Addressing the Affordable Housing Crisis

Speaker 1: It's no secret that the United States is facing a housing crisis. A variety of forces have converged, both economic and political, to create a dearth of residential options in cities across the country, particularly at affordable prices. But possible solutions exist and they're increasingly powered by forward thinking investors.

Rich Roberts: Higher percentage of people who can't afford to rent, higher percentage of people who can't afford to buy, higher percentage of people who are spending an inordinate amount of their income on housing. Everyone's got a housing story throughout the country. The responsibility that I think folks like us have in working in this industry is how do we tackle it?

Speaker 1: That was Rich Roberts, principal& chief business development officer at Redstone Equity Partners, and this is Streaming Income- A Podcast from Barings. I'm your host, Greg Campion. Coming up on the show, my colleague and head of affordable housing at Barings, Daron Tubian sits down with Redstone Equity Partners' Rich Roberts, to discuss the current state of affordable housing in the United States. This episode is part of our Investing Together series where we aim to shine a light on partners like Rich and the Redstone Equity Partners team who are driving value in new and impactful ways. With that, please enjoy this conversation with Daron Tubian and Rich Roberts.

Daron Tubian: Rich.

Rich Roberts: Yes.

Daron Tubian: Thank you very much for joining us today.

Rich Roberts: Thanks so much for having me.

Daron Tubian: Great to have you. You and I have had an opportunity to work with each other for 15 plus years. We've worked on some really exciting projects. Your focus on the affordable housing sector obviously has always been valuable to what we do in this space, but having been on the public and private sector, maybe you could take it just a minute, kind of talk with us through what you've seen, how you came to be a principal at Redstone Equity Partners, your current role and what you forecast for the future.

Rich Roberts: Thanks Daron. Thanks for having me. I was really flattered when I got the call and I was really excited to have this opportunity to chat with you. Looking forward to our conversation and yeah, we've been at it a long time and I don't know if that's a proxy for saying we're old, but at least we've got the season. At least we've got the experience to understand what's going on hopefully, and share with people what's going on in the current environment. You're right, I've done a bunch of different things in affordable housing. It's now approaching almost 30 years in affordable housing. I've been on the government side, I've been on the development side both for- profit and nonprofit. I've been on the financial side where I am now. It's interesting, I had spent some time working in the nonprofit here in New York, and then I'm originally from, I don't know if you know this, but I'm originally from Akron, Ohio. Redstone, up until recently, was based in Cleveland. And I had developed a relationship just based on some Ohio roots with my partners at Redstone. And we've kept in touch over all these years, kind of Ohio guys in affordable housing, working around the country. And when the Redstone team decided that they wanted to get more involved in New York and its immediate environments here in the Tri- State region, they called me and I helped them put together a business plan and then ultimately joined up with the team at Redstone. And it's been boy, almost 12 years now in terms of working together. And we've built a pretty significant business here in New York and it's kind of fanned out all over the Tri- State region. We're a LIHTCs, low- income housing tax credit syndicator. We have about$ 10 billion of tax credit equity under management. We invest all over the country. We've invested in 47 states, district of Columbia, Puerto Rico, over 700 projects, we've invested with for- profits, nonprofits. We've done multi investor funds, proprietary funds with community reinvestment act oriented investors, and so we've seen run the full gamut of affordable housing projects and product types. And so we've seen a lot of different things in the market. I along another one of my partners, Rob Vest, who I think very well, co- head our acquisitions efforts, and we work with a team of originators who source projects all over the country. It's been a really rewarding decade plus on the tax credit side of the business. And in that time, I've had the opportunity to work with you again here at Barings. And so it's been an exciting couple of years.

Daron Tubian: Absolutely. I mean, it's no secret that we are going through a massive housing crisis. So when you look at both at a national and regional level, you take coastal markets like New York City, Boston, the West Coast, La, San Francisco, and now even in the southern region, housing prices are going up. More than 8 million Americans pay half of their income just towards rent. So when you couple the challenges nationally, but then take a more of a regional approach, how do you forecast a possible solution to this crisis? And do you think that some regions are better equipped to address the problem?

