‘Tis the Season… For Affordable Housing?

By Roland Murphy for AZBEX

As has been pointed out on these pages before, when a word is used to describe every situation in the news, it loses its impact. Specifically, when everything is a crisis (COVID, inflation, supply chains, labor shortages, climate, opioids, cream cheese availability, Sharon’s Marie Callender’s pumpkin pie, etc. etc.), nothing really seems a crisis.

The national and Arizona housing affordability situation, however, is worthy of the term.

While market-based solutions are always preferable to government edicts, much has been learned in the last 60 years about how governments and industry can work together to address social problems, including affordable housing.

The federal government, states, counties, cities, and departments and agencies have all made strides toward enticing the private development community to increase affordable housing supplies through the public RFP process. TempePinal CountyMaricopa County and the Housing Authority of Maricopa County all have requests out at the moment seeking partners to enhance housing supplies and earn good returns in the process.

The Numbers

It should be noted from the outset there is no way to 100% accurately describe the state of the market. Multiple data sources exist, and they each have their own parameters depending on how they are structured and the audiences they serve. Even though those audiences often overlap, specific needs are different.

For example, our own DATABEX database is targeted at the Architecture/Engineering/Construction and identifies projects by square feet and estimated valuation. Yardi Matrix is targeted at commercial real estate users and identifies projects by unit count. DATABEX defaults to a statewide search and lets users break items down by municipality. Yardi searches by major markets and lets users refine by submarkets, etc.

Even though apples and oranges comparisons are difficult, they do still have value if one wants an overview of the entire fruit bazaar.

For example, even though DATABEX has a base cutoff of $5M in estimated value for inclusion, as of December 23rd, we show 269 multifamily projects across all types as Under Construction around the state and 228 in the Metro Phoenix area. Yardi, which only counts projects of 50 units or more, shows 144 in Metro Phoenix.

Sticking with Yardi, since it is the standard for multifamily brokerages and market researchers, let’s look at those 144 developments:

  • Conventional (market rate): 132 developments, 33,465 units, 93.1% of total;
  • Partially Affordable: Four developments, 1,392 units, 3.9% of total, and
  • Fully Affordable: Eight developments; 1,101 units, 3.1% of total.

Property class shows a nearly perfect overlap, as 134 of the projects Yardi lists are in the top two tiers of asset classes, which the general public refers to as “luxury.”

While the single most important factor determining affordability is the overall available supply, a development pipeline of 93.1% market rate will take a long time to ripple outward sufficiently to have a real impact in a market that hovers around 97% occupancy. Further complicating that are the facts that Arizona continues to add around 100,000 new residents a year – and is expected to continue for the immediate future – and, as of November 1st, the supply and demand problem showed Phoenix as the fourth largest rent increase market in the country at 26.4%, according to Realtor.com.

And, let’s not forget, regardless of asset class, we’re still falling between 3,500 and 6,000 units short of the necessary deliveries per year to meet our inventory need. Even those need estimates are disputed, with some economists setting them much higher.

Affordability and Government

Since at least the 1960s, affordable housing has been largely thought of as a government issue. Unfortunately, that led to debacles in public housing, segregation into “housing projects,” a variety of administrative issues and a severe social stigma.

To its credit, both the federal and regional governments have improved conditions and penetration in affordable housing programs, but the stigmas remain. The general public still thinks of affordable housing as “The Projects,” and developers are under-incentivized to develop affordable units to any significant degree because of the difficulty in gaining approval and the markedly higher returns that come with luxury market-rate developments that can be easily filled during pre-lease.

The issue is not insurmountable, however. State, regional and local governments have seen the value of partnering with private development to provide incentives via partnership that create affordable units while still providing adequate returns. While they are still far too few to make a major impact in addressing supply, this is not an issue that’s going to be solved by any one channel. Every expert agrees a multi-faceted approach is necessary, and governments in the area are showing an interest in contributing to the solution.

Tempe

As the home of Arizona State University’s main campus and featuring a younger and more diverse demographic than most other cities around the state, it is not surprising Tempe has taken a leadership position on many social issues, including affordable housing.

