Navigating a new normal: Financing affordable housing projects amid uncertainty

Affordable housing investors are relearning the dynamics of a deal. With an abrupt rise in interest rates and rampant economic uncertainty, accompanied by inflation, regulatory changes and a wide bid-ask spread, the current market dynamic is disorienting.

“Investors are caught thinking, ‘What the heck?!’” said Nicole Ferreira, president of CPC Mortgage Co., to audience laughter at the at the 2023 Affordable Housing Finance conference. Panelists for the Debt Financing Power session included Ferreira and Sam Adams, managing director, Affordable Housing Public Finance for KeyBanc Capital Markets (KBCM); Rob Rotach, senior managing director at Walker & Dunlop; and Stephanie Wiggins, managing director and head of production for agency lending at PGIM Real Estate. Tom Anderson, senior vice president of development at Pennrose Capital, moderated the panel discussion.
 

Uncertainty has characterized 2023

The current environment is rough, and difficult to navigate, largely because there is little clarity about the future. The recurring theme has been that uncertainty has slowed transaction activity. While the panelists shared different declines in volumes, most noted that Fannie Mae and Freddie Mac are a good way to check the market. Fannie and Freddie have completed $75 billion in mortgage originations this year against their $150 billion cap, illustrating that activity is down industrywide.

At least some of the hesitation is due to investor reluctance to adapt to a new environment, meaning waiting for borrowers to change their mindset, and people waiting for pricing that doesn’t exist anymore.

The lack of clarity is also pushing up development timelines. According to KBCM’s Adams, developers are no longer worried only about how much a change will cost, but rather how that change will extend the timeline. “In this market, I think it’s more of the risk of the unknown. Many developers are truly recognizing the cost of time in their deals in a way that they didn’t when interest rates were largely flat for years,” he said.
 

Growing appetite for affordable housing

Despite the uncertainty, there was overwhelming optimism for multifamily product, and affordable housing in particular. In fact, one panelist said that groups uninterested in affordable housing deals last year are now calling and showing increasing interest, especially institutional investors. Adams agreed that they are seeing more players enter the space, particularly investors that historically have not been in the affordable sector. “I think we’re seeing some different players come into the space having interest in affordable housing and trying to figure out how to diversify their real estate development,” said Adams.

As noted by one panelist, industry professionals are spending a lot of time educating clients about the lower risk profile. There is a lot of institutional capital in the market. As this capital comes to light, clients must understand that despite the product being very similar, the actual risk profile is very different than traditional multifamily. That is new information for the broader market.

In addition to lower risk, there is tremendous demand for affordable housing. “I am shouting from the rooftops that the fundamentals for multifamily are so strong,” said Ferreira, noting the national shortage of tens of millions of affordable housing units. She went on to say that even ordinary citizens are demanding action on affordable housing, which has helped to generate government support, programs, and incentives. When federal, state, and local governments prioritize affordable housing, it creates a firmer ground for new investors to enter the space.

Affordable housing activity is also helping to improve originations. Rotach, for example, said Walker Dunlop had seen a 30% lift in their pipeline when they “leaned into affordable housing.”
 

Getting creative with deals

While the current debt environment is challenging, all the panelists recommended that developers and investors get creative and step outside of their comfort zone, something that many haven’t done in years. As one panelist explained, many developers specialized and became proficient and efficient at doing one thing that worked. Now, that one product or capital structure might not work. It was suggested that even if you’ve only usually used one product, it’s best to leave no stone unturned. Figure out what might be the best product to get you through your transactions during this rough environment.  

Markets change quickly, according to KBCM’s Adams, who said that a debt product that didn’t work last year might work today. So, it is important to be aware of all the tools at your disposal, and to use those tools as necessary. Often, that requires partnering with an experienced team, and finding a team that can tap into a multitude of different capital sources, especially in the affordable housing space.

The panelists reviewed several alternative debt avenues that affordable housing investors might consider, including the agencies, the bond market and private placements. Adams recommended “having access to capital in creative ways, even potentially expensive capital.” He also noted that “diversifying where people are raising money and putting money together — either at the corporate level or development level — is going to be critically important.”

With more potential volatility ahead in 2024, the investors that can learn to navigate the new normal in the capital markets will be successful. “There are still likely to be some sharp changes, particularly as large organizations figure out how they want to approach the financial world over the next year,” says Adams. “Be aware of all the things out there. Things change quickly.”

To discuss the options for your next project and the content shared on the AHF Live Debt Financing Power Panel, reach out to Sam Adams and his team.

For added insights, we encourage you to listen in on a recent podcast with KeyBank leaders discussing LIHTC housing units set to transition to market-rate in the next decade. To learn more about our full capabilities, go to key.com/affordable.
 

About KeyBanc Capital Markets Public Finance

Sam Adams and his team are affordable housing financing experts. As part of KeyBank’s commitment to affordable housing, they have provided capital markets bond issuance totaling $3 billion for some our nation’s largest housing authorities and developers supporting more than 20,000 units over the past five years.
 

About KeyBank Community Development Lending and Investment

KeyBank Community Development Lending and Investment (CDLI) finances projects that stabilize and revitalize communities across all 50 states. As one of the top affordable housing capital providers in the country, KeyBank’s platform brings together construction, acquisition, bridge-to-re-syndication, and preservation loans, as well as lines of credit, Agency and HUD permanent mortgage executions, and equity investments for low-income housing projects, especially Low-Income Housing Tax Credit (LIHTC) financing. KeyBank has earned 10 consecutive “Outstanding” ratings on the Community Reinvestment Act exam from the Office of the Comptroller of the Currency, making it the first U.S. national bank among the 25 largest to do so since the law’s passage in 1977.