Beyond Motivation: Why Invest in US Affordable Housing? And Why Now?

For many institutional investors, it has been a longstanding perception that an investment in affordable housing in the United States could not generate alpha. However, over the past several years, economic and demographic forces are upending that perception and turning a social challenge into a compelling financial opportunity.

THE PERFORMANCE AND RESILIENCE OF AFFORDABLE HOUSING IS DRIVEN BY A HISTORIC SHORTAGE OF UNITS

In the US, there is an estimated shortage of seven million affordable housing units; and it is a gap that continues to grow.[i] The consequences have been severe, with drastic increases in housing instability, rising homelessness, and families burdened by high rents. 

Regrettably, this shortage is worsening as housing production slows. Higher interest rates and inflation have made new development far more expensive. Based on statistics from the Secured Overnight Financing Rate Index, construction lending rates have jumped over the past few years from around 4.5-5.5% (2018) to as high as 7.5-9%.[ii] While those rates have cooled somewhat with traditional banks pricing construction debt in the mid- to high-6% range, the cost of materials continues to climb. Since late 2018, construction materials pricing is up roughly 42% according to the BLS Producer Price Index.[iii]

These financial pressures have pushed many developers to migrate toward higher-income multi-family projects (or build-to-rent, as they are often known as outside of the US) where elevated rents can more effectively offset higher construction costs.

Between 2022 and Q4 2025, over two million units (2,122,291) of multifamily housing have been or will be built nationwide[iv][v] with 13% of those units (272,872)  being rent-restricted affordable housing for families earning less than 80% of Area Median Income (AMI).[vi]  For reference, 80% of the nationwide median income is just over $67,000[vii]—in line with earnings for professions such as teachers, therapists, flight attendants, construction and building inspectors, property managers, and industrial mechanics.[viii]

These years stand in great contrast to what is expected to occur over the coming four years due to increasing costs. From 2026 to 2029, just 1.6 million (1,623,111) new units are projected to come online (a quarter less than the prior four-year period).[ix] In 2029, it is projected that 425,000 units of housing will come online, of which only 38,000 will be made affordable to households earning less than 80% AMI.[x][xi] This scenario sets the stage for a dramatic reduction in the production of affordable housing.

These shortages, coupled with the steep slow-down in affordable housing production, are major contributors to more than half of all US renter households being cost burdened due to spending more than 30% of their income on housing (“Cost Burdened”).[xii] In most communities, the shallow inventory of lower-cost housing alternatives, coupled with the limited number of new units being built, adds to this crisis.

This precipitous drop in housing affordability has resulted in a market dislocation that, conversely, creates a significant market opportunity for institutional investors to benefit their portfolios—as well as communities.

THE EVOLUTION OF US AFFORDABLE HOUSING STRATEGIES

Traditional Affordable Housing: Tax Credits for Low-Income Housing

Since 1986, low-income housing has been largely driven by the federal Low-Income Tax Credit program. The federal tax credits are awarded to real estate developers in a competitive, scored process.

The primary subsidy – the 9% credit – has typically covered70% of the project cost.[xiii] Of late, with inflation and high interest rates, these subsidies have covered a shrinking percentage of the project cost – from projects we see in the market it is closer to 60% now – necessitating more developers to secure additional government, nonprofit, and foundation financing.[xiv]

In Los Angeles, for instance, a LIHTC project typically has between 6 to 11 sources of financing between public and private sources[xv], ballooning the timeframe for such projects to cobble together these funding sources to stretch to an average of 3-5 years of predevelopment and fundraising for a single project.[xvi]

Scaling Affordable Housing Using Private Capital

About a decade ago, a range of real estate developers and fund managers, seeing the increasing unmet demand for affordable housing, the increasing need for subsidy, and growing cost of projects relying on such complex capital stacks, began expanding the use of financing models grounded in tapping private sector debt and equity.

These funds also incorporate a mix of incomes—including workforce housing (typically affordable to incomes of 80% to 120% of the AMI) and market-rate rents, to enable the economics of the project to support the affordable units. Over the same period, as the shortage of affordable housing impacted communities across the country, many cities, counties, and states began innovating with their own incentives to attract more affordable housing development to their communities (see Texas tax exemption example in section below).

THE OPPORTUNITY (AND THE PERFORMANCE DATA BEHIND IT)

Over the past four decades, the financing for affordable housing has predominantly fallen within the purview of government agencies, nonprofits, and foundations—cementing the misconception that financing affordable housing was misaligned with the needs of institutional portfolios.

