Developer Outlook

By Pamela Martineau
December 20, 2021 9 min read

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It’s 2022 and the COVID-19 pandemic looks likely to roll into a third year, bringing with it more uncertainty, but leaders in the affordable housing space say the new year still looks promising since the industry has already pivoted sharply due to the pandemic and will continue to do so. The new year also may bring significant changes in affordable housing tax credit programs and other financial incentives, which could bolster the industry across the board.

The gift of the pandemic—if there is one, say leaders—is that it has pushed the industry to greater resilience, forcing leaders to think even more creatively to meet the current challenges. And many believe affordable housing’s moment may have arrived due to increased public awareness of the need for such housing.

“The interest in affordable housing has never been higher, both from a need and from an investment standpoint,” says Paula Prahl, vice president for Dominium Development and Acquisitions, LLC. “That interest brings new ideas and players to the game. Both will drive change.”

Third Year of Pandemic
Affordable housing leaders switched up operations from top to bottom over the past two years to meet the challenges of a global pandemic. Residents needed to be kept safe, community spaces evolved into de facto testing and vaccination clinics, food banks opened at many sites, after-school programs and virtual classes were operated—masked—in many community rooms. These service challenges joined other pandemic-related difficulties, such as residents’ loss of jobs, industry labor shortages and supply chain issues.

In short, the pandemic upended operations and brought huge shifts to the industry, and those shifts will likely continue into 2022, leaders say.

“The COVID-19 challenges of 2020 and 2021 look to be continuing into 2022,” says Prahl. “While not nearly as challenging as feared in 2020, the relentless pandemic, with multiple variants, still affects operations across the board.”

Prahl says that from a development standpoint, Dominium has been able to continue at a “pre-pandemic pace, although there are timing challenges, especially in the approval processes at both the state and local levels. These have been manageable….”

She adds that on the property management side, “COVID’s effects were most felt through depressed rent collections, increased stress on residents and some challenges with the timing of rental assistance.”

“We viewed our role during the pandemic—keeping people safe in their homes—as critical and worked hard to achieve that. As the pandemic unwinds or transitions to an endemic, we expect to see more turnover in the tenant base, closer to normal levels. We also anticipate a wave of repairs that tenants deferred due to safety concerns,” Prahl says. “Overall, COVID’s effects on people’s lives—our residents, staff and community members—has been incalculable. And, of course, it’s an ongoing issue. Perhaps the most frustrating, stress-inducing part of COVID is the uncertainty surrounding it. Nobody knows when it will end.”

Patricia Belden, executive vice president of The Community Builders, Inc., says one of the biggest impacts of COVID has been on property management teams and those will continue in 2022.

“The labor shortage will also continue to affect the industry on the site level,” Belden adds. “We are focused more than ever on retaining employees with bonuses and career growth on all levels of the organization.”

Belden adds that on the corporate side, “we’ve done everything we can to encourage people to come back into the office three days a week…but that will depend on what is going on with the virus.”

“We are doing that because of the belief that collaboration is essential,” she says. “Video conferencing is great, but it doesn’t 100 percent replace face to face.”

Ken Lombard, president and CEO of BRIDGE Housing Corporation, says BRIDGE has already adopted huge changes to meet the challenges of the pandemic and he expects those changes to continue in 2022.

“From the start, the pandemic presented challenges to residents, and our staff teams will continue to coordinate support, such as helping residents access rental relief programs, and connecting them with food and other vital resources. Earlier in the year, there were bottlenecks to the flow of rent relief funds, but those have largely cleared up, paving the way for more normalized rent receivables in 2022,” says Lombard.

But there are some upcoming certainties on how the pandemic will continue to impact markets and work situations.

“Bigger picture, housing demand in certain markets could shift as companies and workers make decisions about office re-openings and remote/hybrid work situations,” he adds, “but the markets BRIDGE operates in have had a chronic undersupply of housing for decades, so demand for affordable housing will continue to be critical.”

Supply Chain Issues
Supply chain disruptions due to the pandemic also have put pressure on affordable housing developers and property managers, leaders say, and after two years, they expect those issues to continue. Prahl, of Dominium, says grappling with supply chain issues sometimes feels like playing “Russian roulette.”

