While market-rate developers may ink all the high-profile deals, there’s safety and upside in the affordable game, as long as you have the mind for complicated capital stacks and the stomach for thorny local politics.
That was the theme of the discussion on affordable housing between L+M Development Partners’ Ron Moelis and Slate Property Group’s David Schwartz at The Real Deal‘s 12th annual New York showcase on Wednesday.
“There’s money to be made in affordable,” said Moelis, whose firm is actively working on 16 projects, including the megaproject Essex Crossing and Bronx Point.
Moelis, one of the city’s best known affordable developers, got his start during the Reagan years when the barriers to entry were low and the returns were consistent. The space is a lot more crowded these days, the funding mechanisms are trickier, and it comes during a time of crisis for affordable housing, he said. Government subsidies alone won’t be enough to generate the housing needed, he argued.
But on the balance, it’s a good segment to operate in, added Schwartz.
“Affordable housing is a great business from the standpoint that it’s a steady business,” he told moderator Jill Noonan, TRD’s senior content director. “There’s so much more need than supply. And there’s no risk that you’re not going to rent an $800 a month apartment.”
The developers, who both work in the market-rate and affordable spheres, said they were agnostic over the mix of income levels in developments with affordable components. The development fees are higher when a higher portion of apartments are deeply affordable, but the city government prefers mixed-income formats because it doesn’t have to subsidize the pricier units, Moelis said.
Moelis also tackled Noonan’s question about the criticism affordable developers face when they make good-sized fees on projects. Developers in affordable housing have always turned a profit, he replied, and that’s necessary for additional housing to be built. There’s a lot of asset management, the work is complicated, and the developers typically receive fees in the range of 5 percent, he said. Government directly or indirectly subsidizes about 70 percent of the capital stack, with the rest funded by conventional debt, according to Moelis.
“If you don’t make money, you’re not going to do a good job,” he said. Moelis also acknowledged that affordable housing advocates don’t believe they have a big enough piece of the action. “There’s some truth to that,” he said.
Affordable housing development may be characterized as a consistent, low-risk business, but there is opportunity abound, the panelists said. The state of NYCHA — with a $32 billion capital shortfall and a turn toward private-public partnerships — could provide private firms a lot of opportunities. Teaming up with BFC Partners, L+M got a 50 percent stake in six NYCHA complexes in 2014, and were part of another developer team in 2018 to win a contract to rehabilitate the Baychester and Murphy NYCHA complex in the Bronx.
“There are 173,000 [NYCHA] apartments in New York City,” Schwartz said. “Some of it is amazing real estate. Certainly there’s a tremendous amount of interest.”
He added that there was also a “tremendous amount of fear from tenants and advocates and others, and rightfully so….people are worried about losing their homes in places they’ve lived for 60 years.”
Moelis and Schwartz also acknowledged the hard-scrabble political elements tied to affordable housing development.
L+M claims to have developed $7 billion worth of real estate over the years, and has forged close relationships with key city officials, including former New York City housing czar Alicia Glen. Although L+M’s controversial 1,350-unit residential development project at 260 South Street in Two Bridges — which it is partnering with CIM Group on — has been approved, according to Moelis, the project drew heat over height, density and alleged deed restrictions.
“Obviously some people who see their neighborhood, wherever that is, will oppose that kind of scale and density. But that’s why we have a zoning code,” said Moelis, noting that the development was as-of-right and he has to remain on good terms with the local councilmember, Margaret Chin.
Schwartz has also faced local criticism on Slate’s 40-story Fulton Street tower in Downtown Brooklyn, but said the news got it wrong. “We didn’t have community opposition, we had community board opposition.” The city council approved the mixed-use office project, which contains 25 percent affordable housing on top, in March.
Workforce housing is the new hot sector, according to Schwartz, but you have to be careful about messaging. “If you want investors to pick up the phone, you had better not mention luxury condos,” he said.