Growing economic uncertainty has fueled concerns about affordable housing developers’ ability to finance new projects, but it has also brought increased attention to the undersupplied market.
In an interview with Multi-Housing News, Stephanie Wiggins, managing director and head of production for PGIM Real Estate’s agency lending platform, emphasized the need for all affordable housing development stakeholders to continue working together as affordability concerns worsen.
How do high interest rates, high inflation and the expiration of eviction protections impact the affordable housing sector?
Wiggins: The spike in rates and inflation are significant concerns for the affordable housing industry. High interest rates impact loan proceeds and developers’ and owners’ ability to build, reinvest in, or purchase affordable housing. And high inflation impacts tenants directly, jeopardizing a family’s economic stability and mobility when prices increase significantly more than a family’s wages. The cost of living is increasing. This is adding pressure and stress to many households and to an already stressed system where the affordable multifamily housing market is undersupplied.
READ ALSO: What’s Ahead for Multifamily After the Next Interest Rate Hike
On a brighter note, with a spotlight on the widening wealth gap and tent cities part of the skyline of every major city in this nation, awareness of our nation’s affordable housing crisis has been raised significantly. And as awareness has risen, the crisis is often listed as a top concern of voters. So state and local officials are coming up with ways to address this in most major markets—from tax abatements and density bonuses to low-cost loans and bond issuances. So, as a result of this political momentum, we are seeing many shovel-ready affordable development deals receive additional resources from state and local agencies to keep the deals moving forward.
Affordability and income restrictions are set to expire for more than 300,000 federally assisted rental homes by the end of 2025. How will this impact the sector?
Wiggins: This would put additional pressure on tenants and their finances and would make it more difficult to find safe and decent housing at affordable price points. The good news is that there are programs in many cities and within the agencies that encourage owners to maintain affordability.
Let’s discuss financing affordable housing, which is a complex and layered process that often discourages developers. How do rising interest rates add to this issue?
Wiggins: The pressure of interest rates on affordable transactions is certainly of concern. Capital sources like the GSEs and FHA will maintain stability in the market. Their mission is to provide affordable housing, and they are very focused on these transactions. Affordable housing stakeholders need to readjust and digest the recent increase in interest rates. However, we are not in unchartered territory as interest rates still remain low compared to the long-term historical average. PGIM Real Estate has been financing affordable projects for over 20 years and while the industry will face challenges, we will continue to get transactions done and finance affordable housing going forward.
READ ALSO: Why Affordable Housing Production Lags Demand
What solutions are there to help the financing flow for affordable housing developments?
Wiggins: While interest rates are increasing, Fannie and Freddie still offer a strong product suite to get transactions done. For new tax credits, there are products that offer high leverage (90 percent) and low debt service coverage (1.15x) executions. On preservation transactions, leverage can go up to 80 percent/1.20x. The agencies are thinking creatively about amortization terms. On the FHA side, DSC can go down to 1.11x with up to 90 percent LTV, depending on affordability. FHA also offers the lowest rates across the multifamily spectrum.
Given the stormy economic forecast, how will GSE’s approach deal differently in the year ahead?
Wiggins: With affordability at the foundation of each agency’s mission statement, GSEs will continue to be hyper-focused on mission-driven—less than 80 percent AMI—production and affordability in the year ahead. It is their charge to provide stability during the volatility we’ve been seeing in recent months and going forward in the rising interest rate environment. I anticipate that FHFA, the GSEs, FHA and lenders will work closely to think creatively about new products and deal terms so that affordable transactions continue to be financed.
What can you tell us about agency lending in 2022 in terms of volume?
Wiggins: Despite early 2022 headwinds due to competition in the multifamily financing market, 2022 volumes will be strong for the agencies and lenders. While early 2022 was all about the debt funds, the second half of 2022—particularly late summer forward—is all about the agencies providing stability in a volatile marketplace.
How do you expect agency lending to evolve in the following 12 months in terms of demand?
Wiggins: We expect agency lending to continue to be strong for the next 12 months, although there will be headwinds as we navigate where rates go, as well as the rightsizing of cap rates and resulting pressure on valuations.
Name three things borrowers should keep in mind as we move into 2023.
Wiggins: Borrowers will need to keep in mind cap rates and their impact on valuations, interest rates and SOFR, as well as the economic pressures tenants are facing.