At Issue MD - Now is the Time to Invest in Critically-Needed Affordable Housing

According to new Census data, nearly half of all renters in the Washington metropolitan area are now considered housing cost burdened.  And despite a sharp drop-off in rent growth since the pandemic (November marked the fourth consecutive month of negative rent growth,) the region seems to be losing ground in its efforts to maintain and develop new affordable housing stock.  Even worse yet, market forces are working against our collective efforts to attract new affordable housing investment.
 
The state and local governments that make up the DC metropolitan region have acknowledged the desperate shortage of housing supply that exists, particularly when it comes to affordable units available to those who fall lower on the income scale.  But now is the time to actually prioritize public funding to help bring new supply online and subsidize housing costs for lower-income tenants or else we will surely see our affordable housing crisis worsen.  

Defining the scope of the issue

According to the Metropolitan Washington Council of Governments, we need to add 320,000 new units of housing by 2030 just to keep pace with demand, with 75% of those additional units needing to be affordable to low- and middle-income households.    
 
Most financial and budgeting experts point to the standard used by the U.S. Department of Housing and Urban Development (HUD) to determine affordability.  The 30% rule stipulates that a household should spend no more than 30% of its gross income on housing costs.  This includes not only rent, but also utility costs such as heat, water, and electricity.  A household with housing costs exceeding 30% is considered to be housing cost burdened.  A household with housing costs exceeding 50% is considered to be severely housing cost burdened.  
 
According to the U.S. Census Bureau, the median housing cost ratio for renters in Montgomery County is 30.3%.  The median housing cost ratio for renters in Prince George’s County is 30.9%. This means that more than half of renters in both Counties are housing cost burdened, allocating more than 30% of their gross income to housing costs.  Slightly fewer than half of those are severely housing cost burdened, spending more than half their income on rent.

What constitutes affordable housing in Suburban Maryland?

Area median income (AMI) for Montgomery County is $125,583.  Assuming a monthly utility allowance of $200, that means that the target affordability range for a household making 100% of AMI is approximately $2,940.  The median asking rent per unit in Montgomery County is currently $2,020.  In Prince George’s County, AMI is $97,935.  This sets the target affordability range at about $2,248.  The median asking rent per unit in Prince George’s County is currently $1,662.  
 
On its face, this would seem to suggest that housing affordability is not a problem in Suburban Maryland.  But as the below charts depict, finding affordable units is much more challenging for households at lower levels of AMI, particularly for households requiring larger units.  In Montgomery County, virtually all residents making at or below about 70% AMI ($87,908) will fall into the category of housing cost burdened.  The same holds true in Prince George’s County.  Residents at or below 70% AMI ($68,555) are likely to struggle finding rental housing for less than 30% of their gross income.

What can be done about it?

In a previous publication, AOBA detailed How Multifamily Rental Properties are Financed.  The math changes significantly when it comes to affordable housing, but many of the same principals apply:  

• Financing is needed to seed a development.
• Banks and lending institutions qualify buildings for financing based on a handful of metrics tied to the property’s net operating income or “NOI,” income left over after paying all of the property’s operating expenses.
• As a general rule of thumb, lenders look for a debt service coverage ratio (DSCR) of around 1.25X after paying all expenses of the property, plus any required set-asides for capital improvements and maintenance.  This means that NOI must equal or exceed 1.25 times the amount of debt service (principal and interest payments).  

But, restricting the rents of a property to serve lower levels of AMI restricts NOI, making it difficult to meet these metrics.  Affordable housing generally requires a combination of subsidies, tax credits, and incentives to make the math work and ensure the financial viability of a property.  Thus, additional resources and subsidies are needed to make the numbers “pencil out” for affordable housing.  In fact, the Urban Institute has produced research showing that it is nearly impossible to develop affordable housing without some level of subsidy.  And one source is rarely enough.  Most projects string together multiple funding sources to make the numbers work. Upwards of 10-20 individual funding sources is not uncommon and lining up financing for an affordable housing development can be a multi-year endeavor.  Local governments and investors seeking to build affordable housing draw on a number of scarce sources of financing and our region competes nationally for a limited pool of available subsidies for which there are always way more applicants than funding awarded.  
 
