HUD Sees ‘Massive Drop’ In Multifamily Deal Volume, Slowing Housing Production

The pipeline of new affordable housing projects is drying up. As macroeconomic conditions make it more difficult for even market-rate multifamily deals to pencil, developers trying to make the math work on affordable projects are struggling to crunch razor-tight numbers.

This slowdown in affordable deals moving forward is evidenced by a precipitous drop in new loan volume at the nation's top housing agency.

In the six months ending March 31, the U.S. Department of Housing and Urban Development issued $6.3B in Federal Housing Administration multifamily loans, HUD General Deputy Assistant Secretary Jeffrey Little told Bisnow.

That pace puts it on track for roughly $12B this fiscal year, which ends Sept. 30. This represents a sharp drop from the $24B total in FY 2022 and the $32B total in FY 2021. 

“We've seen a massive drop in the volume of activity at HUD,” Little said Thursday at Bisnow's DMV Affordable Housing Summit.

“A couple months ago, all of our meetings were about getting rid of the queue because we weren't able to keep up with the volume,” he said. “We don't have that problem anymore. We've got plenty of underwriters, it's just that the volume is not there.”  

The drop-off in deal volume at HUD reflects a slowdown in activity for new affordable housing projects at a time when housing affordability in the U.S. has become increasingly dire. According to the National Low Income Housing Coalition, the U.S. faces a shortage of 7.3 million rental homes affordable to extremely low-income renters, or those making less than 30% of the area median income.

"We're not real happy to see such a big drop in volume at a time when we really would like to be getting increases in housing supply," Little said. 

The challenges that have led to this slowdown in activity were the main topics of discussion at the Bisnow event, held at the Renaissance Washington DC Downtown Hotel. Panelists said the same macroeconomic factors making it difficult for market-rate deals to work are additionally onerous on affordable projects.

“With increases in interest rates, construction costs, labor shortages, we're seeing a drastic impact on the production of affordable housing,” MaGrann Sustainability Director Jon Jensen said.

Feras Qumseya, chief development officer of Standard Communities, said that even if developers can get the numbers to pencil initially, constantly shifting economic headwinds, combined with long wait periods for affordable construction approvals, mean deals are constantly on the verge of falling through.

“From the time that I see a piece of dirt to the time that if everything goes well, I could break ground on that, at least three years,” he said, “Just to go through the entitlement process, it takes at least 12 to 18 months. And so when you have an environment like this, what do you do, write a 7% interest rate?”

Because of the complexity of the environment, panelists said it’s becoming increasingly clear that the industry standard for financing affordable projects, the Low-Income Housing Tax Credit, doesn’t by itself make deals work anymore. 

“As an industry, the last 10 years, it was relatively straightforward how to get a LIHTC affordable housing deal closed,” said NewPoint Real Estate Capital’s President of Affordable Strategies Rob Wrozek, who works on financing projects. 

“You got your equity. You got your debt. Fannie, Freddie on the [permanent loan], a local bank on the construction [loan], it was pretty easy," Wrozek added. "I think that mix is going to change quite a bit moving forward.”

On top of that, National Housing Trust CEO Priya Jayachandran, who is working on ways to help affordable programs be used to improve the financial conditions of low-income residents, says the LIHTC standard doesn’t take into consideration those forward-looking priorities.

“LIHTC has been terrific about creating housing opportunities and a whole lot less terrific on sharing some of the benefits and the wealth creation with residents,” she said. 

While LIHTC factors into many deals, it now comes alongside a dozen other financing mechanisms that make the affordable housing capital stack extremely complex. 

“Sometimes we all feel like fishermen up here,” said Stephen Wilson, president of SCG Development. “We're dragging these big nets, trying to collect $200K, $500K. You hope you land the big fish for several million, and you can't count on it. So you're dragging this net to assemble financing on these deals and some of these transactions seven, eight, nine, 10 sources of funds.”

One bright spot in the affordable housing landscape, experts said, is that it is higher on the federal government's agenda than ever before. In its proposed budget released in March, the Biden administration asked Congress for $175B in affordable housing funds. 

“Nobody was talking about that stuff eight years ago, 10 years ago,” HUD's Little said. “And even though the dynamics on the Hill make it pretty unlikely that much of that is going to get enacted, in FY ’23 or ’24, it’s a sea change to see those kinds of things even being discussed.” 

“Kudos to this administration,” said Jayachandran, who worked for HUD under the Obama administration. 

“Never did we ever ask for an increase in rental assistance and this administration has made that asset and that's the first step.” 

Lori Chatman, co-CEO and president of Enterprise Community Partners, said the issue of affordable housing has risen to a level at which the government has no choice but to address it. 

“Half of millennials spend more than 50% of their income on rental expenses,” Chatman said. “When you start talking about 50% of the largest population group now being challenged to be able to afford a place to live and suddenly it’s on the national agenda.” 

NHP Foundation Director of Development Pam Lee noted that the federal push comes after housing rose up the national agenda during the pandemic.

“During the pandemic, there was sort of this unprecedented support for affordable housing that was bipartisan,” Lee said. “We had a huge infusion of funds to support affordable housing and there were programs like eviction prevention programs, emergency rental assistance.” 

But as emergency funding wound down, those initiatives came to an end, placing an increased strain on the affordable market and pressure to get additional funding passed. 

Torti Gallas + Partners President Murphy Antoine said there’s no question that affordability is in the national spotlight, but that next step can't come quickly enough. 

“Awareness is there because the need has never been greater, and the need is really outpacing that awareness,” he said. "So our challenge is to galvanize that awareness.”