Investing Where it Matters: Affordable ESG Investments

August 17, 2021

We are beginning to see a rise in Affordable housing investments across the industry as institutional investors lean in on ESG. Pairing social impact with the high demand for Affordable housing across the country, institutional investors are focusing where it matters.

Investing Responsibly

In recent years, there has been a growing focus on environmental and social impact in the commercial real estate industry. According to the 2020 BNP Paribas Asset Management (BNPP AM) Study, the COVID-19 crisis has highlighted the need for greater awareness of social considerations in investment decision making. Today, many investors are categorizing Affordable housing as an ESG (environmental, social, governance) investment given the social goodness it provides to renters while meeting their investment return objectives. Federal programs such as the Low-Income Housing Tax Credit (LIHTC) program, New Market Tax Credit program and the Qualified Opportunity Zone program have made it easier for institutional investors to evaluate Affordable housing investment opportunities in order to make “impact” investments in underserved neighborhoods.

Affordable Housing Hurdles and Opportunities

The COVID-19 pandemic impacted the housing market in unprecedented ways, including a shift in renter demographics as remote work options gave rise to the untethered apartment resident. As migration trends shifted from primary markets to secondary markets, we saw renter demand and rental rates increase significantly across the board. With housing costs continuing to outpace wage growth, there has never been a more important time to invest in Affordable housing.

It can be very difficult to develop Affordable housing. Some of the main challenges lie in the industry’s increasing construction costs, supply chain issues and labor shortages causing construction delays and financial gaps. We have heard developers having to secure construction contracts and purchase materials earlier than planned in order to lock in pricing to ensure they have the necessary materials to stay on schedule and complete projects. For investors on the LIHTC side, whereby most of the investors are banks, they’ve been challenged with meeting their Community Reinvestment Act (CRA) lending test requirements. As such, most bank investors in LIHTC on the equity side are doing so contingent upon being the construction lender on the project.

The CRA commitment continues to be the main driver for banks investing in LIHTC Affordable housing developments while return plays a key role in investing in Affordable housing among more economic driven investors like insurance companies. Fortunately, given the current low returns in the market for alternative investments, Affordable housing is providing attractive, competitive returns.

For bank investors, investments are largely dependent upon their CRA footprint – essentially where the banks take deposits and have physical branches. Like any real estate investment, institutional investors look to invest in properties where there is a strong market for the particular Affordable development. Low-income census tracts, such as qualified census tracts, and difficult to develop areas are often a target for Affordable housing as this is where the greatest need is and programs such as LIHTC provide additional financial incentives in such locations.

The Affordable housing crisis is quite pervasive, but recently we’re seeing larger groups such as Blackstone, Starwood and others beginning to focus more on Affordable housing, and it’s great to see these big players actively take part in responsible investing.

An Investment in Our Communities and Their Livelihood

With the current focus on social issues and equity disparity, such as income inequality and health disparities, we’re seeing more attention in this space. A person’s home is a significant social determinant of their health. According to the Office of Disease Prevention and Health Promotion, a person’s environment affects a wide range of health, functioning and quality-of-life outcomes. Access to quality Affordable housing options is essential for building healthy and strong communities.

Affordable housing investments not only provide residents with safe housing and improvements to their living conditions but also helps investors meet ESG goals. It is becoming increasingly important that ESG investments no longer act as standalone goals, but rather, are broadly adopted into future business planning decisions. We’re energized by the commercial real estate industry’s heightened awareness, focus and attention on doing the right thing and the continued impact we believe it will have on communities across the country.

Dori Nolan, SVP – National Client Services and Marge Novak, SVP – Capital Markets