“On the construction side, we’ve experienced supply and labor shortages, which have required some ingenuity to navigate, mainly in the form of preordering when we can and stockpiling some supplies,” says Prahl. “Sometimes it is a bit of “Russian roulette”—the appliance truck arrives holding 50 refrigerators when we ordered 25 whole kitchens. We have not had to change the launch dates of new projects and, for the most part, have been able to deliver new construction and rehabs on time.”

Lombard says he expects supply chain and labor issues to continue to impact BRIDGE’s work.

“Both are driving up time and costs, which could create additional delays as developers work to fill gaps,” he says.

Belden says that whenever there is a “great disruption” of any kind, such as the Great Recession in 2008-09 and tax reform in 2017, “there is a bit of catch-up afterwards.”

“Going into 2022, some of that catch-up has happened,” she says. “We are better prepared for and able to plan for the additional time it takes to get materials, for labor shortages in some areas and overall working through COVID necessitated protocols.”

Build Back Better Act and Other Proposed Changes in the Fiscal Landscape
Affordable housing developers are closely watching the fate of the Build Back Better Act, which contains proposed affordable housing financing changes—including increases in the amount of nine percent Low Income Housing Tax Credits (LIHTC) and tax-exempt housing bonds—that could significantly shift the financing landscape.

“If the act passes, that means more affordable housing will get built in areas that have been constrained by lack of tax credits, which includes all of BRIDGE’s footprint: California, Oregon and Washington,” says Lombard. “If it doesn’t pass, shovel-ready projects will be delayed as they wait for allocation. Also, if the amount of credits increases, pricing will likely decrease, at least initially. Lower pricing means higher returns to investors, so that may attract more non-CRA investors; however, Fannie and Freddie have been allowed to increase their investing in LIHTC, so that may help support pricing if their demand for credits is high.”

Prahl says, she sees a “historic level of support currently under discussion in Washington.”

“If passed, the Build Back Better Act would essentially double the amount of Private Activity Bonds to support four percent LIHTC developments—the key housing production tool in the country.”

Prahl says recent proposals by Sen. Ron Wyden (D-OR), to create two new federal tax credit programs also are intriguing.

“The Middle-Income Housing Tax Credit would help renters with incomes just above LIHTC income limits, and the Neighborhood Homes Tax Credit would encourage the building and rehabilitating of owner-occupied homes in distressed areas. Both Wyden’s proposals begin to link the subset of affordable housing to the broader housing market, which is crucial to fixing the housing system in America. Viewing housing as a spectrum, rather than as individual subsets, demands a more holistic approach to the problem. If we fix housing for the country, we’ll fix it for everybody.”

Belden calls the additional federal resources in both the American Rescue Act and Build Back Better a “game-changer” for affordable housing that will add supply to “address the affordable housing crisis across the country.”

Belden adds that she expects to see continued focus on permanent supportive housing to “find solutions for people who are currently or at risk of becoming homeless,” including through adaptive reuse.

“Our current pipeline includes more apartments targeted for extremely low-income renters than in the past, as well as residents earning 60 to 80 percent of area median income and above.”

The new LIHTC four percent floor is another change that has been in place for over a year and Lombard says it has been helpful for projects that had been underwritten prior to the floor, “but at this point, the market has normalized in relation to the floor.”

Prahl says the four percent floor is “increasing the supply of affordable rental homes, primarily because it makes what were marginal developments economically feasible.”

Developers also are eyeing interest rates, which many economists predict will rise to offset inflation.

“Much of the new construction of affordable housing using the four percent tax credit/bond program is possible because of the historically low interest rates,” Prahl adds. “If rates rise too much, fewer of these developments will work financially and that would naturally depress development of new units. We think they will have to rise significantly to totally change the current level of production, and with the recovery as tenuous as it is, we don’t see that large of an increase on the horizon.”

General Forecast for 2022: Positive
All told, the affordable housing leaders interviewed for this story see a favorable outlook for the industry in 2022, despite the uncertainties of the pandemic.

“I think we see the opportunity to do a lot of important work over the next one to three years,” says Belden. “There is a new public attention on the need for affordable housing across many, many cities, states and towns…For me and many of us, it is a time for us to push hard while we have the resources available to help alleviate the housing crisis.”

Prahl adds that the future looks strong, especially for those developers who keep their eyes on the prize – which is providing “good, stable homes and (supporting) strong communities.”

“It’s our hope that any new entrants (to the industry) take that same view,” Prahl adds. “It is what will sustain the program and sustain America’s families.”