Rental Affordability

With Congress back in session after its summer recess, lawmakers will consider several legislative proposals that could impact the multifamily industry.

These include the Choice in Affordable Housing Act, the YIMBY Act and the repeal of the CARES Act’s 30-day notice to vacate, also known as the Respect State Housing Laws Act, all three of which are still in play from last year.

Industry groups like the National Apartment Association and the National Multifamily Housing Council are focused on supporting policies that enable the industry to build more new housing — such as the YIMBY Act, which would require jurisdictions participating in the Community Block Grant program to outline their land use strategy. 

Also among the NAA’s current initiatives is building bipartisan support for the Choice in Affordable Housing Act, which would, if passed, create more incentives for private housing providers to participate in the Section 8 housing program. These include one-time payments for participation and a streamlined compliance system.

“By ensuring that inspections are streamlined, and that we're able to encourage more housing providers to be able to get pre-approved inspections, we can shorten the wait times for renters,” Nicole Upano, assistant vice president of housing policy and regulatory affairs at the NAA, told Multifamily Dive.

The NAA and NAHB also continue to oppose policies that implement rent control at any level, including efforts to federalize landlord and tenant requirements. “Those requirements are so specific to the market and the locality in which the housing provider operates,” Upano said.

Aligned with this priority, the NAA is supporting the passage of the Respect State Housing Laws Act, which would remove the 30-day notice to vacate requirement that remains in place from the CARES Act in 2020. 

All three bills have been reintroduced in the 118th Congress and are presently in committees.

Local legislation

A 59% increase in rents over the last 10 years, and in particular a surge of rent growth brought on by the aftermath of the COVID-19 pandemic, has led to a wave of rent control proposals at the state and local level across the country, according to Yardi Matrix.

The National Apartment Association is tracking more than 190 bills related to rent control and highlights Colorado, Massachusetts and Maryland as states of interest. These efforts, according to Yardi, have de-incentivized new construction in the areas in which they are enacted — such as St. Paul, Minnesota, in recent years — and led landlords to pull housing stock or defer repairs.

Potential rent regulation

In the beginning of the year, the Biden administration unveiled a series of housing-related federal government actions, including an information-gathering initiative about tenant screening and rent increase practices. This announcement included a blueprint for a potential Renters’ Bill of Rights, an outline around which the administration is basing its housing policy. 

Among the actions outlined in the document is a stakeholder outreach program to “identify the opportunities and challenges” of introducing policies to limit rent increases at properties with mortgages backed by Fannie Mae or Freddie Mac.

“That’s a great concern to us,” said Upano regarding this action. “For us, any form of rent regulation has very dire consequences, [and we] try to continue to educate folks about the perils of that policy.”

The NAA sees increased housing construction and reform of the Section 8 program as ways to improve affordability. 

“We want to make sure we're utilizing all the tools in the toolbox to help renters with their affordability challenges, take pressure off of rents and make sure that quality housing at all price points is being built,” said Upano.

This story is the fifth in a series of articles looking at how the rising cost of insurance is affecting apartment owners. Click here for part one, here for part two, here for part three and here for part four.

As rents have moderated, apartment owners have been hit with many cost increases over the last year. Property taxes have gone up. Utility and labor costs have jumped. And that doesn’t take into account the potential millions of extra dollars needed to pay debt service for floating-rate loans.

Add on insurance costs that have jumped more than 100% in some states, and owning an apartment could suddenly become unsustainable. 

“I have clients calling me saying they have to close up shop if insurance pricing continues on this road,” said Danielle Lombardo, chair of the Global Real Estate Practice at Kansas City, Missouri–based insurance brokerage firm Lockton. “They can't do business like this. They can't make deals pencil out and they can't pay debt service between insurance costs, variable rate debt and property taxes. There is just so much that's causing pain.”

With those compounding problems, some owners could be forced to hand back the keys to their properties to the bank. But, more likely, many will be forced to sell, even though that isn’t a simple solution. Insurance price hikes also make underwriting for transactions — and even new development — much more difficult. 

Forcing sales

Venkat Avasarala, founder of Dallas-based Stryker Properties, sold 3,100 units of mostly older properties in September 2021. Yet he’s still active at industry conferences and searching for new deals. 

Recently, he met a Class C owner in Houston who saw annual insurance rates jump from $800 a unit to $2,200. “It tripled,” he said. “Can I triple my rent? No. So that is why these properties go insolvent, and you are forced to give the keys back to the bank. Every little thing contributes.” 

But that may happen in only the most dire scenarios. In many cases, owners stretched thin by premium increases may have other options, even if they aren’t necessarily palatable. 

