by Jeffrey Kittle – President & CEO Herman & Kittle Properties, Inc., Indianapolis, IN
Several times this year I have heard: “Jeff, it is a great time to be a developer.” But while there certainly are areas of our business that are experiencing a tailwind, other areas are facing a headwind. Capital markets and rental markets in particular are enjoying a tailwind. The capital markets are back to pre-recession levels of liquidity (not 2007, but probably 2002), and there is a liquid market for LIHTC equity. Rural deals, non-subsidized acquisitions, and bond deals ALL have LIHTC buyers at aggressive yields in addition to ‘favored’ large MSA 9% deals. During the recession it was difficult to clear the market at any price/yield for rural deals or bond deals.
Liquid debt markets combined with 10 year treasuries hovering in the low 2% range have given a boost to deals in 2015. Most of our construction loans have been at low spreads (200 to 250) over LIBOR and permanent rates have ranged between 3.75% and 5.5%. Banks have strong growth objectives and see LIHTC deals as low risk/high opportunity and many are trying to grow their book of business in 2015/2016 in the LIHTC space. For the first time since 2008, I have more capital available to me than deals!
Rental markets show continued strength. The long-term demographics and outlook for multi-family and in particular affordable housing is very strong. Our portfolio has seen rental and occupancy growth in 2015 across approximately 145 properties/14,000 apartment homes in 15 states and we are projecting continued growth in 2016. It is not quite as easy as “build it and they will come” but it is very good. There is what I call the “human factor”: move-ins don’t happen when expected, units are not rent-ready, staff turnover – these issues combine to slow operations down much more than markets. The markets are there to fill our new and existing deals.
Now for the headwind: staffing, rising costs, NIMBYism, and an uncertain political climate. Never in my 20-year career have I seen pressure on staffing and wages like I have seen the last 18 months. Finding and retaining talent is very difficult, causing wage increases, temporary labor cost increases, and/or missed opportunities because of vacant positions.
Construction material and labor costs are rising. This puts pressure on deal feasibility and makes it more likely that developers will select less experienced subcontractors that may not be able to finish the job. In addition, construction is becoming more risky; you can start at one price with a subcontractor and end up at a higher price later on in the construction process.
NIMBY continues to rear its ugly head, creating more obstacles to developing affordable housing. We have seen several recent deals fall through because we either lost zoning or support due to prejudices about people living in affordable housing.
Uncertain political climate around potential tax reform as well as the fixed 9% low-income housing tax credit rate make it more difficult to make deals ‘pencil.’ Also, a reduction in soft sources of funding further exacerbates ‘holes’ in deals and feasibility.
In spite of the headwinds, I am bullish on the long-term demographics and prospects for affordable housing in the United States. The LIHTC and private activity bonds will continue to be critical tools to combat the affordable housing shortage in the United States.