Propmodo Daily

By Franco Faraudo · Mar. 5, 2024

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Cities across the country have been finding success in issuing bonds to help finance affordable housing projects. These bonds are attracting growing interest from pension funds and other institutional investors, seemingly driven more by potential returns than social impact. Today, we look at how this could change the affordable housing industry.

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Institutional Investors Are Changing the Affordable Housing Bond Market

One of the most pressing issues confronting cities is how to stimulate the development of more affordable housing. Rising development costs and interest rates make it increasingly difficult to incentivize developers and investors to prioritize affordable units over luxury ones. Some cities have found success using municipal bonds as a tool. These bonds, backed by a city's tax revenue, offer the additional benefit of state tax exemption.

Miami’s mayor has announced the city is planning to offer $2.5 billion of bonds, $800 million of which will finance affordable housing projects. Other cities have been doing this successfully for a while. Cities in California like Los Angeles and Berkeley have raised billions of dollars in bonds for infrastructure, including affordable housing. New York sold $700 million of social bonds last year. When the city received more than 2.2 times the amount of demand than expected, they even reduced their yield of the bond to help make the program less expensive.

Private entities like pension funds and private equity firms are increasingly purchasing these bonds. This shift comes as many investors seek to move their funds away from office properties, perceived as a higher risk in the current market. While the rise in private capital demand has helped finance affordable housing initiatives, it's not without potential consequences.

According to a new report by the New York Federal Reserve, affordable multifamily housing makes up an average of 4.4 percent of the institutional investors that they surveyed, a number that is expected to increase. Funds also tended to prefer buildings on the higher end of the affordability spectrum. The largest category of investment was designed for people above 100% of area medium income.

Unlike banks, which often prioritize community needs when investing in affordable housing, private investors and institutions seem more driven by financial returns when purchasing affordable housing bonds. This shift in focus could lead to prioritizing projects that cater to those just qualifying for affordable housing programs, potentially neglecting individuals in greater need of significant rent assistance.

While private investors have significantly increased funding for affordable housing nationwide, concerns remain about the potential impact on the industry's core mission. The influx of profit-driven investments might shift the focus away from achieving true housing affordability and prioritize generating returns for investors instead.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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