Why SFR+? Why Now?
US LMI Rental Housing Overview
With respect specifically to the supply-demand dynamic for families looking to rent affordably, the U.S. is experiencing a massive and well documented affordable housing crisis stemming in large part from (i) the aging of affordable housing properties and (ii) the inability to economically build replacement housing which can be rented affordably to LMI households. As a result, as per the National Housing Trust, Inc., “For every new affordable apartment created, two are lost due to deterioration, abandonment or conversion to more expensive housing.” Meanwhile demand for affordable housing continues to grow as income disparity has accelerated over the past few decades. As a result of the shortage of supply and the strength of demand, Allagash expects that the operating cashflows generated by residential rental properties that are affordable to LMI households should be robust, cyclically insulated, and highly price inelastic – a recipe that, Allagash believes, should generate stable returns with a significantly limited risk profile. Additionally, the non-cyclical nature of the returns generated by the Partnership’s Investment Properties may serve as a particularly effective inflation hedge for investors.
Captive Renters
LMI household rental demand has increased because working-class families without a previously purchased family home are now captive renters who cannot save enough money to buy a home.
According to the Federal Reserve Board, U.S. adults under the age of 45 possess median savings of less than $5,000 and median debt of almost $10,000. As a result, saving for the down payment on a home has become unfeasible creating a large population of captive renters.
Demand is Increasing
Income inequality, home prices, and rental demand by LMI households have risen simultaneously over the last 25-50 years.
Over 50% of households earning below median income rent, versus less than 20% of households making above median income. Allagash expects that as income disparities increase, demand for LMI SFR+ unit rental will also increase.
Supply is Shrinking
The combination of building cost inflation, developer’s equity return requirements, and affordable rent rates being capped by relatively stagnant working-class incomes have effectively extinguished capital allocation to new development of unsubsidized rental housing that affordably serves LMI households.
As LMI housing development has disappeared, aging affordable housing supply has been demolished and replaced by housing serving renters capable of paying higher rents.
Result: LMI Housing Crisis
As LMI demand has risen and affordable supply has fallen, an affordable housing crisis has arisen.
The “Affordability Gap,” paying rent that is over 50% of household income, now impacts over half of US renting households – and disproportionately affects LMI households thereby creating the LMI Housing Crisis.
Downturn Upside
Despite the supply-demand imbalance within the underlying fundamentals of LMI rental housing, organized institutional capital has not moved into this sector. As a result, per-unit pricing remains extremely low relative to other residential assets when using NOI yield as a measure. This low price basis combined in combination with LMI SFR+’s relatively stable income profile can provide a significant opportunity to boost returns through loan refinancing, when interest rates dip during economic downturns.
Inflation Hedge
- “CRE outperformed inflation, its own historical average, and other asset classes (including stocks, bonds, and gold) during most of the last seven periods of elevated inflation..” 1
- “Residential real estate leases… overwhelmingly short-term, primarily 12 months, [allow] for relatively rapid adjustments to new price levels. This is consistent across traditional apartment properties as well as alternative housing investments such as single-family rentals.”2
- “Housing demand is income and price inelastic.”3
- Source: McKinsey & Company: Our Insights, Luby Lupton, Palter, Vickery – 5/19/2023
- Source: TIAA/Nuveen: Real Estate as an Inflation Hedge, 2021 Q2
- Source: National Bureau of Economic Research: Albouy, Ehrlich, Liu– November 2016
- Source: Goldman Sachs Asset Management (8/26/2022) The New Macro Realities For Real Estate: How Inflation, Rates and Recession Present New Risks and Opportunities.
Geographically Diverse
The shortage of affordable LMI rental housing exists throughout the US. Allagash focuses on secondary markets in the Northeast, Midwest, Mid-Atlantic, and Southeast regions, where the perceive purchase pricing, rental demand, growth potential, and cost burden concentration to be particularly compelling.
Historically Resilient
- During the GFC, the housing property sector generally outperformed other CRE sectors as well as most other non-real estate asset classes.
- Within the housing sector, good quality properties affordably serving working-class populations significantly outperformed properties serving more affluent households.
- During the recent rent volatility during the recent Covid-driven volatility, the outperformance of Working-Class SFR+ properties seems to have been even more dramatic.
- Peak-to-Trough, working-class housing rents only dropped 9.1% versus 13.4% for affluent/luxury rents.
- Working-Class rents regained their previous peak in under 3 years while affluent/luxury rents took almost 5 years.
- By the end of 2012, working-class housing rents were about 7% above the previous peak, while affluent/luxury rents were only about 2% above their previous peak.
By addressing the affordable housing crisis in LMI communities, the Partnership can enhance housing stability, promote area resilience, and stimulate economic activity for members of these communities.
- In 2015, the U.N. published 17 Sustainable Development Goals (“SDGs”) with 169 targets and 1-3 indicators per target. The goals were intended to increase an individual’s human capabilities and “advance the means to a productive life.”
- The Partnership’s activities directly apply to UN SDG #11.1: “Ensure access for all to adequate, safe and affordable housing…” as well as indirectly addressing multiple other SDGs:
“We met with a small group of residents who shared their stories of how safe and affordable housing had improved their lives: stability in school for their children, a short commute to work, a safe place for a grandmother to care for her granddaughter. We spoke with a neighborhood store owner who told us how business had improved and crime had dropped in the years since the redevelopment project was completed.”1
Partnership Portfolio Limits Designed to Produce and Maintain Positive Social Impact1
(i) No more than 10% of the units may have a cost basis above $250,000.
(ii) At least 80% of the units shall be leased to Section 8 or other comparable subsidy-qualifying tenants or to tenants benefitting from rent control regulations or to unsubsidized tenants in unregulated units at annual rental rates at or below 30% of their respective AMI.
(iii) No more than 10% of units shall be rented to unsubsidized tenants at more than 30% of 120% of AMI.
1 Allagash believes that the Partnership’s social impact objectives are particularly complementary to its return and capital preservation objectives as (i) any income return that may be forgone as a result of the social impact objectives and limitations is likely to be more than recouped by the reduced term required by the Partnership to reach its exit point as a result of additional capital from socially-driven investment sources and (ii) presenting socially impactful investments to LMI communities can significantly increase community support and help reduce multiple downside risks for property ownership within LMI communities.
The Partnership seeks to effect social impact by providing a product to LMI households that is in extremely short supply.
- Source: Catherine Godschalk of Calvert Impact Capital from Dear Impact Investors: Consider Affordable Housing 4/24/2018
Effecting Social Impact