Spencer Levy
I'm Spencer Levy and this is The Weekly Take. Putting a roof over one's head is typically the biggest expense in a working person's life. And for some, the routine bill, the rent is a monthly struggle even without the challenges of a pandemic. On this episode, we enter a residential sector that addresses this important need, providing vital options for millions of hardworking folks around the country: affordable housing.
Daryl Carter
If you look at January first 2020, we had a significant affordability challenge and most of the major markets in the country a year later that hasn't changed.
Spencer Levy
That's Daryl Carter, the founder, chairman and CEO of Avanath Capital Management, a California based investment firm that focuses on affordable housing. Since its inception in 2008, Avanath has acquired more than two point five billion dollars’ worth of properties, with some 10000 apartment units in 13 states across the U.S..
Sarah Garland
Last March, everybody held their breath. They weren't sure what was going to happen across all sectors of housing, particularly affordable, because when things shut down, our tenants are typically the most hit.
Spencer Levy
And that Sarah Garland CBRE’s director of production for Affordable Housing and FHA Lending based in L.A., Sarah is one of the foremost industry specialists in affordable housing lending and finance. We’ll defined terms, namely what our guests call Capital A Affordable housing versus workforce housing. We'll talk about challenges posed by the pandemic, the role of affordable housing and its future. We'll explore the balance in the business among income, impact and mission driven thinking and a lot more. Coming up, we open the door to affordable housing. That's right now on The Weekly Take. Welcome to The Weekly Take in this week, we're going to be talking about affordable housing, a topic that could not be more timely and important in America today. And to help us discuss this important topic, we are joined today by the CEO of Avanath, Daryl Carter in Irvine, California. Daryl, thank you for joining us.
Daryl Carter
Great to be here. Thank you for having me.
Spencer Levy
Thanks for coming. And we're also joined by our friend and colleague, Sarah Garland. Sarah is sitting in Los Angeles, and she is the director of production for Affordable Housing and FHA Lending. Sarah, welcome.
Sarah Garland
Thank you. Also happy to be here.
Spencer Levy
Why don't we just start off for the benefit of our listeners with a few definitions? Because there's a lot of terms that are used for affordable housing. One of them being affordable housing. Another is workforce housing, and another is housing affordability. So, Daryl, what we start with you. How would you define these three terms?
Daryl Carter
Well, capital A affordable housing, as we like to say in the industry, is generally housing where it is formerly rent restricted and typically targeting families that make under 60 percent of area median income. So that's what we consider affordable housing. And that might be a property that was built with low income housing tax credits. It might be a property that is project based Section eight. It might be property that has a local, either state or local rent restrictions on it. For instance, we own rent stabilized apartments in New York City that would be part of capital A rent regulated, affordable, we consider workforce housing is generally things between 60 and 100 percent of area median income that would not necessarily be rent restricted. You know, sometimes we referred to it as naturally occurring affordable housing. But, you know, the definitions vary. I think the big distinction, those properties that have rent restrictions and those that don't, but they still may serve an affordable resident.
Spencer Levy
Let's now talk about the other aspect here, which is called housing affordability. How do you think about that issue as distinct from the other two types of assets?
Daryl Carter
Well, you know, housing affordability, which generally speaking and just to date myself, I remember years ago in the business that housing was affordable if you paid twenty five percent of your income for housing and then that number kind of went up to 30 percent of your income and now it's kind of considered a third or 33 percent. But anything above that, generally you're considered rent burdened or, you know, housing burden. If you pay more rent than one third of your income. And generally you will have a lot of families in America that are severely rent burdened where they generally pay, I believe, over 40 percent of their income in terms of rent, upwards of 50 percent of their income. In most of our communities generally, the underwriting standards, most of our residents pay between 30 and 33 percent of their income for rent.
Spencer Levy
Thank you, Daryl. And so Sarah, from a lending standpoint, how do these distinctions matter to the lenders?
Sarah Garland
So they matter a lot to the lenders. The capital A from a lender perspective, Fannie Mae, Freddie Mac, FHA, they have special programs focused on capital A affordable, because they want to preserve that housing minimum the terms of the loan and hopefully longer than that. So from a lending perspective, Capital A is actually treated differently than workforce housing because that is really unfortunately, it's just a moment in time. So at that moment in time, it's serving a tenancy that needs to be served, but it could change and be gentrified at any point, whereas Capital A is fixed because it's recorded on the property.
