With Housing Affordability Hitting Crisis Levels, Developers Lean Into Public-Private Partnerships

As the nation hurtles toward a recession, housing developers are asking for extra help from the public sector to prevent the affordability crisis from spiraling further out of control.

In Dallas, for instance, city data shows there is a Metroplex-wide shortage of 85,000 units for households making less than 80% of the area median income. That deficit jumps to roughly 186,000 units when the threshold is lowered to 50% AMI, according to the National Low Income Housing Coalition.

Yet there are fewer than 12,000 units supported by housing programs in production in Dallas — a stark reminder of just how much work still needs to be done to meet demand.

“It’s a drop in the bucket,” city of Dallas Director of Housing and Neighborhood Revitalization David Noguera said. “We’ve got to build new tools and adjust our policies to really build at scale.”

DFW is not alone — across the nation, a record housing shortage is driving affordability challenges. New home starts soared in 2021 and 2022, but Harvard University’s most recent State of the Nation’s Housing report says the backlog is so large it could take a decade of record-level homebuilding to make meaningful progress in affordability.

Affordable housing deals are difficult to pencil even in the best economies.

But developers say higher interest rates paired with the rising cost of materials are widening the gap between what a building costs to construct and the level of rent people can afford to pay, making it even harder to get a project across the finish line.

Recessionary impacts are twofold, Dallas-based Builders of Hope President and CEO James Armstrong III said. Additional subsidies are needed to boost the buying power of residents and offset construction costs.

“You have to look for subsidies in every nook and cranny to make these deals work,” he said. “Because the truth of the matter is Dallas is slowly becoming an unaffordable city.”

Over the past few months, the city of Dallas has experienced a major uptick in the number of developers requesting subsidies, Noguera said. For Builders of Hope’s 20-unit, single-family project underway in West Dallas, the city kicked in $1.5M, which Armstrong said translated to roughly $50K of subsidy for the construction of each home.

“When I started about four years ago, our hard cost number was right at $85 per SF. Now, it’s edging closer to $120,” he said. “In this high interest rate, inflationary environment, families making around or below 80% AMI are no longer able to afford homes in the city of Dallas.”

Subsidies are one way the public realm can alleviate some of the burden on affordable and workforce housing developers. Other options, such as tax credits and density bonuses, are also on the table. Those two programs, Noguera said, helped to produce close to 10,000 units in the pipeline.

“On a daily basis we are talking to developers from all over the country who want to work in Dallas,” he said. “And these are the two programs they’re utilizing.”

High levels of in-migration and a superior job market have spurred extraordinary demand for housing in DFW, which drives up prices and creates an environment of competition between market-rate and affordable developers, said Jason Arechiga, senior vice president at The NRP Group.

But while both types of projects cost the same to build, affordable housing developers face additional restrictions that put them at a disadvantage, Arechiga said.

“[Market-rate developers] can go in and close on a property within 60 days, but because we have all these state, local and federal restrictions, our timelines are triple that,” he said. “We’re still competing for the same piece of land, we’re still paying the same for lumber, drywall and bricks, and we are still borrowing money at the same interest rate.”

Removing barriers is essential to keeping the pipeline of affordable projects moving during a recession, Arechiga said, but Dallas has fewer tools at its disposal than other Texas cities. San Antonio and Austin have passed bonds aimed at addressing affordable housing, and both cities offer development assistance programs not currently available in Dallas, he said.

“[Dallas is] in for quite a bit of a setback,” he said. “Even if you get started now with some of the most progressive and aggressive programs to address [affordable housing], you still have a two-to-three-year delay before you can get those units online. So the next couple of years, unfortunately, are going to be pretty tough.”

For households considered extremely low income, Dallas’ deficit of affordable units far outpaces that of Austin and San Antonio’s, according to NLIHC data. In Austin, there is a shortage of just over 52,000 units, whereas in San Antonio, the shortage amounts to roughly 49,000 units. In Dallas, the shortage is more than 158,000 units.

One newer mechanism Dallas is using to narrow the gap is its public facilities corporation, which can assist with financing mixed-income projects. Created in 2020, the tool allows the city to partner with developers to acquire, renovate or build housing where 50% of units are dedicated to residents making less than 80% AMI. The projects are exempt from property taxes for 75 years. 

Noguera said five projects in Dallas’ pipeline have been created in association with the PFC. 

“We are seeing this much more often because property taxes are a larger component of the expense load in Texas,” said Angela Kelcher, a JLL Dallas senior managing director of capital markets focused on affordable multifamily housing. “In order to address some of the higher costs associated with land, labor and construction while still providing affordable housing, it may be the only way to fill that gap.”

Additional mechanisms at all levels of government are urgently needed, especially as demand for affordable housing skyrockets in growing cities like Dallas, Kelcher said. An expansion of the federal Low-Income Housing Tax Credit and improved access to the $350M awarded to state and local governments through the American Rescue Plan Act are two viable options, she said.

“As is, I don’t think we can build enough to keep up with demand,” she said. “The barriers are currently too high to do that without some of these other actions happening.” 

Piecing together different solutions, or coming up with new tools altogether, may be the only way Dallas can successfully tackle its affordable housing shortage during a recession, Kelcher said. But the clock is ticking, Armstrong said, and if meaningful action is not taken soon, working-class families will no longer be able to live in the city.

“The housing crisis is really an opportunity for us to think outside of the box on how we bring affordability to the market,” he said. “The market is outpriced, so we can’t do it the old, traditional way. The only path I see forward is everyone pitching in.”