“I don't think you're going to see properties close down, but what I do think you're going to see is that we'll put more pressure on people to sell,” said Ric Campo, CEO of Houston-based apartment REIT Camden on the company’s recent earnings call. 

But other factors would also need to come into play to force an owner to sell. “I don't know if I would go so far as to say [insurance costs] would force sales, although you could see that scenario, particularly if rents soften,” said Jack Weir, president of Palm Beach Gardens, Florida-based Eastwind Development. “There is a lot of supply now that's coming onto the market from a multifamily standpoint.”

Tricky underwriting

Even if owners decide to sell their properties, transacting in a market with steep increases isn’t easy. Already, Swapnil Agarwal, the CEO and founder of Houston-based apartment owner Nitya Capital, has seen rising premiums kill deals because buyers have difficulty getting coverage.

“The insurance premiums will break a lot of deals because the buyer will probably underwrite a deal with a normal insurance price,” he said. “And when they start getting the actual costs, they'll back out. I've seen that happen a lot recently. People are underwriting $500, $600 or $700 [per door] in insurance, and the costs come back at $1,600 and the deal didn't happen.”

If deals do get done, buyers will get a discount to account for higher premiums. “The pricing will be reflective of what the cost is from an insurance perspective,” Campo said.

Brad Hill, chief investment officer for Memphis-based REIT MAA, said on the company’s Q1 earnings call that the firm could also see higher premiums cut into sales proceeds on new properties in Florida. 

“I do think that the insurance premiums are going to be a lot higher than the developers underwrote.”

Development deals die

Developers underwriting new deals right now have a different concern. With materials, labor and land costs remaining high and financing costs rising, it's already harder to make new development pencil out. 

Add in higher insurance costs and suddenly it's nearly impossible to make a deal work.

“We are hearing of further new developments in Florida that are not able to start in part because of very large insurance increases,” said Camden CFO Alex Jessett on the company’s recent earnings call.

Any development that stalls means less housing, which drives up prices for consumers. But when insurance increases kill affordable deals, they knock much-needed moderately priced housing out of the market. 

Over the last few years, Matthew A. Rieger, president and CEO of Coconut Grove, Florida–based affordable developer Housing Trust Group, saw 25%-per-year increases in property insurance. But he had been told to budget for 200% or 300% more this year.

“That alone makes affordable housing untenable,” Rieger said. “You can’t build it.”

Apartment executives are adapting to these cost pressures by taking steps to mitigate rising insurance expenses, like shopping for better deals, working with brokers and even self-insuring. Flexibility from lenders, including adopting different risk models, and government-led reforms could also help. But unless the industry can come up with adequate solutions to rising insurance costs, the housing affordability crisis may continue to intensify.

“A stressed insurance market, stubborn inflationary pressures and rising interest rates have disrupted transactions and negatively impacted valuations,” according to a recent National Multifamily Housing Council report looking at insurance issues. “This, in turn, harms the industry’s ability to attract the investments required to meet the nation’s housing needs and help address its housing affordability crisis.”

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Ellia Thompson is a partner in the Land Use and Zoning Practice with Venable LLP. Opinions are the author’s own.

On Oct. 11, Governor Newsom signed SB 4, the Affordable Housing on Faith Lands Act (also known as "Yes in God's Back Yard”), which promises to be one of the momentous state housing bills of 2023. SB 4 allows religious groups and nonprofit colleges to build affordable housing on their land “by right,” without requiring strict adherence to zoning standards.

According to a 2023 report by the Terner Center for Housing Innovation, faith-based organizations and nonprofit colleges own more than 170,000 acres statewide of under-utilized land that could be redeveloped for affordable housing. Of this potentially developable land, roughly 13% is located near high-quality transit.

However, looking at California’s urban areas, the percentage increases dramatically. In Los Angeles and Alameda counties, this number increases to 40%. In San Francisco, 98% of potential sites are located near transit.

FBOs have always faced significant challenges to developing their sites due to limited financial options, regulatory barriers and a lack of real estate development experience. SB 4 addresses these obstacles by removing the regulatory barriers and allowing FBOs and nonprofit colleges to partner with real estate developers to leverage their financial capital and construction experience and expertise. 

Building by right

Under the new law, 100% affordable housing projects located on land owned by FBOs and nonprofit colleges would go through a ministerial process, bypassing the California Environmental Quality Act and subjective local design standards. SB 4 would require that, notwithstanding any local zoning rules, an eligible housing development project would be “by right” on any land owned by an independent higher education or religious institution. 

To qualify, all units, exclusive of manager units, must be affordable to lower-income households, except that up to 20% of the units may be for moderate-income households, and 5% of the units may be for staff of the nonprofit college or religious institution. All affordable units must be deed-restricted for that purpose for 55 years for rental properties and 45 years for properties that can be owned.  