Spencer Levy
I think both of you did an excellent job describing the technical qualifications for affordable housing. But Sarah, who are these tenants? What do they do?
Sarah Garland
So I would say that it really varies on the market. But, you know, there are generally service workers there, teachers. They could be police officers, they could be, you know, anybody that you would see on the street. But it really varies depending upon the market where these properties are located.
Daryl Carter
Our residents are really, you know, and it depends on the market. You know, we own a number of properties in Orlando and one very close to Disney World. And a lot of our residents work there at Disney World. We have, you know, other places in Orlando where they serve in the convention industry and then we own a property that I was just at last week outside of Ann Arbor, Michigan, specifically in Ypsilanti, Michigan, and it's very close to the University of Michigan, my alma mater, and Eastern Michigan University and also the airport. And most of the people who live in that community work at one of those institutions. And so it varies. I mean, we have a couple of communities, one of which is in Poughkeepsie, that serves the people who work at Marist and Vasseur. About 50 percent of our residents qualify for Section eight recipients. One thing that's interesting, about a third of those are two income families. And you say, well, why do they get Section A subsidy? Because they both work at Wal-Mart and they live in L.A. So you have two incomes, but they're combined family income of fifty thousand dollars and a location where rents are twenty two hundred dollars a month. But our residents all work hard and they're pursuing the American dream.
Spencer Levy
Well, speaking of working hard, I want to say, Daryl, well played, getting your alma mater on the podcast. As people on this podcast know, I move heaven and earth to get Cornell University. It's just me mentioning it. Sarah, the pandemic obviously exposed a lot of flaws in commercial real estate, affordable housing, certainly not being distinct. Could you give us what went down in affordable housing during the pandemic from a capital markets perspective a payment of rent perspective and where we sit today?
Sarah Garland
Sure. I think that last March, everybody held their breath. They weren't sure what was going to happen across all sectors of housing, particularly in affordable, because when things shut down, our tenants are typically the most hit because of the employment that they have. But what we found was actually quite the opposite. The affordable housing properties performed great whether because they got the stimulus, whether because cities stepped in or whether because they were tax credit deals and they had sufficient reserves to cover. What we saw was that they never really dipped, they dipped a little bit maybe a few late pays. But in terms of the forbearances that the industry saw, I think the affordable housing performed much better than the rest of the sector.
Spencer Levy
Did the lot trade in the last year? And if so, what was the value of these assets during the pandemic versus before?
Daryl Carter
I will say a couple of things. One is that if you look at January 1, 2020, we had a significant affordability challenge in most of the major markets in the country. A year later that hasn't changed. I mean, if anything, the pandemic has brought more people into needing affordable housing than there were before the pandemic. We saw occupancies increase over 2020 during the pandemic. To your question regarding valuations and things, we bought, I believe, six or seven properties in 2020 and we did not see a significant drop off in values. And part of it was the fact that in most of the properties that we acquired, they were 100 percent occupied with waiting lists. So the demand side of affordable housing continues to be very, very strong. And in fact, the production of new affordable housing has slowed down during the pandemic. So having existing affordable communities of our 80 communities, probably half of them have waiting lists where they operate at 100 percent occupancy. And the one good thing, you know, which is both good, but it's also there's the other side of it. There's more equity capital coming into the affordable housing business. So it makes it a little bit more competitive, but also it provides more liquidity in the space. I'd say the affordable sector from an investment standpoint is just as competitive as the market rate sector.
Spencer Levy
Well, I think in our pre call, Daryl, you suggested that from a value add capital standpoint, you were able to get competitive returns with other asset types. Is that true?
Daryl Carter
Yes, yes. We're able to generate an a value add multifamily returns in the low to mid-teens. You know, the one thing about the affordable housing industry is the income is very stable. You know, we have very minimal turnover. And it dropped during COVID at historically, our turnover was about 20 percent a year. Last year, it dropped to about 15 percent a year compared to market rate properties, which were often 40 to 60 percent a year. I sometimes sit back and think about we operate a business where we have 15 or 20 percent turnover and it's somewhat complex, but I cannot imagine 40 to 60 percent that most of the market deals with.
