Credit: Jack Hornady

On July 27, Related California celebrated the grand reopening of the Martin Luther King/Marcus Garvey Apartments in San Francisco after an extensive rehab of the co-op’s 211 affordable housing units. The $41 million effort necessitated a $5 million buy-in from the San Francisco Redevelopment Agency that Related and construction lending partner Citibank used to negotiate $36 million in Freddie Mac permanent lending made to the co-op board and guaranteed by Related, which then served as a de facto fee developer to the project. Complex, layered financing for affordable housing initiatives like Martin Luther King/Marcus Garvey has become the norm, and absent some high-profile political interest in the project from U.S. congresswoman Nancy Pelosi and then–San Francisco mayor Gavin Newsome, Related California president and CEO Bill Witte isn’t sure the deal would have gotten done. “The building was falling apart, and no steps had been taken to recapitalize it, renovate it, or improve it,” Witte says. “This all unfolded against the backdrop of the recession, so the ability to finance anything, let alone a deal with as much hair on it as this, was further constrained. It was a high-profile problem, but I felt that because the situation was so dire, something had to happen. It had to get done.”

By the tale of the tape, affordable housing developers should be in great shape. With equity dollars from low-income housing tax credits, the Community Reinvestment Act, and the American Recovery and ­Reinvestment Act helping to finance deals despite their innate complexity, affordable housing firms emerged from the Great Recession as some of the largest owners of apartment real estate in the country. According to the National Multi Housing Council (NMHC), the top four owners of rental properties in 2010 were affordable housing firms Boston Capital, ­Centerline Capital Group, Boston Financial Investment Management, and ­SunAmerica ­Affordable Housing Partners.

Despite this, as global equity capital has raced to the apartment sector with its positive returns, affordable housing already seems to be persona non grata among investors. And as a result, affordable housing on the whole is shrinking. The 2011 State of the Nation’s Housing report by the Joint Center for Housing Studies at Harvard University shows that between 2003 and 2009, the number of renters with very low incomes (below 50 percent of AMI) jumped from 16.3 million to 18 million. Meanwhile, the number of housing units that were affordable to households at that level fell from 12 million to 11.6 million. The affordable housing shortage for this group thus widened sharply, from 4.3 million to 6.4 million units.

“If you look at the past several years, the ­market-rate developers were basically shut out and the only thing that moved forward was affordable housing,” says NMHC president Doug Bibby. “But if you look at where the capital and institutional money wants to lend right now, it’s absolutely market-rate core and core-plus real estate.”

With its parent company, Related Cos., born from so-called 80/20 affordable deals in 1972 as a developer and syndicator of affordable housing vehicles, Related California has managing the balance between affordable housing and luxury properties in its DNA, Witte says. As a result, Witte is quick to point out the business benefits of product diversification. “From a business point of view, affordable housing is very consistent—recession or not, you can still be active, so there’s a countercyclical motive,” he says.

For the time being, countercyclical hedges just don’t seem to be in the cards for market-rate multifamily players. You can blame unfamiliarity with the financing; complex rent regulations; and higher levels of on-site programming (think job assistance, drug and alcohol abuse mitigation, child care, and the like). What’s more, affordable housing developers like Witte are reticent to lay out a road map for other multifamily operators to embrace an affordable strategy.

In the end, the affordable conundrum might be best answered by following the money—or lack of it. “That’s the big question, particularly if Fannie and Freddie are shrunk down,” Bibby says. “Where is the investment capital going to come from for affordable? We’re asking that question for secondary and tertiary markets, too, because institutional capital has absolutely no interest in that right now, and most of the banks and life companies are the same.”