The centerpiece of Tempe’s affordability efforts is the Hometown for All initiative approved by the City Council in January 2021. A stated goal of Hometown for All is to accelerate “the growth of affordable housing through a sustainable funding stream.”

The following process and mission overview is taken from Tempe’s initial press release announcing the initiative: “For every development project built in Tempe, an amount equivalent to 50% of certain permitting fees paid to the city will be directed from the city’s General Fund to the Tempe Coalition for Affordable Housing, a nonprofit corporation affiliated with the City of Tempe Public Housing Authority. This coalition is informally called The Affiliate. From there, the funds could be used to buy and rehabilitate properties, or to buy land and request competitive offers from developers or nonprofit partners to build affordable or workforce units.”

Earlier this year, Tempe purchased a 40-room Rodeway Inn on Apache Boulevard with $3.5M in American Rescue Plan Act funding to convert to transitional housing for the homeless while they search for more permanent solutions.

Last week, the City announced it had purchased the three-acre Pollack Apache Center, also on Apache, using $10.7M from the general fund’s unrestricted fund balance. The property will be rezoned as mixed-use residential housing to provide housing and shopping options to the community in support of the Hometown for All initiative.

The property is located next to the EnVision Tempe center, which will open in 2022 and provide job and housing assistance, educational opportunities, health programs and other resources.

Tempe also has an open Request for Proposal for another development on Apache that will repurpose four lots for affordable residential mixed-use. According to the summary, the request covers, “Lease and Development of a Mixed-Use Affordable Housing Project on 4 Vacant Lots. The project consists of the lease and development of a mixed-use affordable housing project on 4 vacant lots consisting of approx. 2.6 acres located at 2320 & 2314 E. Apache Boulevard.”

The detailed language notes, “Preference will be given to a fully income-restricted project. The lots were purchased with HUD/CDBG funds so all HUD/CDBG rules, regulations and requirements apply. The land will not be sold but leased for a 60-year term for mixed-use and multifamily and up to a 99-year term for land trust model home ownership opportunities at a rate to be negotiated during Development Agreement negotiations.”

Responses are due March 17th.

AZBEX emailed a series of questions on affordable development programs to Tempe communications staff and received a response from Deputy Community Development Director – Planning Ryan Levesque, saying in part, “…our Council has come up with innovative ways to make an impact locally. In 2019 City Council adopted an Affordable Housing Strategy Plan and has been making great strides towards increased housing stock for low-income and workforce housing income levels, under the leadership of Mayor Corey Woods. Despite not being able to require a percentage of affordable housing into private developments, an RFP is the appropriate way a City-initiated project can require the incorporation of affordable housing into a project. There are other voluntary options the city has, such as 50% waiver of development fees when a project provides 10-20% of the total units to workforce housing (80-120 AMI) is included within a development for a certain term.”

It should be noted Tempe is not alone in using development agreements to incentivize developers to include affordable units into the mix for new multifamily developments. Particularly in the downtown area, Phoenix has also made use of the method, as has Scottsdale, though to a far lesser extent.

Pinal County

Pinal County also has an affordable housing RFP open at the moment. The request seeks, “…applications from non-profit agencies, public agencies, for profit developers, and certified Community Housing Development Organizations to construct, acquire, or rehabilitate affordable housing,” and identifies six properties in Eloy for consideration.

Project funding comes through the County’s HOME program, and $1.146M is available. $370K is set aside for homes affiliated with CHDOs. Supporting materials for the proposal note eligible housing types consist of:

  • Single- or multi-family dwelling units for sale or for rent;
  • Manufactured housing and manufactured housing lots;
  • Transitional housing (new construction/rehabilitation of rental housing only);
  • Single room occupancy units (new construction/rehabilitation of rental housing only);
  • Group homes (new construction/rehabilitation of rental housing only).

Multiple awards will be issued, but they may go to one winning contractor depending on submissions and circumstances. Questions are due January 15th, with proposals required by February 7th.