More recently, for the reasons noted above and statistics discussed below, affordable housing has begun to attract serious attention from institutional investors as they consider fund managers that focus on this niche investment strategy. The data on the performance and resilience of this asset class, as well as the growing number of managers executing in this space, have been key catalysts behind this growing interest.

By way of example, these projects are often very institutional in nature. The sponsors have often undertaken dozens of similar projects over their careers and understand the space deeply. The returns to the equity investor is often in the mid-teens to low-20’s, and the project is of very high quality. The Atlanta, GA apartment project profile to the right and the Austin, TX project in the section below both exemplify the types of investments that fall within these parameters.

A range of recent studies from the National Bureau of Economic research[xvii], RCLCO[xviii], Nuveen[xix], and the National Council of Real Estate Fiduciaries (NCREIF)[xx] have aligned findings, often centering on how affordable housing assets exhibit lower vacancy and tenant turnover rates and have a lower correlation to macroeconomic swings compared to multifamily housing targeting higher income tenants.

A 2024 study by the Pension and Real Estate Association (PREA) found that over a 16-year period (Q1 2008–Q1 2024), the unlevered average annual return of the most affordable properties serving households at or below 80% AMI outperformed those serving households above 120% AMI by 239 basis points.[xxi] The primary reason cited for this is lower vacancy rates due to more limited tenant turnover.

Our firm’s recent investment experience through the American South Real Estate Funds mirrors these findings. In cost-burdened communities, where over 30% of households spend more than 30% of their income on housing, the demand-supply gap is glaringly obvious. Newly constructed units lease up rapidly, often with waitlists forming before construction is complete. Once leased, tenants are much less likely to leave, given the scarcity of alternatives at similar price points.

Unlike many real estate asset classes, our team regularly witnesses how market demand for affordable housing increases with macroeconomic uncertainty. Families tighten budgets, seeking stability and lower rents, which contributes to the resilience of affordable housing as a niche investment opportunity.

A NICHE MARKET WITH A GROWING TRACK RECORD

Twenty years ago, there were few investment vehicles within this space for institutional investors to consider. Early pioneers—such as the Genesis Workforce Housing Fund—were testing unproven theses.[xxii] Since then, the landscape has dramatically changed. A growing cohort of specialized managers who have launched affordable housing platforms now have a track record of more than a decade within this space, providing investors with the performance data they need to evaluate these options.

Peter Braffman, Head of Real Estate at GCM Grosvenorand one of our most recent investors and strategic partners, has pointed out how his own perception of affordable housing has changed over time: “Before the Global Financial Crisis, we didn’t view this strategy as compatible with traditional institutional investing, whether from a return standpoint or in terms of providing sufficient liquidity for shorter-duration vehicles. Today, we see it very differently – and far more positively.”

Over the past decade, sponsors acquiring and rehabilitating affordable housing—as well as those constructing new projects (collectively referred to below as developers)—have increasingly utilized private-sector debt and equity. More developers perceive the pace of public-sector investment at the federal level as slowing substantially over the years—or being eliminated—and have opted to tap into private capital. For instance, the Austin project profiled to the left, tapped the American South Real Estate Fund II for its equity, rather than undertaking a longer and more time intensive process to secure additional public-sector sources.

Properly structured, private capital is faster and more flexible than government or nonprofit funding sources. Securing public-sector, foundation, and nonprofit financing can often take 4-7 years while private capital can move into projects within a matter of weeks or a few months. Affordable housing developers value the speed, flexibility, and scalability that private equity real estate investment platforms can provide. They also appreciate having equity partners that deeply understand the ecosystem of affordable housing, given the many nuances and complexities involved to make a capital stack work.

Many developers have recently been shying away from federal subsidies or programs – such as the Housing and Urban Development loan programs, which have become even more delayed due to staffing cuts, and even the recently expanded LIHTC program provisions still require developers to knit together additional subsidies to fill the growing capital. This trend is not expected to change in the near term.

On the flip side, local and state incentive programs are growing in both number and popularity. For example, tax abatements, rezoning for infilling, grants, and fee waivers are incentives that can be accessible, without long application periods or complicated compliance requirements. It is these types of incentives that are expected to continue to grow in an effort to mitigate housing affordability challenges.

