With high inflation eating away at personal savings, the number of low-income seniors is growing and LIHTC development struggles to keep up.
By Jeff Shaw
Today’s high inflationary environment is tough on everyone, but persons of limited financial means are getting hit the hardest. Most affordable seniors housing properties are fully occupied with a long waiting list, signaling that there is a strong need for the product.
But the myriad issues facing the commercial real estate industry — especially rising construction costs — have an outsized impact on affordable housing development due to the sector’s already paper-thin margins.
David Block, director of development for affordable developer Evergreen Real Estate Group, says that construction costs have increased between 30 and 80 percent since 2021, and funding for projects has not kept up with the increase.
“Beginning in late 2021 and accelerating throughout 2022, we began to see a delayed reaction to COVID. There had been a build-up of projects that had been delayed, so construction costs started going up almost exponentially,” says Block. “The rise in interest rates made that even more challenging. Buildings that used to cost $300,000 per unit to construct now often cost $600,000 or more.”
Meanwhile, the income among seniors has not increased to keep pace with inflation, resulting in a growing number of low-income seniors.
“Fixed incomes have generally not grown as substantially as inflation, and many more seniors have found themselves hard-pressed to make ends meet as rental housing remains expensive,” says Alex Loo, director at Hudson Realty Capital.
“Also, much of the existing housing infrastructure does not allow for effective aging in place — like narrow door frames (problematic for people with walkers), steps/stairs and the like, prompting concerns about potential for injuries.”
Despite those headwinds, affordable developers and capital providers say the stock of affordable seniors housing is noticeably on the rise.
Meet the growing need
A lot of this rise in development is due to state and local governments taking action. California has famously made growing affordable housing a cornerstone of many new state laws. As a result, permits for low-income and very-low-income units nearly doubled to 20,245 between 2018 and 2021, reports The Mercury News.
Al Fernandez, president of ANF Group, reports that Florida has similarly sought ways to make sure new affordable seniors housing is being built in the state.
“There are many new incentives being provided to developers on a local level encouraging new/repurposed construction to serve the needs of low-income seniors. Mixed-rate communities, public-private partnerships and building tax incentives have catapulted the recent increase of these affordable seniors housing developments,” says Fernandez.
“The State of Florida regulations make affordable seniors housing exempt from most real estate taxes and some impact fees, therefore helping the overall financial feasibility of the developments,” adds Matthew Rieger, president and CEO of affordable housing developer Housing Trust Group.
Harborlight Homes owns and manages Harborlight House in Beverly, Massachusetts, where nursing home-eligible seniors can get access to services in affordable housing instead, reducing the strain on the skilled nursing system.
“In our experience in Massachusetts, it has gotten a little easier in very recent years during and post-COVID,” says Andrew DeFranza, executive director of Harborlight Homes. “The effectiveness of affordable seniors housing with services, leading to elder health and safety, became acutely evident. That said, LIHTC is still fixed at a federal level, constraining production.”
What’s more, states are recognizing that a larger percentage of affordable housing funds need to be moved to properties specifically for seniors, according to Joseph Ouellette, chief operating officer at affordable housing developer Standard Communities.
“For years, many state agencies have prioritized allocating their limited resources toward affordable housing for families. That, in conjunction with our aging population and growing income inequality, has fueled a growing need for more affordable seniors housing. Overall, state and local agencies need dramatically more resources to adequately address the growing need for both seniors and family affordable housing.”
On the federal level, recent administrations have helped pave the way for more affordable seniors housing.
President Joe Biden’s Inflation Reduction Act included billions of dollars in funding through direct spending and tax credits that can be used to preserve and retrofit affordable housing, reduce energy costs and increase community resilience.
The LIHTC is designed to subsidize either 30 percent or 70 percent of the low-income unit costs in a project. The 30 percent subsidy, which is known as the so-called automatic 4 percent tax credit, covers new construction that uses additional subsidies or the acquisition cost of existing buildings, according to industry consultant Novogradac. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any additional federal subsidies.
The Trump administration permanently set a minimum of 4 percent for LIHTCs. Although the name of 4 percent LIHTCs may imply that the credits were always at 4 percent, it was actually a floating rate that usually was around 3.2 percent, according to Block.
“Basically, that meant that for every project using those tax credits, the credits were suddenly worth 30 percent more. That was a huge change to the industry. That big federal policy change turbocharged much of our work over the last five or six years.”
