New Players Streamed Into Affordable Housing In A Down Cycle. Many Will Stick Around When It's Over

A broader array of lenders are dipping their toes into affordable housing, widening opportunities for developers and owners.

Affordable housing is a tricky asset class for lenders, developers and owners used to market-rate housing, panelists said at Bisnow’s 2024 New York Affordable Housing Conference. But like developers, commercial real estate investors keep returning to the space in down cycles, building expertise and sticking around longer.

The result is an increasing number of investors and developers seeking to enter the fray, potentially benefiting the market long-term, panelists said.

Nuveen has been an affordable housing investor since the early 1990s when just a few private funds were interested in investing in affordable housing. Thirty years later, that’s all changed, Nuveen Managing Director for Impact Investing Pamela West said onstage at Convene at 360 Madison Ave.

“For a while, there were just three or four fund managers who were raising capital with investors in affordable housing,” she said. “I think I heard the number has grown to about 46 to 50.”

That’s in part because of where money goes during different points in the capital markets cycle.

“Who wants to buy office and retail right now? That's just not where you want to be,” West said. “So we always see this sort of redeployment of capital into the affordable space.”

Affordable housing can be attractive to both lenders and developers because it is resilient, she said. But affordable housing has also historically been harder to manage and can be less attractive than other investments in the short term, as capital often returns to other asset classes when markets are on the upswing, she said.

That hasn’t stopped a plethora of institutional investors that weren’t in the space from stepping in, West said. State pension plans, charitable foundations, university endowments and insurance companies are now buying into affordable housing.

“We're seeing all these new entrants come into the market,” West said.

Those investors are getting “stickier,” she added, staying in the asset class longer as they get better at investing in, developing or owning affordable housing.

At the same time, some developers and owners that haven’t been in the affordable housing space before are trying to get a foot in the door by working together, panelists said.

“We're also seeing a lot of joint ventures ... between traditional for-profit, market-rate developers and affordable developers,” said Russell Kivler, a partner at Hirschen Singer & Epstein. “The way I see it, it’s a good thing when we have these assets trading hands, bringing in private equity.”

Private equity has been helpful for rehabilitating buildings, stepping in where the city has struggled to find the capital to improve properties, Kivler said.

But the entry of players with little experience in affordable housing brings its own problems because they don’t have the expertise to understand the differences in types of product or the capital stacks, NewPoint Real Estate Capital President for Affordable Strategies Rob Wrzosek said.

“We're also seeing traditional for-profit developers trying to partner with 501(c)(3)s, so they can use that as a way to access tax-exempt financing,” he said. “A lot of developers call us like, ‘Hey, I just sent my letter to the IRS. I'm a 501(c)(3), now let's do a bond deal. It's like, ‘No, we're not going to do that.’”

Instead, developers and investors should make sure they have the right knowledge before jumping in, Walker & Dunlop Director of Multifamily Finance Ethan Waite said.

“Traditionally, if someone's buying an affordable deal and you don't have expertise, we're telling them out of the gate they’d better hire a third-party manager,” he said.

Asset developers and owners trying to pivot into affordable housing in a down cycle are often challenged, Pembrook Capital Managing Director for Originations Terry Baydala said.

The regulatory agreements, nuances of managing different types of affordable housing and a grasp on additional elements that sometimes need to be provided to tenants, such as social services, are often off-putting to some players, he said.

“Operating affordable properties is a lot more complex than just marketing properties,” he said.

Ultimately, most groups are looking for a third-party manager to handle the nitty-gritty for them, West said. And that could be the determining factor when it comes to which players stick around longer versus parking in the sector for short periods during CRE's tricky economic moments.

“I talked to an investor the other day. We explained the whole public-private partnership, and he said, ‘I don't want to talk to a housing agency. I don't want to have to deal with anyone in the public sector,’” West said. “Investors really want access to the returns. They love the social and environmental benefits. But they don't want to have to deal with all the complexity.”