Budgets built before construction no longer match rents affordable housing properties can collect today as affordable housing owners face cash flow squeeze.
By Aaron Kirk Douglas
Many affordable housing properties in Oregon no longer perform the way their developers planned, and the shortfall is now reaching the nonprofits that own them.
That was the message from two HFO Investment Real Estate brokers who specialize in affordable deals, Adam Smith and Sarah Cowley, in a recent conversation with HFO partner Greg Frick.
Cowley joined HFO’s affordable team after nearly two decades in multifamily. She worked as a leasing agent, assistant manager and property manager before moving into asset management, operations and loan servicing. She has overseen dozens of affordable buildings and watched more than 50 properties she managed change hands.
“Being able to be one of the only brokers in Oregon that has an asset management background, an operation, and an affordable background just brings so much to the table,” Cowley said.
The core problem is straightforward: Budgets built before construction no longer match the rents these properties collect today. “What penciled out in pre-development is not happening,” Cowley said. At year-end audits, she added, the debt waterfall is not getting paid down. Soft loans, deferred developer fees and asset manager fees go unpaid.
That matters beyond the property. For many nonprofit owners, the deferred developer fee and asset manager fee help fund staff and other programs, from service delivery to homeless shelters. When a building stops cash flowing, the owner’s larger mission takes the hit. “These projects that were supposed to help the nonprofit with their greater mission isn’t actually helping them,” Cowley said. In some cases, she said, the property is pulling the organization down.
Several pressures are stacking up at once. Insurance costs have doubled in some cases. Utilities keep climbing. New software adds a dollar or two per unit at a time, and that expense creep is hard to absorb on a tight affordable budget. A wave of onsite managers trained during the pandemic never got full training, Cowley said, and owners are now paying to catch them up.
Rents are the other half of the squeeze. Cowley pointed to LIHTC units set at 60% of area median income. A city studio or one-bedroom underwritten at $1,300 a month is now renting closer to $900. She tied the drop to both a softer market and an earlier building wave heavy on studios and one-bedrooms. Developers have since shifted toward two- and three-bedroom units.
The result is a growing number of owners weighing a sale. Smith said the pattern across recent deals is consistent. Nonprofits enter these projects with good intentions but often lack the in-house expertise to manage them through a full cycle.
“Every single nonprofit that we speak to has the best of intentions, but the expertise is not always there to ensure that these properties are looked after properly,” Smith said. He framed the team’s approach as a five-year snapshot: where an owner stands today, where the property is headed and how to solve for debt maturities before they arrive.
Smith said pairing Cowley’s asset management background with brokerage is unusual. “The skill set that she brings is unlike any other partnership in the affordable space that I have seen, especially on the West Coast,” he said.
For owners worried that no buyers exist, Cowley said her early calls suggest otherwise. Some clients feared there was no market. “Through phone calls I’ve made, it’s quite the opposite,” she said, pointing to buyers looking for properties with operational upside.
Bottom line: Affordable owners who wait too long can fall behind on maintenance, and catching up usually takes a cash infusion many nonprofits do not have. Early planning around debt maturities and realistic rents gives owners more options, including a sale to a buyer who can reposition the asset.
About the author:
HFO Research (Aaron Kirk Douglas) from HFO Investment Real Estate’s Multifamily Marketwatch YouTube podcast, hosted by partner Greg Frick. Aaron Kirk Douglas is director of market intelligence for HFO Investment Real Estate In Portland.
