Affordable Housing Vacancy Rates Stay Tight

The affordable housing sector’s vacancy rate remained tight at 2.0 percent for the third consecutive time in the second quarter, reported Reis, New York.

Vacancies rose 20 basis points from a year ago, Reis Senior Analyst Jackie Chung said in the firm’s Affordable Housing Quarterly View. The vacancy rate has remained between 1.8 percent and 2.0 percent since mid-2015; Reis forecasts it will remain at or around this very tight level over the next five years.

Chung said the sector saw 0.7 percent inventory growth between April and June compared to 0.9 percent growth a year ago. Nearly 7,300 affordable units delivered in the second quarter, lower than last year’s nearly 8,000-unit quarterly average and the lowest figure since third-quarter 2017. Rent growth was the highest since 2015 at 3.2 percent over the past year.

“The performance of the affordable housing sector remains strong despite the implementation and subsequent effects of the tax reform bill, which devalued tax credits [including the Low-Income Housing Tax Credit] that helped support the development of affordable housing,” Chung said. “Lowering corporate tax rate from 35 percent to 21 percent means much less incentive for sources of financing to invest in LIHTC properties.”

Chung noted the tax policy change decreased the incentive for financing sources to offset their taxes. She said Reis expects new affordable housing construction to decline by around 40 percent between 2019 and 2022.

“Additionally, it is noteworthy to acknowledge the possibility for the tax reform bill to affect the forecasted construction of market-rate rental units that are also a part of these affordable housing developments,” Chung said.

Reis reported 52 of 80 primary affordable housing metros saw positive net absorption during the quarter while 76 had positive asking rent growth rates.

Looking ahead, Reis predicted this year will have the lowest net absorption and new construction figures since the firm began tracking affordable housing data in 2015. Net absorption could average 25,700 units over the next five years while completions could average 26,100 units, the firm forecasted. Asking rent growth could finish the year strong at 2.8 percent and then decline to the 1.9 to 2.2 percent range next year.