Even more value can be unlocked when multiple government agencies work hand in hand with developers to build the best project possible for the people, adds Block. Evergreen, for example, built two affordable seniors housing projects in metro Chicago that were constructed alongside new public libraries.
“That used a creative program that stretches tax dollars pretty far to help provide not only affordable housing for seniors, but also a needed community amenity that would’ve been difficult to build any other way. The whole is greater than the sum of its parts.”
Evergreen is based in Illinois, which boasts the Supportive Living program that allows seniors housing communities to receive reimbursement for assisted living rather than only skilled nursing. Block notes that a program such as that needs to be rolled out on a federal level, rather than leaving it to individual states. “There is not a strong, consistent, national program for building assisted living for low-income seniors.”
“In every major market around the country, there’s plenty of assisted living for people willing to pay,” says Block. “But if you don’t have those financial resources, you’re either stuck living in independent living beyond the point that is really good for you, or, in many cases you need to go into a nursing home. That’s a real housing gap in the country that not many people are grappling with.”
Another governmental requirement is helping push affordable seniors housing development. Many state and local municipalities are pushing some affordable housing element into larger developments, often requiring some percentage of new apartment units be affordable, leading to mixed-income developments.
“Local governments are forcing the issue with inclusionary zoning ordinances requiring mixed-income units in order to receive subsidies and entitlements,” says Baye Adofo-Wilson, CEO of BAW Development. “You will probably see more of this as more projects are going to need subsidies in this market of inflation and higher interest rates.”
But this isn’t necessarily a case of developers only including affordable elements because they’re forced to, according to Kyle Shoemaker, managing director of Affordable Housing Investment Brokerage (AHIB). This type of development has been largely successful, so it is increasing in popularity, he says.
“Government requirements certainly contribute to this growing trend of mixed-use property development, but I believe there is also a natural growth happening as developers observe what works. Mixed-income properties have proven to be positive contributions to communities.”
Perhaps more importantly, adds Block, is that developers have seen what doesn’t work. With so much demand and so little supply, it could be tempting to build the cheapest, lowest-quality affordable housing possible, knowing that it will likely fill up.
But that attitude only leads to short-lived, unloved properties destined for the wrecking ball.
“That’s an old-fashioned attitude from the ‘30s and ‘40s that gave us public housing that ended up being demolished — properties that we built to maximize units at the expense of quality construction, design, safety and security. When you fail to deliver on those elements, that product won’t stand the test of time.”
Mixed-income developments are welcome, according to Block, because the entire building — and its operations — must meet the standards of the market-rate renters.
“Don’t you want to maximize production? Why wouldn’t you build 100 percent affordable, if you can? Well, if there are market-rate units in there, it tends to elevate the management standard of the entire property,” says Block. “If the whole property needs to live up to a standard of people who can live wherever they like, it’s got to be compelling in order to be successful.”
Fernandez of ANF Group similarly applauds the mixed-income wave, as well as another trend he calls “progressive living.” That occurs when independent living, assisted living and skilled nursing are combined within a development to allow residents to age in place.
“We may also continue to see more public-private partnerships as local cities and counties continue to find creative solutions to address this dire need for seniors housing that those on a fixed income can afford.”
Value-add acquisitions can also help improve aging, substandard affordable housing. Even simple changes to programming can greatly increase the value of an affordable community, says Ouellette of Standard Communities.
“At most of our communities, we offer support and resources designed to enrich our residents’ lives, including access to wellness programs and special events, provided at no additional cost. We recently acquired two senior properties in Chicago and are in the process of adding amenities that the residents are really excited about like a walking park, a pickleball court and a fitness center.”
And just like market-rate and luxury seniors housing, affordable seniors housing will continue to evolve, according to Josh Cohen, president of Beacon Communities Development.
“The economic disruption of COVID demonstrated the critical importance of housing stability. The evolution of affordable seniors housing will see a continued emphasis on these issues: aging in place, resident services, access to healthcare services and housing stability.”
It will never be all sunny skies and no clouds for affordable seniors housing developers. The product is difficult to build, and the challenges aren’t going away anytime soon.
That said, like most in the seniors housing sector, affordable developers are on a mission.
“A developer needs expertise in this area to have a chance at success. Even with expertise, there is not enough funding available to meet the need,” says Shoemaker of AHIB.
“But I am optimistic that there will be more options for affordable seniors housing. The broader real estate industry has become more aware of the crisis of affordability in housing, leading to more great minds working on the problem than ever.”