Our affordable housing shortage comes down to a deficiency of supply to meet demand, a reality that is recognized by COG and its member governments.  The severity of our region’s housing crisis dictates that state and local resources be brought to bear to help bridge the gap in financing for new affordable housing developments and to maintain existing naturally occurring affordable housing stock to meet current and future housing demand.  More must be done to identify, organize, and direct subsidy opportunities to affordable housing developers and managers.  
 
Rental subsidies or voucher programs can further assist our lower-income residents to afford housing and deconcentrate poverty. The primary existing source of such assistance – the federal housing choice (“Section 8”) voucher program – is woefully underfunded, leaving qualifying residents to suffer years-long waiting lists for critically needed support. State and local vouchers can help to supplement federal dollars and help make housing affordable to community members at lower levels of AMI.  The pandemic also revealed the utility of short-term rental assistance in helping struggling renters to stay in place and overcome a one-time financial emergency. 
 
Finally, efforts should be taken to reduce the regulatory burden on housing providers.  Research has shown that regulation imposed by all levels of government accounts for an average 40.6% of multifamily development costs.  This, in turn, translates to higher rents.  Reducing the compliance costs and regulatory burden can counteract this upward pressure on housing costs.  
 
Absent immediate action, the crisis of housing affordability in the Washington metropolitan region will inevitably worsen. 

At Issue is compiled by the Apartment and Office Building Association (AOBA) of Metropolitan Washington, and is intended to help inform our elected decisionmakers regarding the issues and policies impacting the commercial and multifamily real estate industry.  
 
AOBA is a non-profit trade organization representing the owners and managers of approximately 185 million square feet of office space and over 400,000 apartment units in the Washington metropolitan area.  Of that portfolio, approximately 61 million square feet of commercial office space and 151,000 multifamily residential units are located in Montgomery and Prince George’s County, Maryland.  Also represented by AOBA are over 200 companies who provide products and services to the real estate industry.  AOBA is the local federated chapter of the Building Owners and Managers Association (BOMA) International and the National Apartment Association.  
 
Along with input provided by AOBA member companies, the following data sources and references were used in compiling the attached report:  

• Chris Salviati and Rob Warnock.  “More than Half of All Renters Are “Cost-Burdened” According to New Census Data.”  ApartmentList.com.  October 17, 2023.    
• Fourth Straight Month of Rent Declines.  National Apartment Association.  December 4, 2023.  
• WeAreApartments.org.  Data for Maryland, drawn from the U.S. Census Bureau’s 2021 American Community Survey. The National Apartment Association and the National Multifamily Housing Council.  
• Metropolitan Washington Council of Governments.  “COG Board Looks to Accelerate Action on Housing, TOCs.”  February 16, 2023.  
• CoStar Commercial Real Estate Data, Information and Analytics Service.
• Jack Witthaus.  “Brookfield Properties Lays Off Dozens of Workers as US Construction Slows.”  CoStar News.  July 19, 2023.  
• National Association of Home Builders.  “Concrete Products Lead Building Materials Prices Higher.”  March 28, 2023.  
• Barbara Ballinger.  “Multifamily Permits Down 32.2% From a Year Ago.”  Globe Street.  August 29, 2023.  
• U.S. Census.  Quick Facts – Montgomery County, MD.  Population estimates, July 1, 2022 (V2022).
• U.S. Census.  Quick Facts – Prince George’s County, MD.  Population estimates, July 1, 2022 (V2022).
• Regulation:  40.6 Percent of the Cost of Multifamily Development.  Paul Emrath, National Association of Home Builders (NAHB) and Caitlin Sugrue, National Multifamily Housing Council (NMHC).  June 9, 2022.  

AOBA strives to be an informational resource to our public sector partners.  We welcome your inquiries and feedback. For more information, please contact our Senior Vice President of Government Affairs Brian Gordon at bgordon@aoba-metro.org.