Spencer Levy
So, Sarah, let's talk about this capital for a moment. And I know you specialize in the debt side. Tell us about the different types of debt sources that are available to finance at the capital A affordable and then the, I guess, capital W Workforce Housing, which is affordable but not rent restricted.
Sarah Garland
So it's interesting on the debt side, we still really see the agencies as the strongest player in the capital A space because they do feel leverage, they do competitive underwriting requirements. And, you know, and it's their mission. They are always in the business. They're not in and out. I would say the agencies control the capital A affordable market space. For the workforce housing it's a it's a gap. It's much harder to find that middle income debt. And I think the agencies are focusing on it, but they haven't quite solved that issue yet.
Spencer Levy
Daryl, let me turn the same question to you. On our pre call you said that there's a big distinction between different types of capital that are flowing to the space, even between European and American. Tell us about that.
Daryl Carter
Well, I think the one thing is that, you know, there are companies like ours that have demonstrated you can make money in the affordable housing business. It always starts with that. But also, I think that there are investors that that believe that they want to make an impact in creating more affordable housing and particularly in communities of color, which we operate probably 70 percent of our assets. And, you know, in our latest fund, we had 60 about 60 investors and about fifty five percent of those were Europe, Asia and U.K.. One of the things I will say that those offshore investors are much more focused on ESG, including the E and the S and the G, and they all invest very heavily in affordable housing in their countries. And we have a number of investors from the Netherlands. They invest routinely in affordable housing and workforce housing in a variety of different housing, also in kind of in partnership with government programs. And so they're very comfortable with that. And there are very small countries and they have lots of money to deploy. So the opportunity to do that in the US is very, very appealing. And I do think the European and Asian investors are ahead of investors in the US, particularly in all the events that are happening today in social equity and things like that. People are asking the questions. Interest in ESG hasn't been as free flowing in the US as it's been in Asia and other places. But we continue to believe that there will be more and more investors that are coming into the market in the US.
Spencer Levy
Sarah used the word mission driven with respect to the federal lending. We're using the term ESG. I'm going to use a different term if I can. It's called impact investing. Define a little bit more with this mission driven means and which agencies use that term?
Sarah Garland
Well, Fannie and Freddie use the term and mission driven for them is they're a government sponsored entity. And so as part of their mandate and their charter, they have to do a certain percentage of their overall lending, has to meet certain criteria that is defined for them by their regulator. And so that broad term is mission that includes affordable housing as well as seniors housing, manufactured housing, other things. But that whole general mission base is how they refer to it. FHA has always been mission driven. That is, their federal mandate is to serve, you know, markets and noncyclical markets. And they're always they're supposed to be in the market every day helping all types of products.
Daryl Carter
I would just add one more thing that it's important that we talk about institutions investing and it's really also about people that embrace the mission. Our company is successful because we have a team that embraces that mission of investing in affordable housing. Sarah is incredibly successful in this business because she embraces that mission and has done this for many years and more importantly, has a genuine care for people living in the quality of affordable housing. And I can tell you for attracting people on our team that particularly some of our younger staff, they really embrace that and certainly we do this to make money, but, you know, the other thing, it's complicated and the fact that, you know, you have people like Sarah who have committed their careers and learning the nuances of this that really are the most important parts of this business. It's not the institutions, but it's people like Sarah who drilled down to understand this business and who really care about it.
Spencer Levy
If I were to define that in a word, it's not just mission as a means of getting to more and or cheaper capital. It's mission as in culture, the culture of your company. Would you agree with that, Sarah?
Sarah Garland
I would totally agree. And I would say the culture of the industry, I mean, it is an industry of people who want to do the right thing.
Spencer Levy
I think that using the term origin story, which is used in superhero movies, is probably appropriate here for affordable housing. I'd love to hear how you got into affordable housing.
Sarah Garland
Great. Well, I fell into affordable housing. I actually was working in real estate and I actually worked on one of the very first tax credit deals that got done in the state of California purely by accident. And as a result, I went to work for the city of L.A. Housing Department. And from there I went to Fannie Mae as director of affordable housing. And the rest is history.
Spencer Levy
Awesome. So, Daryl, what's your origin story? How did you get into affordable housing?
