The Commercial Real Estate Alpha Site

Another awesome post from Jay Parsons, Rental housing economist and data research aficianado.

I’ve heard from a number of workforce and affordable/LIHTC apartment operators who are struggling with new competition from a surprising source – conventional market-rate apartments. Specifically in high-supply markets. This is unusual, as typically there’d be a sizable gap between market rents and income-restricted rents. But that gap has eroded.

What happened? New supply happened.

The fallout down to affordable and workforce housing is further evidence of “filtering” – the academic term for the downstream impact of new apartment construction.
–> When we build a lot of new “luxury” Class A apartments (even at high rent levels), those units pull in renters from more moderately priced Class B+ or A- properties.
–> In turn, those middle-tier properties cut rents and draw in renters from lower-priced Class B- or Class C properties.
–> And then those lower-priced apartments cut rents – sometimes even more sharply in order to pull in renters who previously didn’t qualify for market-rate rents – to stay full.

On the one hand, it’s a pro-housing policy success story. On the other hand, it’s a real challenge – for the short term – among apartment operators in high-supplied markets.

For operators of income-restricted housing programs like LIHTC, it’s a challenge to compete with a similarly priced apartment that doesn’t require a laborious income verification process.

For operators of market-rate housing, it’s a challenge because your rents are likely well below pro forma.

Cynics see this happening and argue: Apartment developers don’t need tax benefits! I’ve seen similar arguments made against workforce programs like Texas PFCs. But this is a naïve view that assumes what’s happening right now is normal and sustainable. But it’s neither normal or sustainable.

Just because rents are comparable now doesn’t mean they’ll be comparable in the near future. In fact, they likely won’t be. Subsidies tied to income-restricted rents ensure rents remain at certain levels of area median income regardless of market dynamics.

Everyone knows by now that apartment starts have plummeted over the past 18 months. That means significantly reduced supply in 2026-27 (and potentially longer). That likely translates to rebounding rents, assuming the economy is healthy enough to fuel continued demand.

As vacancy rates recover, market-rate apartment operators will be eager to get rents up toward pro forma expectations. That’ll re-widen the gaps between market rents and income-restricted rents.

For policymakers: Don’t assume this is normal. It’s not. It won’t last. So don’t assume we don’t need tax subsidies to get new apartments built. In fact, that represents a big chunk of what actually pencils out for new construction right now given today’s rates and rents. You’re planning for the future, not for today.

#apartments #affordablehousing #rents