Tuesday, March 5, 2013

Tight budget? Think preservation

by Maya Brennan, Center for Housing Policy

The housing industry needs to think about low-cost ways to deliver affordable housing. Recent posts here and on the @the Horizon blog highlight ways to get more years of affordability from a multifamily rental property with little to no additional money, and I would encourage you to read those posts and join the discussion.

But let’s be honest. With sequestration here, we also need to answer the pressing question: How can we reduce the costs of developing affordable housing today? One answer may be preservation.

A new analysis (released by the Center for Housing Policy in partnership with the Compass Group and Summit Consulting) compares the costs of producing affordable multifamily rental housing using either acquisition-rehabilitation or new construction. When both are options, which can produce units at a lower cost?

To get all of the properties on a level playing field, we looked at the combined cost of developing and maintaining the properties over a full 50-year lifecycle. This meant adjusting the total development costs to include enough initial reserve funding to cover the expected costs of major system replacements over the years. We also tried to level the playing field by looking at just the properties financed using Low-Income Housing Tax Credits (231 of them) and controlling for a variety of other factors that might influence costs (location, project size, average unit size, etc.).

After waving a magic wand of statistics, we have results. [Note: For the stats-minded, the magic wand is really an OLS regression. See the working paper and its tables and references.]

Looking at our sample, per-units costs were significantly lower for acquisition-rehab properties. New construction added about $40,000 to $71,000 to the per-unit cost of developing and maintaining affordable rental properties for a full 50-year lifecycle. That’s 25 to 45 percent higher than the costs of acquisition-rehab.

If these results reflect the broader universe of affordable multifamily rental housing, I know which development approach I’d opt for when cost is the deciding factor.

I don’t mean to suggest that the housing industry completely move away from new construction. Holding down costs, although incredibly important in tight economic times, is not the only (or even the best) way to choose a development approach. For example, acquisition-rehab is not going to work if affordable housing is needed in an area with no suitable properties to acquire. Or maybe a development plan involves modern features that the available properties can’t accommodate. The desire for specific neighborhood features (proximity to jobs, transit, high-performing schools), incentives tied to available funding, developers’ specialties, an organizational mission…These can all be legitimate reasons to pursue a specific development approach even if the costs are higher. But isn’t it always useful to know the costs and make an informed choice?

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