Mixed-income project financing increasingly scarce in the COVID era

With so much economic uncertainty looming, some property developers are struggling to find financing for new construction starts, Laurel Street CEO Dionne Nelson said during a panel session at the Urban Land Institute Fall Meeting this week.

"Our financing partners, while they have not walked away from our pipeline and their enthusiasm for seeing us move forward with particular projects remains strong, they've become very hesitant," Nelson said of her company, a mixed-income housing developer focused on residences for working class families and seniors based in Charlotte, N.C.

Deals that should have closed six months ago are now on the table for a fourth-quarter transaction, she added. When it comes to low-income housing tax credit financing that Laurel Street sources for its projects, "we have seen a softening in the pricing that investors are willing to pay for those types of credits. And that is a fundamental result of investors questioning how much income they're going to have at the end of this pandemic, and if they have less income, they pay less taxes," and not need the credits, Nelson said.

The election results should provide some clarity around corporate tax rates that right now factor into the hesitancy for LIHTC investors on the level of investment they are looking to make, Nelson said.

Laurel Street even proactively moved one transaction from the fourth quarter into the first quarter of 2021, in an effort to get better pricing. "It will come back, but syndicators and investors need some certainty around how much capital is going to continue to flow into funds that buy these tax credits," Nelson said.

Still, "frankly we're doing much better than I would have anticipated," Nelson said of the company's portfolio, which is made up of properties occupied by the low-to-moderate income renters who have been hardest hit by the pandemic. Nelson credited that success to the federal stimulus that helped renters make their payments.

Overall, businesses like hers "will be fine, but we have to get to the other side and that will take more time," likely not until some point in 2021, she said.

There's also some good news to mitigate the bad. Historically low interest rates have cancelled out problems with slower rent growth and rising real estate taxes for multifamily property owners, said Mary Ann King, the co-chairman of real estate brokerage Moran & Co. "The reduction in debt service costs has compensated for the weakness in these operating fundamentals," she said.

In some markets, typically suburban ones, cap rates — a measure of the expected rate of return from a property — have compressed because "there's more capital chasing deals then there are deals to satisfy that demand," King said.

Furthermore, capital that might have gone into the retail, hospitality and other sectors has been redirected into the apartment sector, especially in those suburban markets, she continued.

Coming out of the downturn, there will be a lot of upside for her business, Nelson said, "because frankly in the space that we're in, I think there's an awareness about social justice issues that maybe wasn't as apparent a year or two ago. There's an awareness around the affordability issue that is only intensifying in this particular scenario, so I think capital will become more fluid to do the work that we're doing, but you got to get there."

Transaction volume for multifamily properties should rebound in the next couple of years, "as soon as the investment market feels like we've hit bottom and the recovery has really begun," King said. "I think we're going to start to see a broader geography of trades and more people coming back into the market."