September 2022

Bob Simpson, President, Multifamily Impact Council



As we continue to build out a framework of impact investing principles and reporting guidelines for the Multifamily Industry, affordability and how we define it is a critical piece of the puzzle. This is especially true for property owners and investors who serve low- and moderate-income households who are housing cost-burdened but stuck in the missing middle: Either they do not qualify for housing assistance or are denied support due to lack of funding.


Because this is such a critical issue for the industry, we are very excited to share with you an interview with Mark Roberts and Dr. Jake Wegmann.


Mark is the director of research at the Folsom Institute for Real Estate at Southern Methodist University. And Jake is a professor at the University of Texas at Austin’s Community & Regional Planning Program. They released a report this month about the viability of Moderate-Income Rental Housing (MIRH) as an asset class.


You might know MIRH as “workforce housing.” However, mark and Jake think it’s time our industry adopts a better term for rental housing that’s affordable for moderate-income households. Mark explains why in the interview below.


I agree with Mark and Jake that Moderate Income Rental Housing is a far more accurate term, and I think that we can all agree that, regardless of what we call it, the industry simply needs more of it. 


Be sure to read their report. And if you haven’t yet done so, please take a moment to complete our online survey. We’re gathering feedback on our principles, your work, and more. We are nearing completion of our initial work to develop an impact framework, and your input is incredibly valuable in that process.


Thank you for reading and sharing this newsletter.


Till next time,

Bob Simpson

President, Multifamily Impact Council

Q&A: Mark Roberts and Dr. Jake Wegmann

Jake Wegmann joined the planning faculty at the University of Texas at Austin in 2014. His research lies at the intersection of housing unaffordability, land use regulation, and housing production with a focus on fast-growing markets. He received his doctorate from the University of California, Berkeley.

Mark Roberts is the Director of Research at SMU’s Folsom Institute for Real Estate and also Crow Holdings Capital. He previously served in roles at the Real Estate Center at the University of Texas, DWS and Invesco. He received his post-graduate degree in real estate from the Massachusetts Institute of Technology.

Mark and Jake are the authors of Moderate-Rental Income Housing: A Viable ESG Investment, a new report out this month. 

Let’s start with a little background. What led to you and your co-author, Jake Wegmann, compiling this report?

There are a couple of items which led us to this research. First, Affordable Central Texas and the Wells Fargo Foundation came to us and had identified an affordability issue that's going on in the U.S. Affordable Central Texas is trying to address affordable housing issues in central Texas. Likewise, the SMU Folsom Institute for Real Estate is also addressing impact investing and affordable housing. The question we addressed was whether such investments in moderate income housing produced competitive returns and risk relative to the broader apartment market.

We started this research a year ago, and the affordability issues in the U.S. have only gotten worse in certain markets as the Fed raised interest rates. In response to the Fed’s actions, homebuilders quickly cut back on new construction. They're still delivering the units that were in the ground but are delaying plans to build more units.

The Fed is trying to rein in inflation by raising interest rates and is focused on reducing demand. This overlooks the fact that in regard to housing, we really have a supply-side issue – we don't have the amount of housing needed in certain markets relative to the demand. The evidence can be seen by the increase in shelter costs.

Yes, 3% mortgage rates during COVID-19 certainly lifted house prices and the Fed hopes to curb inflation by raising those interest rates and mortgage rates. However, this approach overlooks the migration trends which occurred as a result of COVID-19. Florida, Texas, Arizona, Tennessee and Georgia all saw more people move into their state while California, New York, New Jersey and Illinois saw outmigration. In turn, in those states where there was an influx of migration, home prices are much higher relative to incomes because the supply of available housing was low relative to the influx of households.

In those states which experienced outmigration, home prices are lower relative to incomes. What we really have is a supply-side issue – not enough of it in those states which saw an influx of migration. It’s going to take some time to deliver that supply. However, interest rates are a blunt policy tool, and it may impact home values in both the in-migration and out-migration markets without necessarily addressing housing affordability. 

With the Federal Reserve raising interest rates, the monthly cost of a median-priced home has increased by about 50 percent. And that's feeding into owners’ equivalent rent, which makes up 25 to 30 percent of the Consumer Price Index. So, higher interest rates are making it more challenging to address the affordable housing issues in the U.S. 

And what question are you trying to answer with this report? 

The main question we tried to address was, what are the returns and risk on properties which provide a rent level that a moderate-income household can afford? The market may perceive that those buildings which cater to those renters may generally have lower returns and higher risk associated with them. 

For the time period we studied (2005-2021), the research demonstrates that buildings which have a rent level which someone who is earning a moderate income can afford actually produced higher returns with lower risk than the broader population of apartments within the index we used (NCREIF Property Apartment Index). It was a really encouraging finding. It’s worth noting that the buildings we analyzed were not rent-restricted, but rather offered units which were priced to moderate rent levels. 