Rich Roberts: You're absolutely right. The housing crisis or the lack of affordability was something that was really of the province of high demand, high cost coastal markets. And maybe the city of Chicago as well, the great cities of the world, Los Angeles, Chicago, Tokyo, London, Hong Kong, New York, Mexico City, significant housing affordability because capital wanted to be there. People want to move there. Everyone, the amenities and the businesses are all there. It tended to squeeze out that lower end of the market. And now to kind of use a COVID analogy, that set of conditions has spread like a contagion across the country here in the United States. I travel a lot as I know you do. One of the things I like to do when I'm on the road is to put on the local news or to listen to watch the local NBC or CBS affiliate. No matter where you go throughout the country, when you turn on the TV and political ads, come on, I don't care what side of the aisle, the local official that's seeking office is on Democrat, Republican, independent. One of the things that they will typically say and their spiel to the voters is they may want more border security. They may want crime reduced, but they will always say now and more affordable housing. I don't care what side of the aisle you're on. I just got back from Washington Tax Credit Coalition, which is the organization that lobbies on behalf of strengthening the tax credit in Washington, had their big lobby day on the hill. All of the folks in affordable housing sit in a single room in the Dirksen building, and all of the politicians, the elected officials come in and speak to them, Democrat, Republican, both sides of the aisle coming in talking about how important affordable housing was to them. Everyone from Marsha Blackburn in Tennessee, Ayanna Pressley from Boston, couldn't be more diametrically opposed politically, but both talking about the pronounced need for affordable housing in their communities. And it's in part because of the statistics you cited, higher percentage of people who can't afford to rent, higher percentage of people who can't afford to buy higher percentage of people who are spending an inordinate amount of their income on housing. Everyone's got a housing story throughout the country. The responsibility that I think folks like us have in working in this industry is how do we tackle it? What are we doing about it? I think those are the questions hopefully that we can delve into a little bit here.

Daron Tubian: Well, you make a great point. It's a unifying factor, right? Irrespective of political views. NMHC published a report that said between now and 2035, almost four and a half million new units have to be built in order to be able to tackle the housing crisis. About 35% of that million and a half is just for Texas, Florida, and California, which if you then factor in what's been going on in the market in terms of rising interest rates, which makes it harder for developers to build and get financing, it just compounds the issue in terms of the number of units that are coming to market relative to what demand is. So as we look at opportunities, there are certainly opportunities from a development perspective where developers are having challenges to get their projects built or financed and built. But at the same time, I think from an investment perspective, institutional investment perspective, it actually creates opportunities for investors who have typically not invested in the multifamily affordable space to look at this asset class and say, " You know what? This makes a lot of sense." There's a huge need from a performance track record, it's very solid. So your risk adjusted returns are strong relative to what they're investing compared to other asset classes. We look at it holistically and say, this makes a lot of sense and we can talk more about how we're going to tackle that and what we've been doing to date. But when you look at those stats, additional stats, what does it make you think of in terms of potential opportunities for Redstone?

Rich Roberts: I want to throw one other thing into the mix here that just kind of adds to what you enumerated, which is the significant amount of NIMBYism or not in my backyard situation and concerns that people have with building in their local communities. On the one hand, you've got this kind of juxtaposition of a significant amount of housing need, and on the other hand, you've got this difficulty that you have in building. To play into what you just said, when you do have projects that can get built, that can navigate the gauntlet of local approvals, support from local elected officials, support from local communities, given these intense need, we know that those projects constitute excellent investment opportunities because the competitive landscape for the product is one, we know the demand is through the roof, and two, we know it's very difficult to bring product to the market. So when that product is available, it doesn't take a highly sophisticated understanding of the law of supply and demand to understand that when something does get built, it's probably going to be a successful project and therefore a good investment opportunity. Now listen, as investors, there's very little in terms of the development process and in terms of the political environment that we can control. We have to analyze and review the projects that come to us and come to us that are good opportunities for investment. But what we can do is we can have conversations and we can support the developer partners that we work with in terms of their efforts to get more housing built and their efforts to identify places where it's appropriate. I really liked what you cited in terms of the states where we see the big need. We saw a significant amount of influx of population and movement into Texas, into Florida for a variety different reasons. Some of those were tax driven, some of those were driven by interest in that people had in remote work and opportunities to enhance their quality of life when they could work anywhere. And so we've seen those states really explode in terms of the opportunities, but that's really created affordability pressure in those markets.

