Wisconsin's Housing and Economic Development Authority last week rolled out its Infrastructure Access Loan program, a partnership with developers and local governments to build more workforce housing, against the backdrop of a worsening housing affordability crisis.
Housing supply shortages and high home prices have driven existing home sales to a nadir last seen during the Great Recession, and mortgage applications have hit a 20-year low, as Fitch Ratings noted in a
Renter households face a steep climb to homeownership, with buyers
In Wisconsin, a WHEDA spokesperson said, the new program has rules in place "to ensure continued affordability." For example, multifamily housing is to be rented out to people with annual income at or below 100% of the area median income. For owner-occupied single-family housing, homebuyers' annual income may not exceed 140% of AMI.
Credit rating analysts said workforce housing has really evolved over the last four years or so, driven by the needs of middle-income residents who want to be able to live near where they work.
The Fitch report highlighted two approaches to creating more affordable and workforce housing. One involves bonds issued by
There are multiple examples of this approach in California, but Fitch deemed those examples somewhat speculative, from their bullet maturities to their lack of set rent levels by unit to their high leverage and reliance on rent increases to pay the debt.
The other involves public-private partnerships with developers to create new workforce housing.
"Cities and states have increasingly entered into partnerships with private developers to create workforce housing, leveraging the use of tax-exempt bonds, tax incentives, low-rate government loans and other subsidies to encourage development," Fitch noted.
Federal support is also part of the picture, from multiple federal agencies. For example, Fitch pointed to the Infrastructure Investment and Jobs Act of 2021, which created more low-cost financing options through the Department of Transportation for projects that incorporate public transit access into their development plans.
The DOT programs include the Transit-Oriented Development program, which spans commercial, residential, office and entertainment land uses. Transit-oriented development projects
TIFIA provides direct loans, loan guarantees and standby lines of credit to transportation projects with an investment-grade rating, and the RRIF program provides direct loans and loan guarantees to develop railroad infrastructure projects with a credit rating.
"The most vulnerable affordable housing transactions in our rated universe are those secured by properties with no enhancement or federal support that may not cover higher operating costs that we expect to persist in the near term," S&P Global Ratings noted in a
Karen Fitzgerald, senior director and sector head for community development at Fitch, said that between housing market conditions and new federal support mechanisms, there's the potential for a significant uptick in activity on the workforce housing front this year.
Bonds could be one source of financing in addition to low-interest loans, she said: "We've seen some structures where there's a subordinate tax-exempt financing or even maybe taxable sub-debt that they're including… This could lead to more issuance in the debt markets."
S&P Managing Director and Analytical Manager Caroline West said they're seeing different actors trying to "get every idea out there that they can" in terms of financing affordable and workforce housing projects, because the need is so great. From housing finance agencies to public housing authorities to community development financial institutions, everyone is trying to tackle the problem.
"The financing gets so complicated," she said. "There's just no easy way to do this. In the capital stack, there could be a developer piece, there's this tax credit, and this and that, and just having to pool all these different things together… it's so much effort just to figure out how to finance these things. It is not simple."
Fitzgerald noted that "there's been a significant dropoff in the deals that were unrated, just because interest rates have gone up, and those deals are just not viable anymore," but she suggested programs like the ones at DOT may start to bear fruit soon.
"The TOD program is relatively new, and so developers are coming in and just starting to submit applications for the financing," she said. "But we expect [an increase in activity] this year… There's over $100 billion available in lending capacity through TIFIA and RRIF. And that's not all affordable [housing], obviously, but there's certainly a big supply of available lending capacity out there."
The DOT's Build America Bureau, which administers those programs, did not respond to requests for comment.
S&P's Nora Wittstruck, managing director and sector leader for the housing team, said the rating agency has not yet gotten any official requests to rate projects that use TIFIA, but "it's something that is being pursued" lately.
"We have anecdotally had a lot of conversations with market participants who are pursuing TIFIA as a way to help support affordable or essential housing, or a combination thereof — multi-family units in proximity to transit-oriented development," she said. "So it's definitely a lever that market participants are pursuing. We can't really say whether or not we'll ever actually get a project that includes that component in the capital stack."
"We've received several inquiries on getting a rating on either the TIFIA or RRIF program for workforce or affordable housing," Fitzgerald said. "The key for those is, they often get some additional financing in grants or even subordinate debt from the local municipality. So they're able to put together a financing because the rate is so low that they may be able to meet the coverage levels in our criteria to qualify for investment grade."
Fitch said in its report that standalone and single-borrower essential housing projects' ratings are capped at A-plus. But lower ratings are more common due to lack of pricing flexibility and vulnerability to the local real estate market's fluctuations.
The rating agency considers several factors in rating workforce housing deals. One is whether the deals assume the same rent levels across all units, regardless of area median income levels. Another is the potential for future cash flow volatility if projects rely too heavily on renters at 120% of AMI, whose rising incomes could eventually outstrip the project's income limits.
Fitch also examines the percentage differential between a project's rent levels and local market rents. Higher or market-rate rent levels "could potentially limit future rent growth at the project," Fitch noted in its report.
Another factor analysts consider is that "some of the essential housing projects are subject to local rent control ordinances that limit the rent increases, and so that can over time pressure the ability to offset operating expenses," said Kasia Reed, director of community development and social lending at Fitch.
S&P also flagged rising operating expenses as a challenge in its report. In 2024, "housing entities will have to balance robust demand with competing operational costs," the rating agency said. "Rental housing owners and operators will face rising costs, and some may struggle to maintain operating performance without offsetting rent increases."
Those rising costs include escalating insurance premiums, climbing labor costs and higher interest rates.
"We expect [social housing providers] will continue facing higher property-level costs as their portfolios increase, though federal funding partly mitigates these pressures," S&P said, adding: "Federal financial support [remains] integral to ratings stability across the sector."
"A lot of these projects have experienced significant increases in their expense levels," Fitch's Fitzgerald said. "In some cases, expense increases have been outpacing rent increases. And rents have gone up quite a bit, but now they're starting to stabilize and in some cases go down. So there's concern that because of the rent increase restrictions, there's a limit to how much that project owner can raise rents to cover additional expenses. And for that reason, we say, for it to be at the A or A-plus level, it probably would have to be highly subsidized."
Reed noted that state HFAs are increasingly addressing essential or workforce housing financing
"They're able to take advantage of this low interest rate financing," she said. "And it's just taken some time for them. [For] the projects that they have [underway], they have drawings and specifications, so they've probably used a lot of the time since the [Infrastructure Investment and Jobs] Act was passed to develop these projects. And now they're ready to move forward with the financing portion of it."
These new public-private partnerships all involve new construction, she added.
The Infrastructure Access Loan program in Wisconsin provides loans to cover costs usually borne by developers, such as the costs of installing, replacing, upgrading or improving infrastructure related to workforce or senior housing. Applicants can receive loans covering up to 20% of the total development cost of residential housing, at interest rates of 3% or 1% in municipalities with fewer than 10,000 people.
The governor's office referred all questions to WHEDA. A WHEDA spokesperson said that regarding future issuance to support workforce housing, "Bond issuance is one of many financing strategies employed by WHEDA to finance housing construction. WHEDA will continue to use all funding resources at its disposal to continue to address the housing shortage in Wisconsin."
In a statement, WHEDA CEO and Executive Director Elmer Moore Jr. said reducing costs for developers means lower costs for residents, too.
"This new program gives us yet another opportunity to add much-needed affordable housing throughout the state by helping developers and municipalities reduce the cost of development — a price that is normally passed on to working individuals, families, and seniors in their rent or mortgage," he said.