We analyzed the data in many ways and the results were consistent across a number of scenarios. We analyzed the returns based on vintage years. We also analyzed the performance across a number of individual cities in addition to evaluating performance at a national level. Time and again, the results of each scenario demonstrated that buildings which have a rent level which a moderate-income household could afford produced higher returns with lower risk. So, it wasn't just a coincidence. 

You come up with a new term for this type of housing, Moderate-Income Rental Housing. Do you see that as a new asset class?

We decided to call it what it is – it’s housing for moderate-income households. If you go back and look at the history, people may tend to refer to it as workforce housing. But if you look at the history of workforce housing, that's a type of housing development where a company would provide housing for its employees. On the one hand, the employer is paying the employee a salary. On the other hand, the employer is recouping some of that salary based on what they charged the employee for housing.

In some ways it created challenges for the employees. In addition, the vast majority of those renting other forms of lower-income housing, such as tax-credit financed housing, are employed. This means “workforce” housing isn’t a distinguish characteristic. For that matter, one could argue all apartments are “workforce housing” because the vast majority of tenants are employed. Thus, there is a stigma with this term, and it does not help to address the issue.

At times we may unintentionally create certain terms and it can cause confusion. What we’re saying is that there is a segment of the population that is making 60-120 percent of median family income. Those within this income segment may not qualify for federal programs, such as low-income housing tax credits. Then there is a segment of the population who earns less than 60 percent of median family income who qualifies for government programs.

Finally, there is a segment of the market which includes market rate housing and may include the “so-called” luxury segment. The luxury segment includes buildings which have a rent level which someone earning more than median family income can afford. 

Thus, to apply labels such as “workforce housing” doesn’t communicate effectively the type of housing we're addressing. It’s not housing for the workforce per se, it’s about investing in and addressing housing needs in the U.S. Furthermore, how do we address those needs as developers, investors and as a society? It really starts with rents relative to income levels. That gets to the heart of the matter as opposed to focusing on labels.

How do you want investors to think about Moderate-Income Rental Housing?

If they read the report, what they will find is that in nominal terms, the returns are higher, for those types of buildings that have a rent level that someone making 80 percent or less of median family income can afford. They had higher nominal returns than all the rest of the apartments. At the same time, though, there is this thing called a test of significance – were the returns significantly different from one another? In other words, were the more affordable buildings from a different population of buildings? The answer was no. 

On the one hand, we thought the returns were going to be significantly different, but it was actually a positive outcome that they were not significantly different. If the returns were significantly different from each other, then an investor such as a pension plan or insurance company might need to consider this segment of apartment market as a separate asset class. In turn, they might have to go through a process to qualify this segment of the market for their portfolio which can create some barriers to investing.

Since there wasn’t a significant difference then the barriers to invest are presumably lower. It also helps raise the question, if it’s not significantly different and it has provided good performance, why not consider investing in more of it? In other words, it’s a segment of the market which is already in their toolkit of investment options to consider.

How do you want investors to think about Moderate-Income Rental Housing?

Some may consider moderate income rental housing as a segment housing which addresses the needs of those earning 60 to 120 percent of area median family income. The industry could debate whether this is the right range. Why 120 percent? Why not 100 percent or something different? The real question is overlaying the distribution of housing available against the distribution of income and asking the question, are the distributions aligned? Do we have a mismatch and where is that mismatch? 

If we’re going to improve on our ability to deliver high-quality housing at an affordable rent, investors and developers alike will want to better understand those gaps and whether they are addressing the most appropriate segment of the market. Doing so can create a win-win situation. For developers and investors, they can target an underserved segment where demand is greater than supply. For tenants, it could make for an easier choice if the rent is aligned with their income. Thus, both the investors and the tenants can win. 

Unfortunately, the information needed to undertake such an analysis is not so easy to access. In addition to analyzing the supply and demand gaps, there’s also a need to evaluate the operating characteristics of the various housing segments. There are many industry sources available and by combining databases, one can get to the answers. That said, the first step is identifying the questions the industry needs to ask and setting standards to help answer those questions. If the return characteristics aren’t enough to motivate the industry, there is the additional benefit of positive ESG outcomes by undertaking such an initiative and addressing housing affordability from a grass roots effort.

We propose this is addressed from an industry level, whether it’s the Multifamily Impact Council, the National Multi-Family Housing Council, the National Council of Real Estate Investment Fiduciaries (NCREIF) and the Pension Real Estate Association (PREA). These organizations are raising questions on how to address housing. There are also other organizations that are heavily focused on it too. So having more of a grassroots effort, with a goal of making it simple, believable and, easy to implement, would be the key. 

I would be very cautious as to how one defines those standards. If we overreach, then we risk making it more confusing to address the needs. Given the lack of housing affordability generally, we simply need more high-quality housing offered at a rent level which moderate-income households can afford. Suffice to say, with the Federal Reserve increasing interest rates and financing costs, it’s becoming more challenging to address housing affordability in the U.S. 

Industry News and Updates

Have news to share? Send your links to nick_barron@multifamilyimpactcouncil.org and we'll do our best to spread the word in this newsletter and on our LinkedIn page.

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