Navigating the Affordable Housing Market: A Guide for Developers

If you’re a developer, it comes as no surprise that there’s an available housing shortage in the US. But narrow that down to affordable housing and the problem becomes even more stark.

There’s a deficit of 7.3 million affordable homes in the US, according to The Gap: A Shortage of Affordable Homes (March 2024) by National Low Income Housing Coalition. Nearly three quarters (74%) of renters deemed low income (according to either the federal poverty line or cost of living in their area) are severely cost burdened.

“We’re short on all homes. Full stop. There just aren’t enough of them. And that means that existing homes are getting bid up because we see high income households competing with low income households for the same residences since just not enough are getting built.” – Alex Horowitz, Director of Pew’s Housing Policy Initiative via NPR’s All Things Considered

Both prospective home buyers and renters are in a quandary. In the past dozen years, over 2.1 million units renting for less than $600 have vanished, while the number of units renting for $600 to $999 has decreased by 4 million​ (Harvard Joint Center for Housing Studies)​. Simultaneously, high-end rental units have surged, further exacerbating the affordability crisis. On the buyer side, costs have skyrocketed, pricing out an additional 2.4 million renters from the possibility of purchasing homes in 2023 compared to the previous year​ (Habitat for Humanity)​.

Behind the scenes, developers are also in a quandary, facing myriad challenges that complicate their efforts to provide cost-effective housing solutions. Rising construction costs, regulatory hurdles, project delays, risk management issues, and limited access to technology are some of the most significant obstacles.

Meanwhile, developing new affordable housing projects is made tougher by other factors like limited private-activity bond (PAB) availability required to generate 4% low-income housing tax credits, sustained high interest rates, heightened insurance premiums, and increasing equity yield requirements.

5 challenges in affordable housing development (and how developers are handling them)

With all that’s going on in the affordable housing arena, it’s crucial to remain cognizant of the challenges ahead of you so you can overcome them.

Rising Construction Costs: Construction costs for multifamily rental housing have risen significantly over the past few years. For instance, the COVID-19 pandemic and subsequent economic aftershocks caused a dramatic 17.5% increase in construction costs in what felt like one fell swoop. Fortunately, the annual rate of increase has slowed to 3–6% in 2024. While overall costs remain high, developers are finding some semblance of stability.

Regulatory Hurdles: Navigating zoning laws and compliance requirements continues to be a significant barrier. Developers have expressed the need for more predictable allocation processes for tax credits and other funding mechanisms. Local policies, like inclusionary housing programs, have had positive impacts — but more streamlined and supportive regulations are necessary to meet the growing demand for affordable housing.

Project Delays and Operating Expenses: Supply chain disruptions and labor shortages contribute to extended project timelines. Operating expenses for existing affordable housing properties recently saw a sharp increase, with costs rising by 10.4% in 2022 alone. Since then, developers have been forced to find creative solutions (for example, packaging properties or increasing insurance deductibles) to manage these rising expenses.

Interest-Rate Instability: A dramatic rise in interest rates over recent years has created significant financial challenges. The prime rate doubled over 10 months in 2022 and 2023, leading to instability and uncertainty in financing. While locking in rates early can mitigate some risks, the volatility still poses a substantial challenge for developers.

Insurance Costs and Discrimination: Property insurance rates have soared, particularly in states like Texas and California. Developers face increased scrutiny from insurers regarding the presence of rent-subsidized tenants, often leading to higher premiums or even coverage denial. This practice, which can be seen as discriminatory, exacerbates the financial burdens that can accompany affordable housing projects, pushing developers to be more selective in what they pursue in the affordable housing space.

Opportunities for developers now in affordable housing

Despite the challenges, there are significant opportunities for developers willing to innovate and adapt. You can leverage this period of instability to focus on becoming operationally efficient, ultimately maximizing returns on capital and enabling quicker resource deployment.

Government Incentives and Funding: States and localities are reforming zoning laws and offering financial incentives to encourage the construction of affordable homes. For example, Washington and Montana have legalized duplexes in most neighborhoods, and Colorado has created funding incentives for zoning code reforms. Additionally, Low-Income Housing Tax Credits (LIHTCs) remain one of the most significant sources of funding for affordable housing projects. 

Operational Efficiency: Partner with lenders who are tech-forward and value the efficiencies of technology. This includes working with lenders who offer a collaborative, modern, and easy-to-use platform to enable seamless communication and easier access to capital. Meanwhile, developers can use this time to streamline their internal operations, making processes more efficient and cost-effective. This includes adopting better project management practices, improving coordination with suppliers to mitigate delays, and enhancing cost-control measures. Operational efficiency not only reduces current costs but also positions developers to act swiftly when the market conditions improve. A full suite of technology features that covers this all in one (for example, Built) is ideal.

Public-Private Partnerships: Build alliances with local governments, non-profits, and other stakeholders to access additional resources and support. These partnerships can facilitate funding, reduce regulatory hurdles, and streamline project development processes. For example, inclusionary housing programs or local, regional, and national grant opportunities should remain a key focus.

Sustainable Practices: Embracing sustainable building practices not only reduces environmental impact but also appeals to a growing market segment that values sustainability. These methods can lead to long-term savings and increased returns on investment. Sustainable practices might include energy-efficient designs and materials that reduce operating costs over the property’s lifetime. Even something as simple as building electric vehicle charging stations can have an impact.

From start to finish

To navigate the affordable housing market, developers must have a big-picture understanding of the challenges they’re facing today. What’s more is they must be willing to embrace new opportunities. By staying informed, agile, and up-to-date on tools and technology, developers can make significant strides in addressing a hard-pressed affordable housing ecosystem.