The U.S. faces a huge shortage of affordable housing and has, for many years. Most recently, the New York Times reported that experts anticipate a “production cliff” to hit in about a year, meaning fewer affordable homes coming on the market at a time in which there is already a scarcity of this product.

To discuss this issue. Connect CRE recently sat down with Aaron Pechota with affordable housing developer NRP Group. The topics discussed included challenges impacting affordable housing development and considerations for moving forward.

The following is the first of a two-part interview. The second part of this interview will be published in the June 24 Weekender edition.

Connect CRE: Why is there a continued decline in affordable rental housing availability?

Aaron Pechota: This didn’t happen overnight. The outcomes we’re looking at right now started during the Great Recession. At that point, production was put on hold, meaning housing supply was significantly cut for about five or six years. Then the industry really ramped back up, and you saw a significant amount of production from the late teens to the early 2020s to try to correct that lack.

Along with that, demand has gone through the roof, and we haven’t reached that equilibrium yet. More specifically, on the affordable side, we haven’t been producing enough, whether it’s Low Income Housing Tax Credit or other subsidies. The issue here is that it’s difficult to develop affordable housing without an appropriate government subsidy. That’s on the federal side, as well as the local side, to fill the gaps that are associated with it.

Connect CRE: Are investors cautious about becoming involved with affordable housing?

Aaron Pechota: Any time you cap revenue in rent on any rental operation, it tends to not be worth as much to an investor. From an investment standpoint, however, this type of housing is actually very successful. The returns might be lower, but they’re very stable. Also, the default on LIHTC investments is well below 1% nationally. These are not heavily leveraged assets, but the challenge is that these aren’t assets that show huge increases in value, so it’s hard to get the investment community excited about them.

The LIHTC program that incentivizes banks and other community reinvestment investors is sound and has proven successful. In fact, the main investors are banks who are doing this in large part because of the Community and Reinvestment Act requirements.

Connect CRE: Speaking of banks, has the recent turmoil in the finance industry impacted affordable housing development?

Aaron Pechota: On the affordable housing side, we haven’t seen much pullback from banks. Much of that lending reluctance and pullback is coming on the market-rate side. Banks are looking at leverage on deals and are responding to that. They’re still lending, but they’re doing it under more conservative terms. On the affordable side, we continue to see a large commitment from banks on the regional level – the local banks are stepping in. The super-regional banks and national banks are also supporting affordable housing, so we haven’t seen any negative impact to date.