Material Price Gap Funding

6 min read

Keeping Housing Affordable Amid A Supply Chain Crisis   

The housing development sector nationwide continues to struggle with supply chain disruptions and building material price increases. The causes by now are legion, ranging from loose monetary policy that upped inflation, to a worker shortage that’s cooling production, to clogged ports, rising demand for home renovations and the pandemic-related move from cities. These increases are throwing off project financials for many developers, and ones in the Low Income Housing Tax Credit space haven’t been immune. Luckily, some state allocation agencies are responding to the problem with gap financing and other aid. 

According to Houston-area developer Gary Leach, the current crisis is truly unprecedented: “There has never been anything like this, where everything is in short supply – and it’s been going on for the past six months,” Leach told Houston Business Journal. One Houston project’s cost spiked by $12 million, and the situation is even worse in more regulated markets, concerning concrete, steel, lumber, contractor services and more. In late 2021, the National Association of Homebuilders announced the year-to-date price increase of building materials at 12.2 percent; but Sam Merkle, the director of fund management for the National Affordable Housing Trust and a member of the Affordable Housing Alliance of Central Ohio (AHACO), says that in his region it’s closer to 70 percent for lumber. 

Merkle explains, by Zoom, that the combination of long material lead times, increased expense and looming interest rate hikes “creates a lot of problems for deals at perm conversion,” particularly in the affordable space. “You’ve got a situation that takes a lot longer to get the projects built and leased up.” 

Developers have made adjustments and optimizations where they can. The Houston Business Journal article mentions that one local developer is turning to American manufacturers to acquire materials, rather than putting up with global gridlock. Other builders, in apparent anticipation of the shortages, bought large stockpiles of lumber and other materials back when they were cheaper. And Merkle says there’s a shift by developers towards a more front-loading model for financing, ”whether it’s a little bit larger equity installment or takedown of the construction loan.” 

But ultimately, he says, the cost of all these disruptions “gets passed down to the renter.” The estimated Year-over-Year (YoY) increase of rent is 3.8 percent, according to the Consumer Price Index, but the Federal Reserve of Dallas believes this could increase much faster in coming years, as rent spikes usually trail home price inflation.  

In light of these disruptions, some housing finance agencies are providing additional assistance to LIHTC developers. Recently, the Arizona Department of Housing (ADOH) announced $1.2 million in supplemental funding for projects encountering “severe hardship.”   

“Per the 2022-2023 Qualified Allocation Plan (QAP),” the agency writes in a bulletin, “ADOH has set aside up to $1,200,000 in forward allocated nine percent LIHTCs for projects with severe hardships. Projects may receive up to ten percent of the original nine percent LIHTC award.” 

Michigan is another state that has increased LIHTC allocation to projects encountering supply-chain issues. The state’s Housing Finance Agency announced a funding round in mid-January for vulnerable projects for the 2022-2023 allocation period. However, it only applied to those projects that had received their original credit round during the 2019-2020 period. Ohio announced a similar allocation for struggling projects late last year.  

The situation in Ohio, like elsewhere, is challenging. Merkle notes that all of Affordable Housing Alliance of Central Ohio’s (AHACO) members in the construction business experienced a cost increase in the range of 16 percent last year. That amount “doesn’t sound like a huge amount to the average person…but given how tight our budgets are that’s a very difficult thing to overcome,” he says. “When these costs go up, budgets can fall apart, deals can fall apart, units don’t get built.”  

An AHACO report found that the majority of affordable projects in its service area are facing challenges in some form related to the supply chain crisis. Sixty-nine percent of members faced what they called “excess competition for limited resources,” while 62 percent faced higher expenses for building materials. Merkle is unsure of how helpful the additional allocation in any of these states has been, but he says that developers are constantly attempting to win more of it. 

Luckily for them, LIHTC allocations have increased across the board. Government Sponsored Enterprises are increasing their allocations from $1 billion to $1.7 billion, according to a White House policy brief. Federal authorities have also directed Fannie Mae to explore pre-manufactured structures as a means of helping developers circumnavigate the supply chain crisis, by using less material.

Another source of assistance may come from Environmental, Societal and Governance (ESG) funding provided by institutional investors, notes a December 2021 article by KeyBank.  

“Often an affordable housing deal can meet multiple criteria since it has a social impact and also may remediate environmental issues or implement sustainability features during construction.”  

Blackstone’s real estate arm made a $5.1 billion investment in an affordable housing portfolio being offloaded by American International Group (AIG) in July. Another example is Monarch Private Capital, which financed 35,000 units as part of its investment in LIHTC projects. One survey finds that three-fourths of investors are pursuing ESG investments in some form. Ironically, then, the same easy money that is causing inflation has also pumped the market with liquidity, which should make it easier for LIHTC developers to find private investors, many of them looking to boost their ESG scores.  

Lastly, support for LIHTC developers in need of gap financing may come from the federal government, via the American Rescue Plan (ARP). In April 2021, the Department of Housing and Urban Development announced $5 billion in ARP funds were to be allocated for the specific purpose of financing affordable housing.  

While the supply chain crisis should eventually wane, other factors mentioned above will likely continue to increase the price of materials, thus construction. Affordable housing developers need to adjust by how they stockpile goods and capital, and by seeking as many financing opportunities as possible. Concludes Merkle on the current situation: “The tail of this is going to be a lot longer than the head of it.”  

This article featured additional reporting from Market Urbanism Report content manager Ethan Finlan.