The Top 4 Reasons Large Investors are Expanding Their Affordable Housing Portfolios and Why You Should Follow Suit

Large investors expanding their affordable housing portfolios recently, has become a notable trend in the real estate market. Nuveen, the investment management division of the Teachers Insurance and Annuity Association of America (TIAA), made headlines with its acquisition of a substantial 12,000-unit affordable housing portfolio, predominantly located in the Mid-Atlantic Region with a significant concentration in New York City. Nuveen, which manages $1.1 trillion in assets, is now managing a $6.4 billion portfolio of affordable housing. Prior to this deal, Goldman Sachs, alongside the Michaels Organization and the Community Development Trust purchased $1.2 billion worth of affordable housing across the United States in April. These investments reflect a growing trend among large investors who recognize the advantages of affordable housing investments. In this article, we delve into the top four reasons driving this expansion and explain why smaller investors should consider participating in this promising market.

1. Increasing Nationwide Demand

The demand for affordable housing in the United States has reached critical levels and is continuing to rise. Nuveen’s research reveals that nearly half of all U.S. renters are considered “rent-burdened”, allocating more than 30% of their income towards rent payments. Even more concerning is the fact that one in four of these “rent-burdened” individuals are “severely rent-burdened”, spending over 50% of their income on rent. To put this into perspective, the National Low Income Housing Coalition estimates that the nation faces a shortage of 7.3 million rental homes that are both affordable and available to extremely low-income renters. This scarcity means that for every 100 households in this income bracket, only 33 affordable rental homes exist. Such shortages persist across all states and major metropolitan areas. Despite ongoing efforts at the local, state, and federal levels, the need for affordable housing continues to intensify nationwide. This mounting demand creates an attractive investment opportunity for those looking to enter the affordable housing market.

2. Favorable Yield Stability throughout the Economic Cycle – including a Recession

Large investors are drawn to affordable housing not only due to its social impact but also because it offers favorable yield stability, even in challenging economic climates including a recession. Nuveen’s research showcases the sector’s resilience, illustrating that affordable housing investments have consistently outperformed 10-year Treasuries over the past two decades. Compared to traditional real estate sectors, affordable housing has generally delivered higher yields throughout the last 20 years, as indicated by Nuveen’s research. This long-term track record indicates that affordable housing investments can provide investors with attractive returns and stability, even during economic downturns.

According to Nuveen’s report, an additional favorable aspect of affordable housing is its tendency to avoid downward rent adjustments during a recession, unlike market-rate apartments. This characteristic highlights the durability of cash flow in this sector compared to other forms of housing. Simultaneously, the scarcity of affordable housing options and the overwhelming demand for them contribute to the sector’s robust performance. Nuveen notes that properties designated for lower-income renters exhibit higher occupancy rates and experience less volatility compared to traditional apartments. This phenomenon can be attributed to the persistent undersupply of affordable housing relative to the substantial demand, creating a stable and consistent pool of potential tenants for these properties. By diversifying their portfolios with affordable housing assets, investors can potentially mitigate risk while generating consistent income streams.

3. Backed by Government Subsidies

One of the significant advantages of investing in affordable housing is the access to government subsidies, such as Section 8 vouchers. These subsidies provide property owners with stable and predictable rent collections since the government makes direct payments on behalf of eligible tenants. Consequently, affordable housing investments benefit from reduced risk and enhanced cash flow reliability. The availability of government support adds a layer of security and makes affordable housing investments even more attractive to investors.

4. Alignment with Public and Private Social Impact Investing Goals

It is crucial to emphasize that the expansion of affordable housing portfolios aligns with paramount societal and policy objectives. Governments at all levels, local, state, and federal have acknowledged the pressing need to tackle the affordable housing crisis and have implemented initiatives to incentivize investments in this sector. By engaging in this market, investors not only have the potential for financial gains including reliable, stable income, appreciation, and tax advantages; but also play a pivotal role in addressing the vital housing needs of communities. Social impact investment in affordable housing not only generates economic returns but also drives positive change and improves the well-being of individuals and families in need.

Why Small Investors Should Invest in Affordable Housing

The growing interest of large investors in expanding their affordable housing portfolios is a testament to the opportunities present in this market. The combination of intensifying nationwide demand, favorable yield stability, and government subsidies creates a compelling investment proposition. However, it’s not just large investors who can benefit from this sector. Smaller investors should take note and consider following suit for several reasons.

Firstly, the demand for affordable housing extends far beyond what major institutional investors are capable of filling. The shortage of affordable rental homes affects communities all over the country, of all sizes, from urban cities to suburban and rural areas. By investing in affordable housing, smaller investors can make a significant impact on local communities while generating favorable returns. It presents an opportunity to address the housing needs of low-income individuals and families, fostering social and economic development.

Secondly, the potential for attractive yields and stability applies to investors of all sizes. Nuveen’s research highlights the consistent outperformance of affordable housing investments compared to other asset classes. Smaller investors can diversify their portfolios and access these benefits by engaging in direct investments or investing in private real estate investment funds that focus on affordable housing. This allows them to tap into the sector’s potential while leveraging the expertise and resources of established market players.

Thirdly, government support and subsidies are not exclusively available to large investors. Smaller investors can also benefit from programs such as Section 8 vouchers and other local and state initiatives aimed at increasing the availability of affordable housing. These mechanisms provide stability, reduce risk, and ensure reliable rental income, making affordable housing investments an appealing option for investors of varying scales.

Moreover, the current political landscape and public sentiment favor affordable housing initiatives. Governments at all levels are actively seeking public-private partnerships to address the affordable housing crisis. By participating in this market, smaller investors can align themselves with government priorities, potentially accessing additional incentives and grants.

It’s important for smaller investors to conduct thorough due diligence and seek professional guidance when venturing into the affordable housing market. Understanding local market dynamics, evaluating potential investment opportunities, and complying with regulations are crucial steps to success. Collaborating with experienced investors, property managers, and housing organizations can provide valuable insights and mitigate risks associated with entering a new asset class.

In conclusion, the expansion of affordable housing portfolios by large investors signals the immense potential of this market. The combination of intensifying demand, favorable recession resilient yields, and government support makes affordable housing investments an appealing option for both large and smaller investors alike. By capitalizing on this trend, smaller investors can contribute to addressing the housing crisis while generating financial returns. With the right research, partnerships, and support, they can navigate this market and unlock the opportunities that affordable housing investments present.

To learn more about how you can passively invest in professionally managed affordable housing focused funds, call Peter Neill, Co-Founder & Partner, GSP REI at 610-357-2330.