A view of downtown Austin from Zilker Park in August. MIKE CHRISTEN/ABJ

Austin Business Journal writes, "a new report challenges the idea that investing in more affordable housing developments yields lower returns than luxury apartments — bringing added weight to a local fund that aims to maintain cheaper housing.

The report from Southern Methodist University and the University of Texas at Austin finds that moderate-income rental housing is a viable and profitable investment for those seeking to support a fund that embraces environmental, social and governance principles, or ESG.

Supported by Affordable Central Texas Inc., which controls a low-cost housing fund in Austin that has raised tens of millions of dollars, and the Wells Fargo Foundation, the study aimed to define a profitable asset class called moderate-income rental housing, or MIRH.

Released Sept. 15, the study comes at a pivotal moment in Austin’s ongoing affordability debate as residents continue to grapple with the rising cost of living and voters consider a $350 million bond to fuel construction of new affordable housing.

More on the study

The study analyzed a decade of data from metropolitan areas across the United States and showed that the MIRH outperformed rental properties with higher rents, with an average unleveraged return of 9.4%. The asset class also had the lowest risk spread, at 2.6%, when compared with other real estate investment opportunities.

The report drew on data from the National Council of Real Estate Investment Fiduciaries and analyzed eight metropolitan areas from the second quarter of 2011 to Q2 2021: Atlanta, Austin, Dallas, Denver, Houston, Phoenix, Seattle and Washington, D.C.

The nation’s three largest metros — New York, Los Angeles and Chicago — lacked enough MIRH assets to allow for analysis.

The study defined these MIRH as large multifamily rental properties occupied by tenants earning between 60% and 120% of the median family income level, with at least half the residents earning less than 80% MFI.

The median family income level for a family of three in Travis County is currently $99,250. For the same size family, 80% MFI is $79,450, according to Austin's Housing and Planning Department.

Austin Housing Conservancy expands portfolio

That's good news for Affordable Central Texas. The nonprofit runs the Austin Housing Conservancy fund, which aims to keep Austin affordable for the men and women who keep the city functioning smoothly each day. Unlike traditional affordable housing efforts supported by the local and federal government, the conservancy works to support "missing middle" housing that can be accessed with a wide range of people.

"Demand for affordable rental housing for moderate-income households is surging as homeownership becomes unobtainable for many. At the same time, interest in Environmental, Social, and Governance investments is growing rapidly," stated David Steinwedell, founder, president and CEO of Affordable Central Texas. "We can’t afford to lose the people who power our communities, and we have a market solution to a market problem. MIRH delivers consistent, predictable returns and makes a real difference in the lives of our neighbors."

Affordable Central Texas rents units to those making 60% to 120% MFI. The fund is supported by investors and made profitable with state real estate tax abatements. Funds are solely borrowed through the Federal National Mortgage Association, commonly known as Fannie Mae.

The fund recently purchased Bridge at Monarch Bluffs, located near Bluff Springs in South Austin at 8515 I-35 South, and Retreat at North Bluff, located off South Congress Avenue at 6212 Crow Lane.

Constructed in 2009 and 2011, respectively, the two complexes add 570 total units to the conservancy’s portfolio.

The seller of Bridge at Monarch Bluffs was Griffis Group Residential while the seller of Retreat at North Bluff was a partnership controlled by Presario Ventures. Purchase prices were not disclosed.

Representatives for the fund said that, even prior to its acquisition, Retreat at North Bluff was offering affordability with income-restricted units.

The Bridge at Monarch Bluffs units will become moderate income affordable as renewals and new leasing occurs and residents are income qualified.

After five years, the fund is approaching $25 million raised and has established an ambitious roadmap to raise at least $60 million more in order to acquire an additional 10,000 rental units and provide affordable housing for an estimated 15,000 to 18,000 Austinites.

Established in 2018, the fund currently owns 1,740 apartments. Its backers include former state senator and Austin mayoral candidate Kirk Watson and Heritage Title Company President Gary Farmer.

Analysts offer insight

The MIRH research was prepared by Mark Roberts, director of research at the Folsom Institute for Real Estate at SMU, and Jake Wegmann, associate professor at the Community & Regional Planning Program at UT's School of Architecture.

"I would say that our most important bottom-line finding is that under a variety of assumptions, moderate-income housing within the NCREIF dataset ... has generally provided better returns since 2011 than what we might call ‘above moderate’ housing (i.e. similar assets, but where the average apartment has rents above the affordable level at 80%),” Wegmann said.

Wegmann stressed that depending on the exact comparisons, the differences in both returns and risk are not always statistically significant. Even if they are not, that comparison provides evidence that moderate-income rental housing could be a high-performing asset for investors.

"In the report, we advocate that the multifamily industry viewed holistically (investors, developers, lenders, but also policymakers and others) move towards defining a standard and widely shared definition of moderate income rental housing," Wegmann said.

The same way that Enterprise Green Communities and Low Income Housing Tax Credits have created widely recognized standards for green building and low-income rental housing, Wegmann said there would be considerable benefits to doing the same for moderate-income rental housing.

"This could create a new vehicle to tap into the burgeoning interest in ESG investment. A lot of ESG investment is directed toward the 'E' n ESG — toward environmentally focused investments — because it is easy to quantify the performance of a lot of green technology in terms of defined metrics (tons of CO2 avoided, reductions in water usage, etc.)," Wegmann said. "Social outcomes can at times be tougher to quantify, but a moderate income rental housing standard would create a new, precisely defined form of socially responsible investment."

Other key findings of the study included:

  • MIRH’s average total rate of return, 9.35%, exceeded the overall NCREIF property index for apartments, 8.37%, as well as the assets classified as "above-MIRTH"
  • MIRH returns exhibited relatively low correlations with indices of other mainstream asset classes like stocks, government bonds and high‑yield bonds
  • Despite generally tightening rental market conditions over the past decade, particularly at the lower end, MIRTH assets since have somewhat counterintuitively exhibited slightly lower average occupancy rates, 93.3%, than above-MIRTH assets, 94%
  • MIRTH assets have required higher capital expenditures, 1.5% on average, than above-MIRTH properties, 0.88%. However, these higher capital requirements are more than offset by the assets' higher income and total returns."

Source: Austin Business Journal 

Written by: Mike Christen

Published: October 12, 2022

Posted by Grossman & Jones Group on


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