The project must also satisfy certain health and safety criteria, including that it cannot be located near industrial facilities.

Getting started

By making YIGBY applications ministerial, SB 4 aims to speed up project processing times and limits the options available to opponents who may want to challenge a project. With the threat of a CEQA lawsuit neutralized, developers will face less pressure to downsize or redesign affordable housing projects so as to mitigate typical “Not In My Back Yard” concerns about project size and scale.  

In short, SB 4 empowers FBOs and nonprofit colleges to build housing on their land without jumping through hoop after hoop of discretionary land use and environmental reviews and prevents CEQA and local political processes from being misused to obstruct much-needed affordable housing projects.

As Newsom has just signed SB 4, religious institutions and nonprofit colleges should begin planning for future development now. Importantly, YIGBY projects can only be built on land owned by the FBO or nonprofit college as of Jan. 1, 2024, so any pending purchases of land suitable for housing must be closed by that date.

Sarah Hoffman, an associate in the Environmental Practice at Venable LLP, contributed to this article.

ATLANTA — Over the last three years of the National Apartment Association and Appfolio’s annual survey of challenges facing the apartment industry, respondents have consistently cited operational efficiencies, maximizing revenue and profits and staffing and recruitment among their top three concerns.

However, the order has shifted this year. Concerns about staffing have fallen back, from 74% in 2021 to 42% in 2023, while worries over operational efficiencies have jumped 14% YOY to 76% this year.

Paula Munger, vice president of research at the NAA, attributed this shift to the impact of inflation and rising operating costs during a session at the association’s Apartmentalize conference in Atlanta last week. Indeed, 47% percent of survey participants cited inflation as an obstacle to maximizing revenue, and 37% named it as an efficiency challenge.

Munger and two panelists — Stacy Holden, industry principal at Appfolio, and Neil Cadman, president of the Cadman Group — discussed how property professionals can tackle these issues, as well as prepare for the challenges ahead.

Efficient operations

According to Holden, up to 40% of the day-to-day work of running an apartment property is considered busywork. Faced with a need to optimize costs, a number of respondents chose to automate what processes they could in order to reduce the time, effort and money needed to perform them. 

“[We are] working to automate more repetitive tasks, educating staff on our processes end to end and empowering the leadership team to make decisions,” said a survey respondent.

However, while there are a wide number of tech solutions and vendors that promise to solve for efficiency, Cadman cautioned that tech adoption may have the opposite effect if not handled carefully. 

"We have all of this tech, yet we're still mired in busywork,” Cadman said. “Technology has not made us better, it’s allowed us to put more work on our staff. [And] each time that we leverage something new it’s like we relearn the wheel again. We’re property managers ... We’re not tech people, and sometimes [learning] the tech gets so involved that it’s taking us away.”

Maximizing revenue

On top of rising costs, the apartment industry is also struggling to maintain occupancy and retain tenants. 

According to Cadman, filling a vacancy isn’t just generating revenue — it’s protecting it. “A vacancy is writing a check every day and tearing up that money and you will never get it back,” he said.

To protect that revenue, Cadman said, owners and operators must ensure theirs is “the best building on the block” — especially in high-inventory markets where tenants have more to choose from. “Be the company that returns the phone call, be the person that has more open houses,” he said.

It is vital for property managers to work with existing tenants to understand their needs. “We’re in a customer service industry, and it goes right to NOI,” Cadman said. “If you’re nice to people, they will feel important. These are peoples’ homes. When they call to tell you that something’s wrong, it’s in their home.”

Another important piece of the puzzle is the state of landlord and tenant advocacy at the national, state and local levels, and its corresponding effect on policy. Cadman points to Los Angeles — where the COVID-19-era eviction moratorium remained in place for three years, well after the end of the federal moratorium — as an example that directly impacts revenue.

“If that’s not advocacy for tenants, I don’t know what is,” Cadman said. “Our tenants are our lifeblood, they are our partners. If we as an industry don’t solve for affordability, it’s going to be solved for us.”

Dive Brief:

• The Federal Trade Commission has announced a new proposed rule to prohibit businesses from charging “junk fees,” which it defines as hidden or bogus fees that are not disclosed to consumers before they begin a purchase.
• The rule would require businesses, including multifamily providers, to disclose all fees in a transaction when quoting or advertising a price. This, according to the commission, would ensure customers know exactly how much they are paying, what they are paying for and whether they can get a lower price elsewhere.
• The FTC would be able to seek monetary penalties against businesses that do not comply with the rule and secure refunds for customers.

Dive Insight:

In response to the announcement, National Apartment Association CEO Bob Pinnegar said that the organization supports transparency and dialogue between multifamily providers and residents, but is not in favor of added regulations, which he said can limit the availability of affordable housing.