Daron Tubian: What I think makes this really interesting, more so than what I've seen in the last five years is that historically you would not really get much institutional interest in investments for affordable housing projects by investors who are not in this space already. It was either conventional, multifamily or commercial, and then you had group of investors who are focused just in LIHTC and affordable housing. But now you see developers who are actually beginning to hire personnel who have affordable housing expertise to incorporate into their broader development strategy. So I think market shift, we won't say whether affordable housing investment should be 10, 20 or 30% of an investor's total portfolio, but it should be part of that group. It should be something where if you have investments in different asset class, among them, one of them should be multifamily, affordable or middle income housing. And that shift in institutional thinking process I think is really important.

Rich Roberts: Yeah. And I would just cite two things kind of in addition. One is what I call the Kevin Costner point, right? If you build it, they will come. We know that rings true in the world of affordable housing, one, because of the demand component that we just outlined, and it extends through every segment of the population. Older people who are retiring, younger people who are first starting out can't afford, but we also know just with the statistics, no one can afford housing. There's just such a deep market for it. The second thing I'll say is that because of a lot of different factors, going back to the origin of the industry, the structuring of these transactions is extremely mature and complex, reserves, guarantees all of the things that are put into place. Once investors work with-

Daron Tubian: Compliance.

Rich Roberts: Yes, work with compliance, work with seasoned and appropriate professionals in this space, they learn the nomenclature of it, the structuring of these transactions. I had an interesting conversation with a friend of mine who until recently headed up the workout group at a major money center, CRA bank, and now has gone to a smaller regional bank. She told me that in her old life at the large money center bank, she had over 100, just in her specific portfolio, she had over 100 commercial real estate assets that were in workout, not one affordable project. Because of the structuring of those transactions and the series of insurance policy or measures that are baked into the transactions that help to protect the investment, the projects just given their income restricted nature don't generate tremendous upside, but they're very focused on protecting the downside and structured in a way so that they perform as underwritten. You really do get what you see when you enter into one of these transactions. So I think those are just important considerations for investors to consider.

Daron Tubian: 100%. I mean, that's an excellent point. The Mortgage Bankers Association issued the report for mortgage delinquencies within the multifamily sector over the last three years, and it's still hovering around 1%, and within the affordable sector, it's even less. So talking about Texas, we had the opportunity to work together on a pretty important project in Austin.

Rich Roberts: Yager Flats.

Daron Tubian: Yeah, Yager Flats. And maybe you can just give a quick overview of what that was. What was the relationship between Redstone and Barings?

Rich Roberts: It's interesting, we were on the equity side, you came in on the debt side. I think the interesting thing about Yager and Austin, Austin is becoming an extremely unaffordable market. The overall housing market there, the market rate market is responding tremendously. I mean, it's through the roof, literally through the roof, the number of market rates starts that are scheduled to occur in the next 24, 36 months, but very little of that is affordable. Our ability to finance a project that responded to that component of the market, I think is a great success story. We got to do more of it in Texas. We got to do more of it in Florida. Austin, South Florida are becoming two of the most unaffordable markets in the country. And again, for investors, I think investors should derive some degree of comfort in stepping into a market where we know the affordability pressures are so intense that again, in terms of demand is going to be very deep for that housing. We're going to continue to be able to do more of it in these markets, and I think it's going to make for very attractive projects that I think are going to perform well.

