Three Kentucky Developers Discuss Issues at Home and Beyond 

Most National Council of Housing Market Analysts (NCHMA) annual meetings begin with a roundtable from developers, to help ground the conference in the ‘on the ground’ work that the market analysis industry exists to support. The 2024 conference—held this past September in Louisville, KY—was no exception, and began with National Housing & Rehabilitation Association President and CEO Peter Bell leading a discussion with three prolific developers, all with ties to the Bluegrass State, to dig into current issues and trends in their work.

Though there is still some residual anxiety from the deep disruptions and uncertainties of the COVID-19 pandemic and its aftershocks, there was a general sense of optimism from the developers that the industry is beginning to stabilize. Below are some of the common threads of that discussion.

Workforce Housing and Early Forays into the Average Income Test
“The new keyword for affordable housing is workforce housing,” said Tammy Stansbury, vice president of development at Woda Cooper Companies, Inc.

Though this is certainly a critical frontier in affordable construction, Stansbury and the other panelists also expressed some trepidation at jumping fully into workforce housing as a dependable source of revenue. “In a lot of states that we work in, there’s just not a whole lot of soft funds,” said Stansbury. “So, trying to fill that gap is becoming more and more difficult.” For example, Stansbury recounted one deal in Kentucky that simply couldn’t go through. “For one, Kentucky doesn’t allow tax abatements, and there is no PILOT program, and you need those types of funds in order to make those work.”

This is a relatively contemporary difficulty, said Nick Chitwood, executive vice president of capital markets for LDG Development. Just three years ago, Chitwood pointed out that LDG was able to make mixed-income workforce deals that were supported simply with “traditional equity. No tax credits or anything like that. The only reason they worked was a little bit of subsidy and some pilots to leverage the debt and make it work.”

Still, in Stansbury’s experience, many cities are desperate for family-oriented housing that will provide sustainability to new forms of industry. “When we go and meet with cities, the development groups there, all they talk about is bringing in new industries.” However, Stansbury said, when those new industries come in, “there’s no place for the people to live. And there’s a phrase that’s been going around Kentucky for a while: ‘Where do the jobs go to sleep at night?’”

Chitwood says that this kind of development works best for investors “that didn’t need crazy high returns and didn’t want to flip the money every two or three years. They just wanted to do a deal and hold.” It takes work to convince investors of this kind of construction, but Chitwood says it is a key pathway to a healthy business strategy. “We’re trying to grow a portfolio, not build and flip assets.”

One pressure within the workforce housing world is to utilize recent income averaging guidance to allow for renters earning up to 80 percent of area median income (AMI) within Low Income Housing Tax Credit-supported units – a potentially appealing way to help construct affordable workforce housing. All three panelists expressed some concern that the 80 percent units were becoming difficult to fill, concluding that those tenants may be struggling to afford those higher rent units. Michael Hynes, CEO at Winterwood, found that using the average income test to reach 80 percent AMI tenants can create a bit of a challenge. Often, “what we’ll find is that our 80 percent units do wind up having longer vacancy terms than the remainder of the tiering in those properties.”

Hynes does recognize that this data is more anecdotal, and that market study analyses may occasionally diverge from reality, simply because there isn’t enough data and experience to accurately predict the demand for 80 percent AMI units. “A couple more years of data will help us really quantify” the ideal service bands for efficient capture rates, Hynes said.

Instability and Current Challenges
While all three panelists expressed that the market is continuing to smooth out from the uncertainty following the COVID-19 pandemic, they all still identified major issues that continue to cause real stress in their efforts to construct affordable housing.

In terms of both material costs and increased lead times, construction costs continue to be an unpredictable burden. For example, Stansbury recounted a recent construction that was delayed over four months while their utility hookup was hung up on a switch gear for one side of the building. “That’s eating into our tax credits, that’s eating into our profit, our operational expenses. But we’re finally starting to see that some of that is slowing down.”

Indeed, Bell recounted that he has heard similar stories from developers across the industry that switch gears have become more difficult to acquire and expressed a need to sit down with some of the larger utility companies to see if a solution couldn’t be found to this surprisingly costly issue.

Delayed construction costs are compounded by rising interest rates, says Stansbury, as more loans need to be taken out, and money is simply more expensive due to the sustained high-interest rate environment.

Still, said Hynes, these challenges could be weathered if they simply stabilized and became more predictable, allowing developers to convert transactions into permanent, stabilized operations. “If costs are high on the construction side, but they’re stable, they can be underwritten. If rates are high, but they’re stable, they can be underwritten. Anything can be underwritten if there’s stability. But it’s the past two or three years of very tumultuous availability, pricing and interest rate fluctuation that have been the challenge.”

Also, Chitwood said that time has continued to stretch out on some deals, despite supply chain issues largely smoothing out. They might be done with a project for 60, 90 or 120 days, “and we just can’t close it out for whatever reason, whatever city thing or municipality issue that just seems to percolate out there for much, much longer than it should.”

Chitwood predicted that the market will stabilize mostly because “there’s not going to be a whole lot of supply coming online because it’s been so difficult to do things.”

One other hot-button stressor these days has been the insurance issue, as many factors— environmental disasters chief among them—have combined to raise rates to astronomical levels, particularly in the Gulf Coast. One potential way to mitigate these issues is to shield market-specific risks by spreading insurance costs through a very large portfolio. Chitwood cautioned that this urge should be resisted so that both developers and state agencies are aware of how alarming the insurance environment is in certain parts of the country. “The deals should stand on their own with real numbers,” he said.

Expanding Organizational Footprint and Employing Market Analyses Successfully
When expanding into new markets, it is critical to use the knowledge from market analysts to ensure that new developments are as successful and resilient as possible. “When we have a site that we’re pretty convinced that we can make it work, then our financial analysts will run some numbers,” said Stansbury. “Once they come back with their numbers, at that point, we’ll engage our market analyst.”

To ensure successful expansion, all three panelists emphasized the importance of old-school shoe leather investigation as well. “Go to the market, get your feet on the ground,” said Chitwood. “Drive to the comps, drive the area. That’s going to be your best bet. Before we’re… really pushing something, we want our teams with their feet on the ground.”

For Hynes, this brings about one simple rule for expansion: don’t venture too far from your existing footprint. This is simple operational calculus. “We’ve got to operate the property for 20 years, if not more. So, can we staff it? Can we reach it, and can we get there – how long does it take to get there if we have to send people there? Does it require flights? Are there direct flights? Those kinds of things. So, it’s a staffing property manager’s perspective first.”

Once a developer has a good read on a possible site for expansion based on feel, it is important to employ a solid market analysis to craft the approach to building and leasing strategies. “We use market analysis to help us determine income mix and rents,” said Hynes. Even after a site has been identified and put under site control, Hynes said a market analysis can be useful “to really define the unit mix, the income mix and the rents, we had to have advice on that. We had to have help.”

Listen to the full presentation at NH&RA’s On-Demand Learning Center.