Rising construction costs are holding back affordable housing projects and driving up market rents

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A housing project in the Northside neighborhood of Missoula. (William Munoz/Missoula Current)

To begin building an 80-unit affordable housing project in Texas, real estate developer MVAH Partners must find a way to bridge a $3 million funding shortfall due to rising construction costs.

MVAH Partners received federal tax credits in February last year to build the apartments. Since then, however, building material and labor costs have risen more than 40%, according to Brian McGeady, managing partner of the Ohio-based firm.

“We’re trying to find ways to rethink development and find top-up funding to get it over the finish line,” McGeady said.

McGeady and his team faced a similar problem with another development in the Midwest (he wouldn’t disclose the condition) that cost more than $1 million in the red. In the 50 days it took MVAH to redesign and re-propose the project, costs had risen further, forcing them to reduce the number of apartments in the development from 58 to 42.

“It’s a moving target that’s moving at such a fast pace, you’re just not sure what’s going to happen,” McGeady said. “I mean, you have timber prices going up and down 40% in a 45 day window right now. It’s crazy.”

Developers across the country face similar challenges. For developers of market-priced apartments, that means charging higher rents. For those building rent-restricted projects using tax credits or other government assistance, rising costs could undo an entire project. And the slowdown in construction comes at a time when there is a desperate need to increase the national supply of affordable housing.

The stock of low-cost rental housing has been declining for some time: In 2019, there were 3.9 million fewer units rented for less than $600 compared to 2011, according to the Joint Center for Housing Studies of the United States. Harvard University. The overall rental vacancy rate in the fourth quarter of 2021 was just 5.6% – the lowest figure since the mid-1980s – proof that the supply of apartments is extremely tight.

Nationally, rental prices have risen more than 17% over the past year, according to Apartment List, which tracks rental properties across the country. These rising rents have put homes out of reach for many low- and middle-income renters.

Tenant incomes have not kept pace with rising rents. Nationally, about half of renters pay more than 30% of their income in rent, the standard measure of affordability, according to Ingrid Ellen, director of the Furman Center for Real Estate and Urban Policy at the University of New York.

Ellen said government housing programs have failed to respond to changing tenant needs and broader economic conditions.

“Nominal housing assistance spending has remained essentially flat over the past two decades, despite wild swings in the national economy,” Ellen wrote in an email to Stateline. “These challenges will only compound the long-standing housing problems faced by low-income renters.”

The pandemic has laid bare the nation’s housing needs and the extent of housing inequities, said Carolina Reid, research adviser at the Terner Center for Housing Innovation at the University of California, Berkeley. It also made clear that the patchwork of state and federal housing programs does not effectively address these challenges.

“United States housing policy and programs are the result of decades of small fixes and small programs that add to each other without really thinking about the whole system and what the whole system needs,” Reid said.

Expensive wood

The largest source of affordable housing funding is the federal Low Income Housing Tax Credit program, known as the LIHTC, which was established in 1986. Since its inception, the LIHTC is credited with having created 90% of affordable housing in the United States, according to the federal government. Department of Housing and Urban Development.

Under the program, which is jointly administered by the IRS and state real estate agencies, private developers compete for federal tax credits, which they typically sell to private investors. The influx of cash allows them to build housing that they can rent at below-market rates, which they are bound to do for 15 to 30 years.

But due to rising construction costs, many loan recipients say their LIHTC projects are no longer financially viable, according to JP Delmore, assistant vice president of government affairs at the National Home Builders Association.

The cost of lumber is a major contributor, Delmore said. The price per 1,000 board feet of lumber topped $1,500 last year, nearly three times the pre-pandemic record high. Delmore said his group’s economics team estimates that this added an average of $7,300 to the cost of building each new apartment at market price, or about $67 more per month in rent per unit.

Wood is not the only material whose cost has increased. Ohio-based developer MVAH also saw an increase in most petroleum-based products, including asphalt and shingles. McGeady, the company’s director, said the costs of these products are “skyrocketing” and fluctuating almost as much as lumber. Rising fuel prices have also increased the cost of manufacturing, delivering and transporting all materials.

“There has never been a period that I can remember when things moved so quickly,” said McGeady, who has worked in construction for 23 years. “We really don’t have a definitive number until we’re ready to sign a construction contract and close.”

Almost every state has LIHTC projects facing funding shortfalls due to inflationary pressures, according to Jennifer Schwartz, director of tax and housing advocacy at the National Council of State Housing Agencies, an association representing all states. state housing finance agencies.

“Unless we can close these gaps, we face a vicious cycle where cost increases make it impossible to build affordable housing and the lack of supply of affordable housing allows market rents to rise even further” , Schwartz said.

A possible solution?

Schwartz said it would be possible to use billions in federal coronavirus aid to help fill the gaps, but US Treasury Department spending rules prevent it from being used for LIHTC projects. The problem is that, under current rules, stimulus funds must be spent by the end of 2026. This means the money cannot be used for long-term loans to help fund LIHTC developments. .

Some state housing agencies have found a way around the restriction by mixing federal coronavirus aid and other funds. Mark Shelburne, a housing policy consultant at Novogradac, an advisory firm specializing in low-income housing finance, said some agencies have been able to use recovery funds to cover up to 75% of the cost of a loan with these workarounds, but the process is complicated and adds cost to a project.

“The projects awarded in 2020 and 2021 are facing unprecedented cost increases due to the dramatic weirdness happening all over the world,” Shelburne said. “It’s just something about how Congress wrote the law, and how [the U.S.] The Treasury interpreted it as having created this problem.

A bipartisan bill in Congress would allow states to use clawback money to lend money to LIHTC developers.

Timothy Henkel, director and chairman of Pennrose, a management and development company with affordable housing projects in more than a dozen states, said developers are “all sitting on the edge of their seats,” waiting to see if Congress will approve the bill.

Pennrose has 10 projects with funding shortfalls ranging from $6 million to $8 million. Five of those projects are in Maryland, where the state housing finance agency approved initial bids more than a year ago. Pennrose had estimated that construction costs would rise no more than 3% in the approximately three months it would take to close the deal and begin construction. The actual increase was found to be closer to 18%.

“When you have this volatility and explosiveness in the industry, in terms of building costs rising, all bets are off,” Henkel said. “So our view of the finish line is very muddy.”

This story was written and produced by Stateline News, part of the Pew Charitable Trusts. The original story is found here.

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