Daron Tubian: Yeah. I mean, I couldn't agree more. Texas is a huge market, Austin in particular, so I think you take a market like Texas that's growing so much and the need is so much, you need the expertise and the focus of developers that can tackle the issues, but do it in a way that's holistic in terms of the challenges specific to those markets. As you know, we're a Charlotte based company. Our activities are national, both from a debt and equity perspective. We've been, I would say, a little bit more focused in expanding our debt activities within the Charlotte market. So we've certainly done a handful of projects, kind of what I would say, standard affordable housing projects, but also we've been looking to do more, what I would say, missing middle income workforce housing, mixed income as well. So we had the chance to work with you guys on another deal, Trella Uptown. Give me your take on that in terms of the differences you saw there from Redstone's perspective relative to what we did on Yager.

Rich Roberts: That project is an interesting project, I think, one, because of its long history. That's one thing that people should also realize too about affordable housing projects. And a lot of the projects we work with is that they often take a fair amount of time to kind of put together and-

Daron Tubian: To bake.

Rich Roberts: To bake. In this case, this was land that was owned by the housing authority, and that just takes longer to bring to market and to develop a privately owned parcel. But the housing authority was really committed to a mixed income project. And as a result, we've got a project, result in a project that serves some low income people and some people at the very high end in the same project, which is a really unique. And with no splitting of amenities and no different entrances and none of that junk that sometimes goes on in projects that we really don't encourage because we've got a long track record, I think throughout the country of understanding that a variety of different populations and people from a variety of different backgrounds can live together in buildings with great result for everybody involved. We're really proud of that project for that reason, I think it's going to be incredibly successful. And it's very high profile in Charlotte, right? It's right in the middle of town, is visible to a tremendous number of people who are coming downtown and a project that's successful. And by the way, these projects aren't for every developer. You got to know which developers can successfully execute them. And so we're thrilled that this will enable to come together. Now, one other thing we got to talk about with this project, which is that the mixed income nature of the project does not create an easy financing. You remember when your kids were little and they didn't want their food to touch on the plate? That's kind of how the mixed income residential real estate world has been. Really don't want our projects to touch. The structuring and issues that come up in an affordable transaction are much different than ones that come up in a traditional market-

Daron Tubian: Conventional.

Rich Roberts: ...conventional transaction. And so investors tend to, and financing parties tend to like to keep those apart. But we also need to understand, as I mentioned earlier, the objectives of our partners at the local level. Government is very interested in creating mixed income communities, very interested in not creating communities that are exclusively low income and for a variety of different reasons that's important from a fair housing standpoint and a whole host of other issues. So when we can do those projects and when we have creative financial partners like Barings and like Redstone, I think we're able to navigate those waters. One final thing is the fact that we've got our relationships, our personal relationships go back so far, and we've worked with each other on a variety of different levels. And I think you started out the podcast by talking about we've worked on equity together, we worked on debt together, we've seen-

Daron Tubian: Construction perm.

Rich Roberts: ... construction, perm,a variety of different things. We're able to really understand the mutual objectives of all the parties involved and are able to navigate some of these issues that come up.

Daron Tubian: And honestly, I couldn't emphasize that more because relationships are key for any successful project. And I think what made Trella Uptown uniquely challenging amongst affordable housing projects in general is just the capital structure had to be two- tiered, right? You have a market rate component, you have the affordable component. And from a capital perspective in terms of how the fund lead to be deployed, they have to be addressed in a way that investors are comfortable and the debt providers are comfortable from a collateral perspective. Another added layer of complexity on that transaction was time. It was a year- end transaction, so we had to bring in all the parties to get to a mutual point of understanding of all the different complexities on the debt, equity, subsidy side, property taxes as well. And I think the relationship that we have with Redstone, the relationship that we have with the housing authority, mutual relationship really enabled all the parties to get to a point that they can ultimately close the transaction by year end. I don't think that would've been achievable if those relationships were not there.

