Riding the Ripple Effect of Tax Changes

Overview

Sun Belt cities in the Southeast have grown significantly in recent years, a pattern that accelerated when the pandemic quickly increased the number of people who could work and live anywhere. Naturally, businesses want to locate where they can attract talented workers and people want to live in an affordable place with plenty of work and a nice lifestyle.

But you know how that goes: popularity = demand = higher prices. That affordability angle may be fading a bit now that more businesses and people have migrated from coastal gateway cities. While these Sun Belt locations are still affordable relative to some of the coastal cities, the cost of living – especially housing – has increased.

Now a new twist may affect the lack of affordable housing throughout the country and in some of these Sun Belt locations, too. Low Income Housing Tax Credits, a federal government tool to increase the production of affordable housing, generally require an affordability provision of 30 years. After that period, the owners can raise the rent to market rate. An estimated 20% of apartments built with tax credits are likely to see the expiration of their affordability protection by 2027, according to Moody’s.

Whenever you have regulatory constraints on prices and availability go away, it changes market dynamics. If certain units have been held at a regulatorily imposed reduced rent and then all of a sudden they’re free to go wherever the market is, there’s a ripple effect.

I don’t see those affordable units as a direct competitor to our buildings, but that doesn’t mean they won’t have an impact on markets and submarkets where we own and operate buildings. Many of those buildings are 30 or 40 years old. But there’s probably a segment of people who will say, “I’d live in that apartment. I was overqualified for it before, but now that I can move in, I might shift from the apartment I live in now to save money.”

That scenario directly competes with non-rent restricted but affordable apartments. Plus, some of those apartments might be renovated and rehabbed because of the opportunity to get paid a return on additional invested capital.

That will ripple throughout the entire spectrum of apartments. Most of our buildings are at the other end of the continuum in terms of their age and quality and caliber versus rent restricted buildings. They’ll add to the supply-demand characteristics we’re dealing with in a particular submarket, but we probably won’t even notice the source.

I expect the amplitude of the ripple effect will be dampened by the time it reaches our end of the continuum. We’ll stick to our strategy and provide homes for our residents with great amenities and outperform the competition no matter where it comes from.