Maricopa County

Maricopa County has an affordable housing RFP out for consideration as well.

According to the documents, “The purpose of this solicitation is to increase the affordable housing stock in Maricopa County. Maricopa County Human Services Department is seeking applications from for-profit or non-profit affordable housing developers which, when approved by the Maricopa County Board of Supervisors, will result in development agreement(s) to increase the number of affordable housing units. Awards will result in grants or loans as determined in the ‘to be negotiated’ project specific Agreement.”

MCHSD will award up to $30M to eligible projects funding from the American Rescue Plan Act. Components of the request include:

  • Property acquisition for affordable rental/ownership/supportive housing properties,
  • Acquiring, rehabilitating or constructing new properties,
  • Instituting long-term master leases for affordable rental housing for special needs tenants, and
  • Rental development projects using Arizona Low Income Housing Tax Credits.

Submissions were due December 21st and will be opened January 11th. Contracts are expected to be awarded February 23rd.

Housing Authority of Maricopa County

The Housing Authority of Maricopa County also has a Letter of Intent in the works. The invitation states, “The Housing Authority of Maricopa County is looking to develop more affordable housing in Maricopa County to meet the need of very-low, low- and moderate-income families and seniors who need housing that is reasonable to their income level.”

The Authority wants to enter into partnerships with developers “who have the desire to develop housing that is maintained at an affordable rate for at least 15 to 20 years in the market. These include, non-profits, for profits, and local governments who share the objective of developing more affordable rental units in Maricopa County. HAMC is interested in family, senior, and workforce housing developments that target incomes from 30% to 80% of Area Median Income. The projects must be open to accepting Housing Choice Vouchers and other rental assistance programs managed by HAMC.”

More Drops Needed to Fill Bucket

While it is admirable for these government entities to expand their affordable housing efforts, particularly by engaging with private developers, much more needs to be done.

One key hindrance in developing affordable housing is Arizona’s prohibition on inclusionary zoning, which restricts municipalities from requiring a portion of appropriate developments be designated affordable. The measure was enacted under 2015’s Senate Bill 1072.

In the same email exchange noted above, Tempe’s Levesque said, “The State’s inclusionary zoning prohibition certainly makes it a challenge for local cities to consider opportunities to incorporate affordable housing into a development. But with the right types of incentives and a willing developer that is interested in affordability, a partnership can be formed through a Development Agreement. The best way Cities can combat the inclusionary zoning issue, is make a point of emphasis to provide as much voluntary programs that supports affordable or workforce housing.”

Courtney Gilstrap Levinus, President and CEO of the Arizona Multihousing Association – one of the state’s leading housing advocacy groups, was less diplomatic but more encompassing in her responses to our questions. Referring to the City of Phoenix Housing Plan, she said, “The AMA has supported this strategy, and we will continue to do so. Using the Phoenix example, the RFP process coupled with other initiatives – like expedited plan review, reduced impact and permitting fees and well-funded public-private partnerships – represents the city “putting its money where its mouth is,” as opposed to a “workaround” to avoid limits on inclusionary zoning. Also, as is the case with every RFP, participation is strictly voluntary. No developer is forced to respond; rather, companies can choose to participate or not. The RFPs are a great first step but so much more needs to happen.”

She went on to say, “The AMA also believes that cities need zoning reform, they need to reduce the barriers to entry and they need to approve and expedite projects. Unfortunately as you noted in your recent article(s) (AZBEX Dec. 7, Dec. 3, Nov. 30) cities are not inclined to solve the problem as they fear the NIMBY organized efforts. We are now seeing cities blame the very industry that is trying to solve the problem. They are shifting the blame for their lack of approving new housing units as they advocate for rental control, mandating Section 8, as well as inclusionary zoning. All of these ideas will only increase the cost of housing for all Arizonans and reduce new housing stock as investors seek environments with less onerous regulations.”

As we move into the new year, bringing with us all the challenges of the old, let’s take a moment to reflect on the progress we have made (and we have), but let’s also keep our eyes and minds open to the fact that there is much, much more to do.

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