The Fed has hiked rates aggressively to cool down inflation, and while in theory this helps to slow down demand, it can also have the perverse effect of impairing supply. You see this phenomenon most clearly in housing, where higher rates have translated into a slower pace of new development, at a time when housing units are already seen to be in shortage.
One place that is trying to tackle this issue head on is Montgomery County, Maryland. They’ve adopted an innovative approach aimed at expanding production of affordable public housing even amid higher rates.
In a new episode of the Odd Lots podcast about Montgomery County’s affordable housing model, Zachary Marks, Chief Real Estate Officer at the Housing Opportunities Commission of Montgomery County and Paul Williams, the Executive Director for the Center for Public Enterprise discuss how what they are doing differs from other affordable housing models.
Typically, affordable housing that gets built in the United States is funded with either the Low Income Housing Tax Credit or Section 8 vouchers. Under LIHTC, housing developers in the US receive tax credits for agreeing to reserve a specific percentage of rent-restricted apartments for lower income households. Section 8 of the Housing Act of 1937 permits private landlords to receive payments of rental housing assistance on behalf of low income households in the US.
One theoretical approach to thinking about the housing affordability problem is to simply allow developers to build more homes and increase supply. Part of the problem though, again, is that in periods of higher rates this impulse diminishes, even if the demand is there. What’s more even when more housing is built, developers may be inclined to build more high end units.
“Typically the LIHTC, which is the standard way in which affordable housing is produced in this country at this point, will force a building [to be] somewhere between 80 percent and 100% affordable,” says Marks. Montgomery County has been a pioneer in thinking about what the government can do to produce more affordable housing and their solution is to use LIHTC and Section 8 vouchers while also self-financing and building mixed income properties. Montgomery County’s mixed income housing model isn’t widely practiced yet but creates an opportunity to produce extra housing availability while still supplying private income households.
In an HOC mixed income building, a majority of units are priced at market rate and some are portioned off for affordable housing. “It would basically form a condominium for the market rate units and a condominium for the low income housing tax credit units, effectively executing two transactions, even though they're effectively in the same building,” says Marks. This innovative model allowed HOC to deliver affordability in what are “otherwise class A+ majority market rate socioeconomically mixed buildings.”
A distinct aspects of these moderately priced dwelling units is that you might not even realize that a building is part of the affordable housing model. Generally, affordable housing units and properties don’t come with amenities like gyms, courtyards, rooftops and swimming pools, however, the buildings in Montgomery County run and operate like luxury condominiums. Marks and Williams explain how the HOC has historically approached affordable housing this way and view it as a “financing solution, not construction solution.” Since a majority of the units in their buildings go for market rate and only a portion are MPDUs, they strive to produce market competitive projects.
Marks says they often hear from residents that they “didn't even know this was owned by HOC” and both residents of their rent restricted units and market rate units share the same sentiment. The HOC is continuously improving on their affordable housing model and is currently using Montgomery County’s Housing Production Fund to “set some higher standards in the market around energy efficiency and even scale.”
The Montgomery County Council approved an annual appropriation to finance $100 million in bonds to produce 6,000 new housing units. These luxury buildings that house MPDUs tackle two problems at once because the government agency is able to produce more affordable housing, especially through the HPF, and developers are happy as their Class A buildings fill up with private income renters.
One of the biggest risks from a construction perspective is the permanent operating phase of a building. Once construction is done, developers have to fill their buildings with tenants and there’s always a risk of wondering how long it will take to lease it out. “When you do a project like this, if you have a third of your building at these affordable levels, HOC has a line out the door of thousands of households who are waiting for affordable housing so the lease up for affordable units is like the snap of a finger compared to market rate units,” says Williams. The amount of risk reduction that comes with market rate, luxury apartment buildings that offer MPDUs keeps both the government side and private equity side’s supply growing and Montgomery County, Maryland may have found a way to do just that.