Rich Roberts: And that goes to that home cooking you're talking about, Redstone with a significant presence in Charlotte, you all being based in Charlotte, the housing authority understanding the commitment that both organizations had to" hometown" I think was important in that as well.

Daron Tubian: You know what? So that's a good segue. We talked about the mixed income component of Trella Uptown. The broader strategy that we've incorporated in the last two years in terms of workforce and middle income housing is very important to us. We are focused on what we've been doing for 25 plus years of investing, both on the debt and equity side of affordable housing investments. But as I mentioned, workforce housing is becoming a very growing part of the crisis. It's also a catalyst, workforce housing, I think it's a catalyst for economic growth. When you have young professionals or emergency personnel like police officers and ambulance workers and firefighters who can commute to work within 15 to 20 minutes versus two hours and provide that economic mobility, it actually helps a lot towards productivity. And that's, I think, a very important component of how we look at workforce housing. So you're not just providing housing to address the needs of middle income households, but you're also essentially creating a facility for them to be more productive. So workforce housing, I think is doing a lot to help that cause in terms of just providing more accessible housing to folks who may not necessarily qualify for affordable housing, but also don't qualify for market rate housing, they fall in that hybrid zone. Any thoughts on that?

Rich Roberts: Yeah. Well, I think you raised a number of excellent and important points. So many of the issues that we're facing, and I think in contemporary society, these questions are a part, they're not the whole solution, but they're part of a consideration. Do our law enforcement officers become more effective, more community- minded law enforcement officers if they live in the communities in which they work, as opposed to only being able to afford something an hour and a half away? I grew up in a family of teachers. My sister's a teacher, my mom was a teacher, my dad's a retired teacher. Our public school educators less stressed out, more able to give in the classroom if they're not confronting long and difficult commutes. I mean, these are things that I think people don't think enough about. One of the things that we find at Redstone, since we have historically been a tax credit syndicator, we understand that the program and the investments that we do are very prescribed by a government program that strictly sets the affordability level of the housing that we produce. Typically, and I think most people are listening know this, it's restricted to people at 60% of area media income in below. And they go back to the statistics we cited at the beginning. There are a whole range of people from 60% of AMI to 120, 150% of AMI, who have difficulty finding housing.

Daron Tubian: Especially in the coastal markets.

Rich Roberts: Especially in the coastal markets. You cited teachers, firefighters, police officers, but did you know a lot of people in the New York City shelter system are working? These are people who work who can't afford housing and are homeless. So we've got to do more. And I think I'll just go back now and put my non- investor hat on and put my just I'm a houser, right? I'm somebody who believes that housing is a fundamental right, ought to be provided to people. We have to figure out some way to make it available. It is essential to all of our daily lives and to the success of everybody in our society that they have housing that they can afford. If we're committed to affordable housing, are we going to merely restrict ourselves to the structure of a program that says we can only provide housing for this level of people at this income, and everybody else is kind of on their own? I don't think we can rest there. We have the financial wherewithal, we have the creativity. We have the commitment to understand that there's more that we can do for that workforce, for that middle income renter, that middle income homeowner, that individual that's looking for housing, that's at all levels of the income strata. And so-

Daron Tubian: And they're above the 60, 80%-

Rich Roberts: They're above the 60 80%, and we-

Daron Tubian: We shouldn't focus just on 80% or less.

Rich Roberts: And we can provide good product for them, either in terms of preserving the housing that they're currently in to making sure that it continues to be high quality and continues to be attainable from an affordability standpoint or in providing new housing, and we've looked at a variety of different projects where we think that that might be possible. Some of it, and I'd be curious to get your thought about this because I know you've seen some of these situations as well. Some of it is also housing that may have been targeted to a higher level of the market that may be now, given some of the things that are going on in the market, might be repurposed to a different level of the market and maybe made available in that context as well.