Daryl Carter
I’ve been in the real estate industry for 40 years, and I started out in banking and then built one company that was involved in investing in inner city areas, but more a broader range of apartments. And one of the things that I notice is that, generally speaking, people in affordable housing communities were served very poorly by landlords, you know, just abuses and poor practices. You know, as a person who grew up on the west side of Detroit in the African-American community and notice, you know, looking at the industry and that there are very few companies of color that serve communities of color in inner city neighborhoods. And so I really wanted to build when I started a Avanath that I really wanted to build, a company that would take the highest standards in the apartment industry and apply them to communities, particularly communities of color and affordable residence.
Spencer Levy
Well, Daryl, do you have a point of view of whether people should be forced to move out of these buildings should their income begin to exceed a certain level?
Daryl Carter
Every state approaches it differently. I like Florida's. Florida's is if you qualify for three consecutive years, then your grandfather, you don't have to qualify again. And I like that because, you know, we know of people in some of our communities where there is a hard cap, where they don't they refuse a raise or a promotion because all of a sudden if they get they move out of our community, they will have to pay 40 percent more and they've gotten a 20 percent raise. That's an issue I would like to see where I think Florida's laws are they work well because people can stay there longer. And then at some point, if people make enough, they'll move naturally to a more expensive apartment. So, you know, it is a challenge if someone just makes slightly over the maximum rents, they have to move and, you know, disrupt their family
Sarah Garland
And especially in the really high cost areas.
Daryl Carter
Yes.
Sarah Garland
Where the difference between affordable and market is huge. And that makes it a really big problem if you become over income.
Daryl Carter
Right. And then if they move out and have a market rate property, they're probably going to go to a lower standard apartment than ours and they're going to pay more. So it's a huge disincentive.
Spencer Levy
Let's talk about the cost of construction. What I get from a lot of developers is we'd love to build affordable, but it cost me the same to build an affordable unit as it does to build a market rate. What's your reaction to that?
Daryl Carter
Well, I think in places like California, it's very difficult to build new, you know, the best nonprofit developers and one of which is bridge housing. I'm on their board probably seven hundred thousand plus a unit to build a new unit. We're able to acquire and renovate much cheaper than that, which is kind of the way to go in high cost markets. But what's interesting, we're building the ground up development that will be about 30, 40 percent affordable in Detroit. Now, Detroit has lots of vacant land, you know, because the footprint of the city went from two million to seven hundred and fifty thousand. But also, we can use modular construction there so we can build something that's under three hundred thousand a unit in Detroit and you can still make it affordable. And so, you know, when we look at different places, the one thing I would say in most major metropolitan markets, there is demand for quality, affordable and workforce housing. You know, the stronger markets are those where the delta is bigger between market rate rents and affordable rents like California, you know, the two coasts or, you know, case in point with that. But, you know, there's demand in a lot of cities across this country.
Spencer Levy
Let's go back to modular Daryl, and what do you think the future of that is not only for what might be considered traditional modular, built offsite and brought there, but also really cool innovations? Not saying modular isn’t cool, Daryl. It is cool, but cool, like taking old parking garages and converting them into affordable housing, using old shipping crates, which I've seen in certain jobs and turning those into affordable housing. How far do you think it's going to go and how far are you willing to push the envelope?
Daryl Carter
The interesting thing about modular construction, it's been around, you know, for many, many years. Certain panels and components are literally assembled in the factory with walls and pipes and things like that. And they're assembled on site. In other countries they do more of that than in the US. You know, part of the challenge is just simply and a lot of markets are some of the unions that want to see things built, traditionally stick built. And then there are municipalities that they think it's a poor quality of construction, which is not the case. You know, and I think we have to start looking at these things.
Spencer Levy
Let me ask a pandemic related question. Given the challenges of COVID-19, have these apartment communities become more expensive to build and or redevelop when you take into consideration wellness?
Daryl Carter
Well, they're certainly more expensive to manage. I can tell you that. I mean I would just cross our board with all the protocols we've used for COVID-19, including protecting our onsite staff, you know, has added seven percent to just the repairs maintenance. The other thing that we are in the process of bidding on now is our insurance. We've had tremendous inflation and casualty insurance because of wildfires and windstorm. But I think the pandemic will have some issues on it. We're in the process of building all that now. But yes. And I think the other thing, there are a lot of stopwork orders during COVID, which is delayed projects. Any time you delay something, I mean, we we've had one in Detroit. We expect that to break ground on this spring. I mean, last fall. But we're now a year behind. So that adds costs too.
