Luke Rottmann
As institutional capital flocks to the latest novel investment strategies—those promising a fresh angle, a splashy narrative and the allure of eye-catching returns—one familiar, yet often overlooked, sector offers a more stable and diversified opportunity: affordable housing debt. It’s not flashy, new or designed to deliver 20% gross returns—nor is it at risk of being overbought. And that’s precisely the point. Sometimes, the obvious and time-tested solutions are the ones worth considering.
Affordable housing itself is a well-trod space among institutional investors. The case for it is almost intuitive: Whenever demand far outweighs supply, there is opportunity to capture value, and perhaps nowhere is that imbalance more pronounced than in the U.S. housing market. Historically, though, equity strategies have been the primary institutional focus in the sector, given the attractive total return potential, with the goal to drive net operating income and exit at higher valuations. But after the recent volatility across all classes of multi-family real estate, many CIOs are likely feeling a bit let down. Haven’t we heard this story before?
Enter affordable housing debt. After all, lending to a property is not the same as owning a property—especially when it comes to affordable housing.
Steady Income Opportunity
Affordable housing debt is not a niche sector. It’s a long-established and essential financing structure for multi-family properties that restrict all or a portion of units to residents at or below 80% of area median income in exchange for local, regional and/or federal subsidies, such as the Low-Income Housing Tax Credit. Given the public/private nature of these projects, in addition to extremely robust demand, occupancy tends to remain high and cash flows stable.
For investors already active in affordable housing equity, debt offers a lower-volatility alternative that smooths returns. While it might not be flashy or complicated, yields on affordable housing debt are competitive with market-rate multi-family debt, while offering investors predictable cash flows, even when other parts of their portfolio are struggling.
Historical performance data further highlight the lower-risk nature of affordable housing debt. For more than two decades, LIHTC-backed properties have consistently maintained cumulative foreclosure rates below 1%, even through economic downturns like the Great Recession and the COVID-19 pandemic, according to CohnReznick’s most recent “Affordable Housing Credit Study” from 2023.
This resilience stands in stark contrast to the higher default rates seen across broader commercial real estate markets during periods of financial stress. Notably, the same report went on to show that the annual foreclosure rate for LIHTC properties has remained lower than that of multi-family properties financed by FDIC-insured institutions—typically staying below 0.1% in any given year since 2002.
Seeking Yield Without Sacrificing Liquidity
Many investors mistakenly equate affordable housing debt with concessionary returns and long holding periods. Although affordable multi-family debt spreads tend to be lower than market-rate multi-family spreads, the payoff is lower default risk and lower average volatility. While it has long been an investment anomaly that some of the riskiest assets tend to be the most highly levered, the same common leverage tools—fund-level debt or securitization—used by market-rate real estate debt strategies are equally approachable—and, arguably, more so—for affordable housing debt strategies.
Additionally, many investors still gravitate to the common misconception that affordable housing debt is difficult to exit. However, just like market-rate debt, there are plenty of liquidity-generating options, such as private commercial mortgage-backed securities, agency CMBS or other agency securities.
Designed to Let Investors Rest Easy
In an unpredictable and volatile market, consistency is a rare and valuable commodity. Affordable housing debt provides reliable, long-term income at a lower risk profile with the potential to add shine via leverage.
At IMPACT Community Capital, we have made the case for more than 25 years that affordable multi-family housing belongs in every institutional portfolio. With broader commercial real estate continuing to face headwinds, the case for affordable housing investment—particularly affordable housing debt—has never been clearer. It is truly an opportunity hiding in plain sight.
Luke Rottmann is the managing director for investor relations and capital markets at Impact Community Capital. He can be reached at LRottmann@impactcapital.net.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.
Tags: affordable housing, Fixed-Income, IMPACT Community Capital, Low-Income Housing Tax Credit, Luke Rottmann