Daron Tubian: Look, I do think there shouldn't be a single focus on affordable housing below a certain threshold, whether it's 80%, to your point to 120% New York City, 150, 165% MAMI. Those are still challenging rent levels for a lot of workers. And part of addressing the crisis that we're facing is making sure that we're not just helping the very low income families, but also middle income. And I think that is really the growing part of this industry.

Rich Roberts: Let's talk about climate change. If we're going to combat climate change, we got to get people off the highway and we got to get them into housing that's closer to where they work so that we can address some of those issues as well.

Daron Tubian: Make it more manageable.

Rich Roberts: Yeah.

Daron Tubian: Yep. Agreed. All right. So Rich, as a national and very active tax credit equity syndicator, you guys have a lot of different partners. You work with different lenders, construction lenders, perm lenders. Obviously, there are CRA lenders who are really active in this space, mainly they have to be, but also it's important, right?

Rich Roberts: Yeah.

Daron Tubian: But there are also non CRA investors and lenders who are active in this space like we are, right? When you look at your business strategy and your partnerships with both CRA and non CRA lenders, what's important to you? What specifically, can you give us a couple of examples in terms of things you look for or Redstone looks for that makes partnerships important to you?

Rich Roberts: I think that whether financial institutions feel as though their motivation for getting involved in affordable housing is responsive to a regulatory regime or is a more specific analysis of the economic benefit of making the investment, and those are kind of the non- Community Reinvestment Act actors. I think that all those investors share a couple of different characteristics when they're good. I think one, they're committed to the asset class, they understand that the asset class is important and performs. They're excited about being involved with it. Most people, and I think a lot of people don't understand this, most people in the investment field make decisions about investments because they're excited about, they think it's a good investment, they think it's something they should be doing. There are a lot of different places to put their capital and they make decisions on which ones they think are best. And I think that we've got the benefit of working with a lot of different institutions that the best ones are the most excited about getting involved in the asset class. I think two, and I think this is something that we tried to cite today in our conversation with respect to the investments that we've cited and focused on, they're creative. They're creative and flexible. They understand that they may be expecting a fastball, a curve ball may come, and they got to be able to adjust to be able to hit it. I think that's an important component of a successful investor in this space. I think transparency is also a big component of what we look for. Tell us what you're really looking for. Tell us what your real concerns are, because we need to understand what you're really concerned about so we can address it. So I think if you're going to get involved in this space, you got to like it, you got to be flexible, and I think you've got to be open and transparent about what your goals are. And I think if you bring those three criteria, and I think most of the financial institution we worked with, but I think in particular, Barings brings those things to the table, and I think that's why we've had a very productive relationship.

Daron Tubian: I could not agree more. And on that point, I will also add that when we look for partnerships, we look for not only institutions that share our perspective in terms of what we think it's important, not just in the next year, but also in the next 5 to 10 years. And in every conversation I've had with you and other folks at Redstone, it's always good to see that when we talk about what the opportunities are, we're also exchanging notes on the challenges. And that's an important component in terms of how we go about thinking about, okay, here's where the market is today. This is where we like to be in the next 24 months, and among the partners that we can work with, who do we trust that we can ultimately have a shared vision and reach that objective together? That's a good way to say thank you again for joining us today.

Rich Roberts: Thank you for having me.

Daron Tubian: Really appreciate it. Look forward to working more with Redstone.

Rich Roberts: Yeah, we'll talk soon.

Daron Tubian: Yeah.

Rich Roberts: Thanks, man.

Daron Tubian: Thank you.

Speaker 1: Thanks for listening to this episode of Streaming Income, the third installment of our new Investing Together series. If you'd like to stay up to date on our latest thoughts on asset classes ranging from high yield and private credit to real estate debt and equity, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. We publish a new episode every other week. And if you have specific feedback, you can email us at podcast @ barings. com. That's podcast @ barings. com. Thanks again for listening and see you next time.