The UCLA Ziman Center for Real Estate presents the next in a series of Affordable Housing Policy Briefs. This August 2019 Brief considers proposals to help preserve naturally occurring affordable housing” (NOAH) – a crucial housing component in high-cost areas such as California. The Brief discusses why developers often choose to convert NOAH properties into luxury or “low-income housing tax credit” (LIHTC) projects. A case study in Glendale, California examines under what conditions preserving NOAH for workforce housing becomes a better investment than converting to luxury or LIHTC.
The disappearance of naturally occurring affordable housing (NOAH) remains a persistent problem in high-cost metropolitan areas of the United States. The term NOAH refers to existing Class B and C housing built prior to the 1990s, which is generally affordable for middle- and low-income households. Rents charged for NOAH multifamily units are typically lower than those charged at market-rate units due to their age, condition, outdated design, location, and, in some cities, rent control laws. NOAH often serves as “workforce housing” because it tends to be affordable for middle-income workers who earn between 80% to 100% of Area Median Income (AMI). This segment of the workforce usually includes teachers, accountants, office managers, and nurses who often are unable to afford rents charged at luxury buildings. In addition to subsidized affordable housing, NOAH is a critical piece to meeting the demand for affordable housing in high-cost cities.
Without rent-control laws, a market correction, or other similar conditions, NOAH will continue to disappear. A number of cities, including San Francisco, Atlanta, and Los Angeles, have begun implementing innovative programs to preserve the remaining supply of NOAH.”
CB Richard Ellis estimates that, nationwide, there are approximately 12 million workforce housing units across 66 major metropolitan areas. The multifamily industry removes more than 100,000 of these units per year through demolition or conversion of properties to high-end rentals. NOAH is frequently replaced with new or upgraded Class A luxury buildings that are unaffordable to middle-income earners. Although the supply of workforce housing is diminishing, demand remains high. According to the United States Census Bureau, there are 13.5 million single-family and multifamily workforce renter households. Moreover, the demand for workforce housing also includes higher-income individuals who seek to save money, as well as low-income individuals who have no other options.
As a value-add investment, workforce housing typically achieves lower returns than luxury housing conversions. Developers can make superior returns by acquiring and upgrading existing Class B or C assets into luxury Class A properties. On the other end of the spectrum, developers may choose to convert a NOAH property to low-income subsidized housing (affordable to workers earning 60% or less of AMI) in order to access state and/or federal low-income housing tax credits (LIHTC). This can result in a shortage of housing for middle-income workers who rely on NOAH.
Nonetheless, workforce housing projects produce stable cash flows in high-cost areas due to the large unmet demand. Further, government-sponsored entities such as the Federal Home Loan Mortgage Corporation (Freddie Mac) offer favorable loan terms to workforce housing projects because these projects help preserve affordable housing. Additionally, communities and governments are generally supportive of workforce housing because these projects tend to displace fewer existing residents.
Workforce housing also has fewer restrictions than LIHTC projects in terms of required renovation, rents, and hold period. In addition, many high-cost cities in California are currently considering the adoption of rent-control laws, which would greatly reduce the feasibility of luxury housing projects. Moreover, should there be a market correction in the next few years, there would likely be greater demand for more affordable housing such as NOAH for workers who lose their jobs or suffer pay cuts.
The author of this Policy Brief is UCLA Anderson School of Management MBA 2019 alumna Maya Saraf.
Author: Form Magazine
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