Affordable housing is one of the most challenging areas of commercial real estate, but for developers, there are ways to make it not only palatable, but even profitable. We’ll be discussing how at Bisnow’s Philadelphia Multifamily and Affordable Housing Forum at World Café Live on July 28th.

David Cardwell Any city that experiences growth in its real estate market will always feel a corresponding pressure on existing, reasonably priced housing populated by working class families. The drive for renovation and new construction has to be reconciled with the fact that it changes the demographics of areas it revitalizes.

The two primary methods cities use to ensure the availability of affordable housing are the preservation of older, Class-C properties and the setting aside of units in new construction at below-market rates. Though the former often positively impacts a greater number individuals and families, most agree that both are necessary—a “multi-pronged approach,” as CAPREIT president Andrew Kadish puts it.

Often, Class-C properties are owned and managed by smaller firms or even individuals, and investment firms like CAPREIT, Fannie Mae and Freddie Mac come in to infuse capital for renovations and maintenance that keep units safe and up-to-date but still affordable.

“It’s a different business model,” says Freddie Mac’s David Cardwell. “You don’t see institutional owners say, ‘I’m going to buy a host of affordable properties and maintain them.’ It’s a much more organic process.”

That process requires a higher level of expertise than most areas of development, considering all the federal programs in place to both aid and regulate affordable housing. But that can be a plus.

“The Class-A market is so tight and crowded with developers that you’re beginning to see some drop back into Class-B space and try to add value in renovations,” Andrew says. “There’s just not as much competition in the affordable housing space. So why compete with 30 other companies on value-added deals?”

And it’s not an altruistic field. “Our returns [on affordable housing] often exceed those on a market-rate paradigm,” he adds.

Despite that profit, they’re fighting the tide. “We’re still losing about 125k rental homes per year nationwide to obsolescence, and to C-Class communities being bought and renovated into B+ and A- properties to the point where your standard worker can’t afford them anymore,” says Andrew.

Still, cities will always push towards newer, better construction, and simply preserving older buildings is insufficient—hence set-aside programs. Philadelphia has tried to incentivize this avenue by allowing for zoning variances, but the first developer to utilize this program, PMC Property Group, changed its mind at the eleventh hour and opted instead to pay the Philadelphia Housing Trust directly.

PMC Property Group It’s a controversial decision, one that Mayor Jim Kenney says will not be allowed to happen again. As useful as that money can be to the city, it’s no replacement for real, tangible places for working-class families to live.

“I think it is extremely important to have set-asides, whether it be for a Class-A or a Class-B project,” Andrew says. “Does it hamstring the developer a little bit from hitting profitability goals? Yes, but I think making affordable housing units available is more important.”

A stronger policy on ensuring affordable housing would undoubtedly be beneficial to those in need of it, but any sort of mandate would be a double-edged sword, according to David.

“[The city] might have chased some developers away, but some developers may now go into it with eyes wide open,” he says.

As an unprecedented amount of new, Class-A construction is set to begin in the city, the issue of affordable housing is gaining urgency. And most of these projects are in urban cores where the cost of land commands higher-amenity units and higher rents. Federal programs such as Section 8 are meant to combat that rising cost, and to allow developers to fund their projects while still making some space affordable, but like the minimum wage, it has fallen behind economic growth.

“[Government funding] is kind of stagnant at this point. They’re kind of keeping up with where they left off, not expanding their resources,” David says.

Philadelphia does not have the astronomical rent prices of New York or San Francisco, but it’s rising steadily. Measures like the set-aside provision sometimes look like the only barrier between an economically diverse city and an economically exclusive one. “Affordable housing is really an income issue,” David says.

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