Spencer Levy
We talked about the difficulty of building more affordable housing, particularly in areas that have good school districts, suburban areas, et cetera. There's a term for that. It's called NIMBYism.
Daryl Carter
Yes.
Spencer Levy
How big of a problem is that? And is it possible that we can overcome it?
Sarah Garland
Daryl?
Daryl Carter
Oh, my God, it's a huge problem. And I think that part of the challenge I'd like to believe we can we can overcome it. One of the things we ask the residents, well, don't you want when your kids come out of college, don't you want them to come back in the neighborhood? And everyone says, of course. And they said, well, where are they going to live? Unless they live in your basement, you need to have affordable housing because they're coming out of school and they're making forty thousand a year. So you're going to either have to subsidize them or you let me build apartments that they that are cheap enough for them to live. That's one of the things that I think can counter the argument also of people having to take care of an elderly parent and wanting more affordable seniors housing. So I think that, you know, sometimes when we talk about housing affordability, people perceive of who's going to be moving in from not that neighborhood. But we ought to say, look, you know, where are your children going to live? I think that becomes one of the compelling arguments that we try to make in countering the NIMBYism.
Spencer Levy
So, Sarah, what do you see as affordable housing over the next several years and maybe how affordable housing becomes? We see more of it, make it easier to finance. What's your point of view?
Sarah Garland
I think that the timing is right. The pandemic certainly put it on everybody's radar. I think we have a new administration has focused on it. I think the industry is primed to sort of attack this window of opportunity, and I think that more and more focus will be put on it. And I think that more and more players will enter the market. And I hope that more units get produced as a result of all of that. But at the very least, I think it hopefully will become easier to do.
Daryl Carter
I agree with everything Sarah just said and view very positively the prospects from an investment standpoint over the next few years. And my hope is that, you know, some of the things that happen in this infrastructure bill will apply to affordable housing. I mean, we have lots and lots of older buildings, some of which we acquire that have major energy retrofit needs. And when you think about it, one of the things that we often do when we buy a property is make it more energy efficient and put in LED lighting simply for one thing, because it lowers our residents’ utility bills. So it is my hope that with some of the infrastructure and more capital coming into the affordable space and talented people like Sarah and the CBRE team that does a lot of our debt that, you know, we can, you know, make an impact on some of the affordability challenges across the country.
Spencer Levy
You know what's very interesting about that last answer, and it was going to be my last question, but it was such a good answer. I'm going to just keep going for a second here. Daryl, let's talk a little bit more about the infrastructure plan from Biden. You mentioned how it's going to help improve electrical and or conservation needs. Any other commentary on the potential for an infrastructure plan from the Biden administration?
Daryl Carter
Well, the only other thing I would mention that and I'm not sure whether it would be part of the infrastructure plan, but I know part of his goal was to increase Section eight vouchers by a significant amount. The number that I heard, it's been 15 million and that would be a game changer on getting more Section eight voucher holders to people who need them. The waiting list is about 10 years for people who are eligible to get a voucher, meaning that there's only one voucher for every seven or eight or nine residents depending on the location. So we need more of that. That can make a big difference on affordability.
Spencer Levy
Great. So on behalf of The Weekly Take, I now want to thank both of our guests for joining us today on The Weekly Take, starting with Darrell Carter, the CEO of Avanath Capital Management. Daryl, thank you.
Daryl Carter
Thank you. Delighted to be here and also with my good friend Sarah.
Spencer Levy
And speaking of our good friend, Sarah. Sarah, thank you for joining us. Sarah Garland from Los Angeles, director of Production, Affordable Housing and FHA Lending. Sarah, thank you.
Sarah Garland
Thank you as well. And thank you for doing this podcast on affordable housing.
Spencer Levy
For more on our show, please visit CBRE.com/TheWeeklyTake. As always, we welcome your feedback and suggestions and we invite you to share the show, subscribe rate and review us wherever you listen. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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