“Rental housing fees are disclosed in the lease and during the application and leasing process. It is incumbent on both parties to ensure they can uphold the terms of their contractual agreement,” Pinnegar said in a statement provided to Multifamily Dive.

Once a notice for comment on the new rule is published in the Federal Register, consumers will be able to submit feedback in writing or electronically for 60 days. 

California recently banned junk fees at the state level with legislation set to take effect on July 1, 2024. The effort to ban junk fees nationwide is one of a number of recent Biden administration actions that could impact the multifamily housing sector; others include gathering information on certain housing practices, such as tenant screening processes and rent increases, and the creation of a blueprint for a Renters’ Bill of Rights.

Earlier this year, Marcia L. Fudge, secretary of HUD, released an open letter urging housing providers and local governments to “adopt policies that promote fairness and transparency of fees faced by renters.” Her recommendations included:

• Eliminating or limiting application fees.
• Allowing a single fee to cover multiple applications on the same platform, or to cover applications at multiple properties owned or managed by the same provider.
• Eliminating duplicative, excessive and undisclosed fees, including administrative or processing fees.
• Identifying bottom-line costs for tenants in advertising, including move-in costs, monthly rent and fees.

At the time, Nicole Upano, assistant vice president of housing policy and regulatory affairs at NAA, defended the presence of fees during the renting process. "Rental application fees are a necessary part of doing business, helping cover the costs associated with responsible screening,” Upano said. “It is paramount that housing providers retain the ability to screen prospective residents and ensure the long-term viability of rental communities.”

Dive Brief:

• Columbia, Maryland-based nonprofit Enterprise Community Partners has announced the first properties participating in its Renter Wealth Creation Fund — an investment vehicle that provides residents of affordable housing with an ownership stake in their properties, according to a press release shared with Multifamily Dive. 
• Sheridan Ridge Townhomes and Willow Green Townhomes, both located just outside of Denver in Arvada, Colorado, are the first properties to participate in the fund. Lakewood, Colorado-based Archway Communities is the developer and operator of both sites.
• Using capital investments from national foundations, banks and individual investors, Sheridan Ridge and Willow Green residents will receive a cash back payment for their on-time monthly rent. Archway will also be able to execute on $1.7 million in renovations and preserve current rent rates and income restrictions.

Dive Insight:

One of the goals of the Renter Wealth Creation Fund is to provide an opportunity for lower- and moderate-income renters to build wealth through housing — something that historically has only been possible through homeownership, according to Enterprise.

In addition to reimbursements for on-time rent, long-term residents also have the opportunity to share in the property’s appreciation value when and if realized through a recapitalization or a sale. This will be open both to current and former residents.

“With the Renter Wealth Creation Fund, we hope to demonstrate that renters can and should have access to the wealth-building opportunities that have historically only been available to homeowners,” said Chris Herrmann, chief investment officer and fund manager of Enterprise's real estate equity business, in the release.

To Herrmann’s knowledge, the Renter Wealth Creation Fund is the first program of its kind. “Collectively, we expect that these three benefits will create a unique environment that helps residents thrive,” Herrmann told Multifamily Dive. “We hope that the Renter Wealth Creation Fund can serve as a model for impact investors nationwide.”

The fund’s capital investors can expect to receive a 4% return on their investment, while 80% of the proceeds of a recapitalization or sale will go to current or former residents, according to Herrmann. Some of the investors, including insurance company New York Life, have also chosen to support the program with grants.

Material benefits

Archway Communities, an affordable housing provider with nine properties in the Denver metro and Colorado Springs areas, chose to participate in this new fund in order to support the wellbeing of its residents, according to George Kelly, chief investment officer at Archway.

“Resident services and support are central to our work at Archway Communities,” Kelly said, “and this partnership with Enterprise Community Partners provides a new approach to fund these critical services and support our residents on their path to a more stable future.”

Enterprise is partnering with tech firm Stake to facilitate the cash-back program, which will also provide additional rewards if the money is saved through the end of the month. This offering was created based on focus group feedback during the fund’s design. The exact terms and amount of cash back will be set by Stake and will vary from property to property.

Sheridan Ridge and Willow Green were constructed in 2003 and 2005, respectively, and contain 125 apartments across 13 residential buildings total. Sheridan Ridge has one- to four-bedroom units affordable to residents earning 30% to 100% of area median income, while Willow Green has two- and three-bedroom units affordable to residents earning 30% to 60% AMI.

Renovations will include floor, roof and window repairs, upgraded security measures and improved drainage. The fund will also provide resident services, including financial education, support groups, youth programming and wellness activities.

Correction: This story has been updated to reflect that the fund's investors can expect a 4% return.