For instance, in Texas, projects can qualify for a 100% property tax exemption. A 200-unit project can claim an annual property tax abatement, worth approximately $900,000 to $1 million a year, if the owners commit through a covenant to  reserving at least 10% of the units for households making less than 60% of AMI, and an additional 40% of the units are affordable to families earning less than 80% of AMI. These incentives typically boost net operating income by a full 20% to 25%. These types of incentives—particularly across the South where states and localities are very competitive for new business—have been very effective at incenting developers to their communities.

Developers interested in taking advantage of these programs are finding that these incentives can be quite accretive to their project bottom line. Utilizing private-equity real estate funds enables these developers to move quickly once they leverage into these more straightforward local and state programs (compared to complex federal programs).

The most successful developers in this space are those who are adept at pivoting as the market shifts. Many have refined replicable construction models for greater cost and time frame efficiency, built specialized contractor and subcontractor relationships, or deployed new technology that reduces both development and operating costs. Such innovative development strategies are most successful because they seek out opportunities even in uncertain markets.

WHY NOW?

Investing in affordable housing, due to the range of factors noted above, is increasingly viewed as a solid and strategic option for sponsors seeking more conservative, resilient, and niche strategies that are less correlated to the macro economy. And, for investors who might be overexposed to high-income housing, affordable housing offers a diversifying opportunity.

Affordable housing is not just a moral imperative for society. It’s an investment opportunity hiding in plain sight.

ISSUE #20:

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CONTENTS

Note from the Editor: Issue #20

Benjamin van Loon | AFIRE

AFIRE Investor Survey: The Case for US Real Estate in 2026

Benjamin van Loon | AFIRE

The Data Center Pipeline: Is it a Boom, or a Bubble?

Scot Bommarito, William Maher, Andrew Janko, Amber Hughes | RCLCO Fund Advisors

Autonomous Intelligence and the Global CIO: Formalizing Conviction in a Fragmented Market

Francis Huang | Apers AI

A Home Genome Project: How a City Learning Cohort Can Create AI Systems for Optimizing Housing Supply

Brookings

How C-PACE (and Stretch PACE) are Rewiring Global Real Estate Finance for the Energy Transition

Jonathan Seabolt | Clearwater PACE

Solar Wave: Community Solar is Set to Transform Lease Income

Michael Sanduski | Lumen Energy

Trade Winds Redrawn: US Tariffs and Commercial Real Estate

Stewart Rubin and Marshall Swett | New York Life Real Estate Investors

The Complexity Premium: Leveraging the Alpha Opportunity in Regulated Gateway Cities

Donal Warde | Consultant + Richard Cadena | Bank Hapoalim (BHI) + Wenpeng Ding | Zicklin School of Business

NYC Office Recovery: Repricing Physical Infrastructure in the Age of AI

Scott Crowe | RXR

Beyond Motivation: Why Invest in US Affordable Housing? And Why Now?

Deborah La Franchi | SDS Capital Group

Build-to-Rent: Redefining Housing for Renters and Investors

Paul Kolevsohn, Alex Lachman, Lev Kling-Bronstein | Stockbridge + Don Walker, Kevin Cody | John Burns Real Estate Consulting

Inflation Fighters: The Case for Mission-Critical NNN

EJ Wislar | PRP Real Assets

Private Apartment Equity or Private Debt: Comparing Investment Performance of the Two Quadrants

Gleb Nechayev | Berkshire Residential Investments

Meet Them Where They Are: National Demand Landscape Survey

Kevin Hudak and Michael Broder | RCKRBX

REIT Puts and Calls: Public Market Signals for Private Real Estate Investors

William Pattison, Michael Steinberg, Carsten Raaum, Kiel Deitrich, Jacob Kurosaki | MetLife Investment Management

Modernizing Management: How Structural Shifts in Real Estate are Rebalancing the GP and LP Relationship

Finn DuComb-Festor and Miles Treaster | Cushman & Wakefield

Clarifying Vision: Exploring the Dynamics of Slowing Capital Flows

Cliff Booth | Westmount Realty Capital

DISCLAIMER

The publisher of Summit is not engaged in providing tax, accounting, or legal advice through this publication. No content published in Summit is to be construed as a recommendation to buy or sell any asset. Some information included in Summit has been obtained from third-party sources considered to be reliable, though the publisher is not responsible for guaranteeing the accuracy of third-party information. The opinions expressed in Summit are those of its respective contributors and sources and do not necessarily reflect those of the publisher.

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