Creating Affordable Apartment Rents in High-Cost Areas

Freddie Mac White Paper

Unique financing structures help create affordable apartment rents even in high-cost areas, said Freddie Mac, McLean, Va.

A new Freddie Mac white paper, Affordable Housing in High Opportunity Areas, studied Honolulu, Hawaii, Silicon Valley, Calif. and Portland, Ore., three high cost-of-living areas constrained by either high land and construction costs, lack of buildable land or zoning restrictions.

“Improving access to affordable housing in high opportunity areas can be especially difficult,” said Steve Guggenmos, Vice President of Multifamily Research and Modeling at Freddie Mac. “The case studies we analyzed show that a diverse capital stack and an array of community stakeholders are often essential to success.”

The National Association of Home Builders this week reported apartment construction is leveling off nationally but spreading out geographically as multifamily building is increasing in less densely populated areas including small towns and rural counties.

The Freddie Mac report examined Kalani Gardens in the Honolulu area, Studio 819 Apartments in Silicon Valley and Teal Pointe in the Portland area. Guggenmos said he hopes the affordability lessons learned in these properties apply elsewhere as well.

“The cost of housing across Hawaii is driven up by several obstacles, but perhaps most notable is the scarcity of buildable land coupled with high demand for housing,” the report said about Kalani Gardens. “These factors drive up construction costs in the state, making building and operating an affordable rental property economically challenging.”

To provide affordable housing in this high-income area, Kalani Gardens required multiple layers of subsidy, including Low-Income Housing Tax Credits, HUD Section 8 and Section 236 subsidies. The property’s $1,187 average rent is nearly half the $2,208 average market rent per RealPage data. “Income limits and rental-increase restrictions ensure this property remains affordable regardless of market rate rent growth,” the report said.

Silicon Valley is considered a center of economic prosperity and growth. Over the last five years Santa Clara County’s employment base grew more than 10 percent compared with 7.4 percent nationally. But despite local governments’ efforts to rein in rent increases through regulation, rent growth continues to outpace wage increases, causing rent burdens for many area residents.

Freddie Mac highlighted Studio 819 Apartments in Mountain View, Calif., where rents range between $768 and $1,153, well below the $2,419 prevailing submarket rent. To maintain its low rents, Studio 819 Apartments relies on an array of federal tax credits and subsidies, soft debt from the City of Mountain View and a loan from a community development financial institution, the report said.

In the Portland area the percentage of multifamily rental units affordable to very low-income households dropped by 46 percent between 2010 and 2017–the largest drop among the 50 largest metros. But one affordable housing success story is Teal Point apartments in Clark County, Wash., with average rents below $875 compared with the $1,242 submarket average.

“Teal Pointe was the first property to receive financing from Freddie Mac’s mezzanine funding pilot program, which has since ended,” the report said. “As a result of that financing and a LIHTC investment, Teal Pointe did not need to rely on city funding, freeing up local funding for other affordable housing investments.”