Does the perfect pairing exist?
Some would argue that it’s peanut butter and chocolate. Every year, people around the world eat more than five billion peanut butter cups. If, like me, you have eaten more than a few, you can appreciate the unique and perfect combination of sweet and salty goodness that this pairing creates.
Socially minded investors have long been searching for an asset class with a similar unique combination of goodness that features the ideal mix of tangible social impact and profitable investment rates of return. In the United States, I believe the asset that best checks those boxes is an affordable multifamily housing property.
Large and Growing Opportunity
It is no secret that the United States is grappling with a severe affordable rental housing crisis driven by a significant undersupply of apartment units that are affordable to low and moderate-income families. To fix this imbalance, the National Multifamily Housing Council (NMHC) estimates that we will need to build 4.3 million new apartments by 2035.
Policy makers on both sides of the political aisle agree that more public funding will be required to solve this problem and that more private sector capital will be needed to leverage that support. This represents an excellent opportunity for impact-driven investors to enter the affordable rental housing ecosystem and create tangible social impact while meeting their fiduciary responsibilities.
Fiduciary Responsibility
In recent years, several state governments have raised concerns regarding the potential conflicts that impact investments may have with the fiduciary responsibilities of their pension funds. Additionally, some regulatory agencies have expressed concerns that ESG policies and impact investing may conflict with the fiduciary duty of prioritizing financial returns.
These are valid concerns and everyone in the impact investing community must take them seriously. After all, the most impactful thing a state pension fund can do is keep their financial promises to their retirees. Fortunately, affordable rental housing does just that.
In a recent report, the Pension Real Estate Association examined the characteristics of investments in affordable rental housing properties. It found affordable housing investments do not merely serve a social purpose but also offer competitive financial returns, often with lower volatility compared to higher-end properties.
While affordable multifamily properties drive social impact via slower rent growth, their steady income streams and resilience during economic downturns contributed to superior long-term performance for investors. In fact, since 2008, the cumulative annual growth rate of Net Operating Income at affordable multifamily properties was 5.7% compared to 0.7% for non-affordable market rate properties.
This stable growth of net operating income is driven by several factors:
- Higher Occupancy Levels. On average, affordable rental properties experience higher and more stable occupancy levels than conventional market rate properties. By capturing a higher percentage of a property’s gross potential rent and minimizing lost income from vacant units, affordable properties can generate a more stable and predictable stream of rental income.
- Reduced Vacancy-Related Costs. Higher levels of affordability typically result in higher renter retention rates. When more renters stay in the same property for longer, vacancy related costs (such as remarketing and renovation costs) at the property go down as well.
- Lower Cost of Capital. Affordable rental properties are also more likely to be eligible for lower-cost capital such as tax-advantaged equity, tax-exempt bond financing and lower permanent debt pricing from government-sponsored enterprises Fannie Mae and Freddie Mac.
Affordable rental housing investments also benefit from a more stable risk profile. According to public data from Fannie Mae, the serious delinquency rates for affordable properties across their book of business has been consistently lower than conventional market-rate properties since 2012.
Delivering for families in need
According to the Harvard Joint Center for Housing Studies’ America’s Rental Housing 2024 report, over 12 million renter households spent more than half of their income on housing. That’s one in every ten households in the United States.
Think about that the next time you walk into a grocery store. It’s likely that every tenth person you see is paying so much of their income on housing that they can barely afford the food in their shopping cart.
Impact-driven investors can make those trips to the grocery store less stressful through supporting the creation and preservation of more affordable rental housing properties. This also presents the opportunity to improve renters lives across a broad spectrum of other social impact measures that include:
- Wealth Building. Affordable housing enables people to save money, invest in education or job training, and build assets over time. This can lead to greater economic mobility and provide a pathway out of poverty.
- Health and Educational Outcomes. People living in affordable rental housing are less likely to experience the negative health consequences of housing instability and homelessness. Families with affordable housing enjoy lower rates of chronic stress, fewer mental and physical health problems, and better overall health outcomes.
A stable and affordable home also helps kids benefit from consistent school attendance, reduced stress at home, and a supportive learning environment. This increases their chances of academic success, making friends, and completing their education.
- Stable and Diverse Communities. When people can afford to live in an area, they’re more likely to stay, put down roots, and strengthen community bonds. In areas with rising housing costs, this helps prevent the displacement of low and moderate-income households, ensuring diverse communities can thrive without being pushed out by gentrification.
Impact begins at home
Over the course of our lives, we will spend more time in our homes than in any other place on earth. For over 100 million people in the United States, that home is an apartment building—and far too many are paying too much for rent.
When investors increase their allocation of long-term capital to support the creation and preservation of more affordable rental housing properties, they have the unique opportunity to improve the lives of low- and moderate-income households and generate stable long-term returns for their clients.
Having spent more than 25 years working to finance and support affordable housing properties across the United States, I am amazed by the growing number of highly sophisticated and impact-driven owners, operators, and investors who recognize the win-win potential of affordable rental housing.
Like peanut butter and chocolate, affordable housing is an asset class that offers a perfect combination of goodness: long-term social impact mixed with strong and steady financial returns.
Bob Simpson, former head of multifamily affordable and green financing at Fannie Mae, is the founder and CEO of the Multifamily Impact Council, a non-profit membership organization.
