Now, the pandemic has exacerbated this crisis, with millions of low-income service-sector employees forced out of work and left without reliable income to satisfy rent obligations. One-time stimulus checks, increased unemployment benefits, and eviction moratoriums have offered some support, but many of these benefits have expired, and uncertainty looms around future government assistance.

The public health crisis will end, and the economy will inevitably bounce back. But the affordable housing crisis will likely be worse on the other side of this pandemic. Institutional investors with a focus on environmental, social, and governance (ESG) investing can help address the housing crisis through investment opportunities in both the public and private markets.

In the public markets, fixed income investments that support affordable housing include corporate bonds, taxable/tax-exempt municipal bonds, and residential mortgage securities. Objectives include increasing homeownership for low- and moderate-income populations, expanding the availability of housing near public transportation, sponsoring mixed-used development projects, or supporting public housing. A small number of fixed income managers specialize in this niche sector, and a larger number include affordable housing as part of a broader ESG mandate.

One way to support affordable housing is through purchases of residential single-family and multi-family mortgage-backed securities, typically issued by federal government agencies. Some managers invest in a broader fixed income opportunity set than mortgages. They may purchase corporate bonds whose proceeds aim to develop or preserve affordable housing options for low- and moderate-income populations. Municipal bonds, either taxable or tax-exempt, can also support affordable housing initiatives, such as through development or improvement of public housing.

Managers that specialize in this area typically target competitive risk-adjusted returns relative to an appropriate investment-grade fixed income index, at reasonable fees. Vehicle structures include mutual funds, commingled funds, or separate accounts, and some even allow for investments targeted in a specific geographic region of the United States. These targeted strategies have gained traction with some clients, including large public pension plans with a desire to advance affordable housing initiatives in their communities.

In the private markets, real estate investment managers offer opportunities focused on affordable housing, primarily in the form of closed-end commingled funds. These funds generally pursue value-add strategies, targeting an internal rate of return (IRR) of 10%-14%, net of fees. As with other closed-end funds, these investment opportunities are illiquid, with a fund life of 10 to 15 years. Additionally, fees paid to the general partner consist of both asset-based and performance-based fees, both of which can vary between organizations and funds.

There is a strong case for private market investment in affordable housing, as the affordable subsector remains undersupplied, with plenty of demand from cost-burdened residents. During the pandemic, multi-family property investors and operators have closely monitored rent collections and vacancy rates. Despite the significant increase in the national unemployment rate, Callan’s discussions with managers focused on the affordable housing subsector have broadly indicated that rent collections have been less impacted in affordable housing than in market-rate housing, and vacancy rates have also remained consistently low. Tenants in affordable housing properties generally have a greater ability to satisfy rental payments because the rates are often significantly lower than market-rate units. In addition, the limited supply of affordable housing makes the market incredibly competitive for renters, which further incentivizes tenants to meet their rent obligations and avoid eviction.

Due to these supply-and-demand dynamics, the affordable housing subsector tends to be particularly cycle-resilient compared to other forms of multi-family properties. For example, the luxury apartment subsector focuses on best-in-class units in buildings with attractive amenities, meant to attract high-income earners. While luxury housing allows for higher base rents and rent increases, this subsector tends to experience increased vacancy in economic downturns as residents downsize or move to apartments with fewer amenities. In addition, luxury housing has become oversupplied in recent years due to increased construction activity.

Affordable housing-focused strategies within both fixed income and private real estate provide a compelling investment opportunity with an attractive risk-return profile. And investing in affordable housing presents the opportunity to support diverse communities that have been disproportionately harmed by the affordable housing crisis, which has been worsened by the COVID-19 pandemic. As institutional investors increasingly look to implement ESG goals within their portfolios, Callan anticipates growing interest for investment opportunities that support the development and maintenance of well-run affordable housing properties. Institutional investors evaluating these opportunities should consider factors including:

1. The fit in their portfolios and with their risk-return objectives, either in fixed income or in private real estate
2. The impact on implementation of ESG goals, such as making economically targeted investments
3. The nuances between various investment managers’ strategies focused on affordable housing, either in fixed income or in private real estate, and how their selection of strategies and investment vehicles can impact liquidity needs and fees