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Lument: Workforce Housing Preservation in Creation: Takeaways from NMHC Spring Meeting

During a panel discussion at the 2024 National Multifamily Housing Council (NMHC) Spring Meeting, several experts from different facets of the workforce housing subsector gathered to discuss the importance of preserving and revitalizing existing properties to meet demand. The discussion was framed by the notion that workforce housing preservation is itself a type of creation, and incremental efforts to enhance affordability in projects can add up to make a meaningful difference in increasing the quality and availability of affordable housing nationwide.

Stability as an Investment Thesis

Several experts noted that approaching the issue should start with an examination of tenant needs. Staying in tune with what tenants need and want is essential, be that through surveys or other communications. Doing so allows developers to further an investment thesis of stability—by combining the most appropriate services for their group and understanding their tenants, developers can maintain higher occupancy with lower turnover, achieve better overall economic results, and therefore compensate for a less robust course of increasing rents. Rather than pushing cost increases onto their renters, developers can lower costs in the context of turnover and vacancy as a means of generating stable, long-term returns.

Agency Opportunities

Both Fannie Mae and Freddie Mac offer programs to incentivize the development and preservation of workforce housing. The programs aim to lower costs and provide incremental benefits that help push toward affordability. Of course, developers who own a significant number of units will be able to benefit the most through this incremental approach.

Workforce Housing Preservation is a Freddie Mac program that enables borrowers to voluntarily set rent restrictions on at least 20% of a property’s units to support tenants with moderate to low incomes. Available in all fixed-rate structures of seven years or longer, the program offers competitive pricing, and for borrowers seeking lower leverage, Freddie Mac will consider 35-year amortization.

Sponsor-Dedicated Workforce is a similar product offered under Fannie Mae. Like Freddie Mac’s workforce housing program, it is for conventional market-rate multifamily properties and requires setting aside 20% of the units at rents affordable to residents earning 80 percent of area median income (AMI).

There is a continuum of benefits that Fannie Mae and Freddie Mac financing can provide—one might get a longer amortization, longer interest only period, and a lower interest rate.  By combining all these cost savings and benefits, owners are able to provide greater affordability to their tenants. Of course, deal specifics matter, but in general, the greater the affordability, the more advantageous the financing will be.

Educating Renters

Also discussed during the NMHC conference was the idea of educating renters on financial matters, which can have a ripple effect of positive benefits. Many developers are offering programs to help tenants improve credit, which can lead to meaningful savings on many things beyond rent. Further, developers are helping tenants by instituting programs for after school care, counseling to help tenants make better financial decisions, tips on improving overall health and nutrition, and programs to alleviate food insecurity.

Incremental Affordability

The conversation focused on value-added approaches to preserve and renovate older properties as quality workforce housing, an approach that often costs less than new construction. Panel discussions made it clear that incremental affordability is the key to effectively preserving and thus creating more quality, affordable housing, as the approach can help borrowers find a path forward that benefits both renters and the bottom line.

By focusing on specific actions that can incrementally enhance affordability, developers can maximize the benefits of advantageous financing. Big picture, there are investors who focus on preserving housing at affordable levels and the more affordability that goes into a project, the more financial benefits that can be provided by Freddie Mac, Fannie Mae and other financing partners.