Affordable Housing Preservation Remains a Strong Social Impact Investment, Policy Paper Concludes

As the United States struggles with a severe housing crisis, investing in affordable housing preservation offers stable, risk-adjusted returns that can produce positive social outcomes.

That’s the overarching message of a report released in August titled, “Insights: The Time is Right for Investing in Affordable Housing Preservation.” Authored by Thomas Paramore and Emily Greenwalt, of Boston Financial, the policy paper outlines some of the benefits and challenges of investing in affordable housing preservation. The report is offered for informational purposes only and is not intended as investment advice.

Demand for Affordable Housing Outstrips Supply
Investing in affordable housing preservation can be a stable investment in today’s housing market where “demand for affordable housing far outstrips supply,” the paper states.

“Investing in affordable housing addresses an important social need while delivering compelling investment benefits,” the policy paper states. “In our opinion, preservation investments offer attractive, risk-adjusted returns as an asset class that can perform well in market periods ranging from periods of growth to economic downturns.”

Using the definition of affordability where households spend only 30 percent of their income on housing, only 7.1 million units are available for extremely low-income households across the country, leaving a shortage of 3.9 million units. That statistic comes from a March 2024 study by the National Low Income Housing Coalition (NLIHC), “The Gap: A Shortage of Affordable Homes.”

Preserving existing affordable housing is a critical component of maintaining a viable stock of affordable units. Affordable housing preservation involves investing in existing affordable rental units at risk of significant rent increases or of being converted into market-rate housing. Preservation can include an investment that stipulates limited rental increases on current tenants and modest rent increases on units that turnover. Some investments place long-term affordability restrictions on units.

The report states that the shortage of affordable housing impacts nearly all states and continues to rise. It was exacerbated by the pandemic and further worsened when pandemic-related rent subsidies lapsed. Higher interest rates have also precluded the construction of more units in some cases.

Additionally, in the next five years, 342,809 units are scheduled to lose rent and income restrictions as properties come to the end of their federally mandated affordability periods, according to the NLIHC report.

“The investment case for preservation is compelling in today’s market,” the Boston Financial policy paper states. “Demand for affordable housing far outstrips supply, and demand often increases in recessionary environments as incomes fall and renters find themselves priced out of higher-class, market-rate housing. As the U.S. continues to face economic headwinds, we believe preservation investing is poised to perform well relative to the traditional commercial real estate asset classes, while also generating positive social impact…”

Benefits of Investing in Affordable Housing Preservation
Preserving affordable housing often carries fewer investment risks than constructing new affordable housing. There is no new construction involved in affordability preservation and therefore none of the associated risks that come with such ventures. Generally, the properties are already stable ventures with minimal lease-up risk. Occupancy rates also tend to be more stable and have remained higher than market-rate units during the past three economic downturns, the report states.

“An additional benefit to affordable housing is government-secured rent subsidies, such as Section 8, which may support some or all units at affordable properties,” the policy paper states. “In these cases, the government pays the rent for subsidized units directly to the property owner, eliminating the collection risk that can be found in conventional market-rate apartments.”

The Boston Financial policy paper also cites affordable housing as providing an “important diversification within a broader real estate portfolio.”

“In contrast to most other real estate sectors, demand for affordable housing can rise with inflation, which reduces renters’ buying power and forces some to seek lower-rent apartments,” the paper continues. “Affordable housing’s inflation-hedging and recession-resilient qualities help to offset corresponding weakness in other real estate sectors.”

Building Relationships is Key
The world of affordable housing is complex with a myriad of local, state and federal regulations. Wading through the complexity often requires strong relationships with local stakeholders and government agencies, the paper states. And these relationships need to be nurtured and “developed over extended periods of time,” the report states.

“The affordable housing market presents significant barriers to entry…,” reads the report. “Such barriers create challenges to new supply and underscore the importance of working with experienced managers who know the market and the major players involved.”

Those who choose to invest in affordable housing preservation would be well-advised to work with specialized investment managers with a long track record of success, the report continues.

“Affordable housing is so complex that it takes years to fully understand the regulatory landscape, overcome the high barriers to entry and develop the relationships needed for success,” the report reads. “Ideally, a manager will have been in the business for several decades.”

The cache of experts needed to successfully navigate the affordable preservation terrain must include expert property evaluators.

“In addition to evaluating strong opportunities, knowing what not to buy and when not to buy can also have a positive impact on performance,” the report continues. “The best managers have the expertise and pipeline depth to evaluate affordable housing properties critically and make sound investment decisions accordingly,” states the report. Strict underwriting policies and procedures are also key.

Impact Investing
Investing in affordable housing preservation can be highly appealing to investors who seek to make a social impact with their investments.

“These investors review opportunities more holistically and assess the value of their holdings not simply in financial terms, but also for the contributions they can make to the communities where investments are located,” the report highlights. “Studies indicate that housing security is a major determinant in health outcomes, economic opportunity and educational attainment for members of a community.”

According to research by the U.S. Department of Housing and Urban Development, people with secure housing reap positive effects both mentally and physically. Housing stability reduces exposure to domestic violence, depression and food insecurity.