, to house people affordably,” said Kelcher, who also leads JLL’s affordable housing group.

The supply-demand imbalance, paired with the inherent stability of affordable housing as an asset type, is behind the sudden surge of interest among both new and existing investors, said Alexa Abbott, a development analyst for Dominium. 

“There’s been a change in the top owners of affordable housing,” she said. “Groups that typically weren’t investing in affordable housing before are purchasing them at a higher rate.”

Institutional groups like Blackstone and Starwood Capital have become some of the largest owners of subsidized affordable housing in the U.S., acquiring more than 138,000 units backed by LIHTC and other housing programs, according to 2022 figures by the Private Equity Stakeholder Project. 

Government-sponsored enterprises, including Fannie Mae and Freddie Mac, were granted approval to reenter the LIHTC equity market in 2017, Kelcher said. Meanwhile, the agency became increasingly focused on mission-based lending, and ESG investing was on the rise.

“All of these factors on the money side were happening in parallel with an increasing affordability crisis that was expanding beyond the high-cost coastal markets across the country,” Kelcher said. 

In response to the urgent need, state and local governments began rolling out programs centered around increasing the supply of affordable and workforce housing, Kelcher said. 

A mixed-income housing development bonus was passed by Dallas City Council in 2019 to incentivize the creation of apartments affordable to various income levels. In 2020, the city created its public finance corporation, which grants up to 99 years of property tax exemption in exchange for affordable units.

But despite best intentions, programs intended to boost the supply of affordable housing haven’t been sufficient in meeting the need. Population growth is happening too fast for developers to keep up, while at the same time, building and labor costs continue to rise. 

Because LIHTC properties are subject to rent caps, owners have fewer mechanisms for mitigating those increases.

“We always seem, year in and year out, to be playing catch up,” Deuillet said. “It’s very challenging these days for developers to build affordable housing.”

At the state level, the Texas Legislature passed its own LIHTC program last year, which could eventually spur more investment, Arriaga said. But at an initial cap of just $25M per year, the program is too meager to make a meaningful impact.

“It’s not sufficient or significant enough to put a dent in the overall need, much less in the DFW area,” he said. 

Voters in Dallas will be asked to approve a $61M bond proposition in May aimed at stimulating the production of affordable housing in three target areas of southern Dallas. 

Housing advocates who pushed for a $200M allocation have criticized the measure for being woefully inadequate, but Arriaga said even a small amount of dollars is better than none at all, especially in an era when state and federal resources are stagnant. 

“These cities are bursting with population, and they have to do something,” he said. “Their only real option is to issue these general obligation bond initiatives and hope citizens are seeing the need and would support that investment.”

In a classic case of two steps forward, one step back, efforts to create more affordable housing in Dallas are now threatened by development fee increases approved last month. The multifamily industry is already dealing with higher costs on the operational side, making any additional increases hard to stomach, Bludworth said.

“Market-rate multifamily and affordable multifamily need to be considered separately … because they are operating under a different set of standards,” she said. “If a city has subscribed itself to wanting to promote affordable housing, it certainly doesn’t make sense to increase costs related to providing that housing.” 

Financing challenges have slowed investment, but deals should pick back up once interest rates come down, Kelcher said. Sellers have begun to accept the change in values, which is narrowing the bid-ask spread and should lead to greater momentum in the coming months. 

“People aren’t being paid to sit on the sidelines,” she said.