Housing Affordability in Norwalk A study of alternative methods for creating diverse housing options December 2017
Curr rrent Housing Figures • Review of multifamily housing constructed since 2011 Multi-family since 2011 Rent/SF SF Studio $3.45 536 1BR $2.42 830 2BR $2.02 1,227 3BR $1.87 1,638 • Rent premiums on new studios + 2BR Multi-family Rents Rent/SF Rent/SF Since 2011 Before 2011 % +/- Studio $3.45 $3.15 9.6% 1BR $2.42 $2.50 -3.1% 2BR $2.02 $1.77 14.0% 3BR $1.87 $1.88 -0.3% Approximately 4,721 housing units in study area* as of 2016 American Community Survey (-11% vs. 2012 ACS) • *South Norwalk and Downtown Norwalk Census Tracts – 440, 436, 437
Recen ent p proj ojec ects & & rents The Berkeley at Waypointe 1BR – 785 SF - $1,825 $2.32/SF 1BR – 897 SF - $1,285 $2.44/SF 2BR – 1,139 SF - $2,165 $1.90/SF 2BR – 1,783 SF - $3,445 $1.93/SF SONO Ironworks Studio – 524 SF - $1,750 $3.34/SF 1BR – 749 SF - $2,400 $3.20/SF
Model Assumptions & Complexity What might a typical multi-family development in Norwalk look like? • 100 units; 4 stories of housing over 1 story commercial • 40% 1BR & Studios; 50% 2BR; 10% 3BR • 10,000 SF commercial space • 140 parking spaces (1.3/resi. unit; 1/1000 SF commercial) • 10% units affordable to earners of 80% of SMI.
Model Assumptions & Complexity
Expected d returns for commercial real estate 20% 12%+ more speculative, one-off projects 15% 9%-12% higher-risk, emerging urban market multi-family 10% 6%-9% (2017 avg. = 7.3%*) low-risk, institutional-grade multi-family 5% 5-6% and below unlikely to attract profit-seeking investment *PWC Real Estate Investor Survey, Q1 2017
Ba Base Sc se Scen enario io – 10% % Affordability What might a typical multi-family development in Norwalk look like? With dozens of input assumptions based on history & regulations: Total Development Costs $29.5 million Gross Income $3.0 million Operating Expenses ($1.2 million) Net Operating Income (stabilized year) $1.8 million Net Present Value = $2.3 million Project IRR = 10.0%
Expected d returns for commercial real estate 20% 12%+ more speculative, one-off projects 15% Base forecast 10.0% IRR 9%-12% 10% of units affordable For 80% AMI higher-risk, emerging urban market multi-family 10% 6%-9% (2017 avg. = 7.3%*) low-risk, institutional-grade multi-family 5% 5-6% and below unlikely to attract profit-seeking investment *PWC Real Estate Investor Survey, Q1 2017
Defining Affordability for Norwalk “AFFORDABLE”: A household making 80% or less of area median income spends no more than 30% of its pretax income on housing. For Norwalk, area median income is defined as the Connecticut-wide median income (SMI) Local market affordability, based on MSA data, is referred to as area median Income (AMI) For a CT household of… State Median Income 80% SMI Max. “affordable” housing cost Max. “affordable” monthly rent 3 $82,440 $61,200 $18,360 $1,530 4 $91,600 $68,000 $20,400 $1,700
Defining Affordability for Norwalk Maximum Monthly Affordable Housing Payment Household Size 1 2 3 4 5 6 7 8 30% $481 $550 $619 $688 $743 $798 $853 $910 % of CT 50% $803 $918 $1,031 $1,146 $1,238 $1,330 $1,421 $1,513 SMI 80% $1,190 $1,360 $1,530 $1,700 $1,836 $1,973 $2,108 $2,244 100% $1,603 $1,832 $2,061 $2,290 $2,473 $2,656 $2,840 $3,023
Defining Affordability for Norwalk Max. Monthly Affordable Housing Payment Household Size 1 2 3 4 5 30% $481 $550 $619 $688 $743 50% $803 $918 $1,031 $1,146 $1,238 % of CT SMI 80% $1,190 $1,360 $1,530 $1,700 $1,836 100% $1,603 $1,832 $2,061 $2,290 $2,473 Compare to standards based on NORWALK AMI: Max. Monthly Affordable Housing Payment Household Size 1 2 3 4 5 30% $737 $790 $948 $1,053 $1,138 % of 50% $1,228 $1,316 $1,580 $1,755 $1,896 Norwalk 80% $1,965 $2,106 $2,528 $2,808 $3,034 AMI 100% $2,456 $2,632 $3,160 $3,510 $3,793 Building for 80% of SMI is actually ~48% of Norwalk AMI. Source: CT Housing Finance Authority & HUD
Challenges in affordable housing • Longer lease-up time (limited pool of qualified renters) • Bureaucratic hoops (income verification) • Often additional variable costs • Political buy-in (aesthetics and demographics)
Rent Assumptions Avg. Unit Monthly Product Unit Mix Size (sf) $/SF Rent Rent Market 1BR/Studio 40% 750 $2.75 $2,063 Market 2BR 50% 1,000 $2.50 $2,500 Market 3BR 10% 1,250 $2.25 $2,813 Controlled 1BR 40% 750 $1.60 $1,200 Controlled 2BR 50% 1,000 $1.50 $1,500 Controlled 3BR 10% 1,250 $1.40 $1,750 Retail (NNN psf/yr) $25.00 Other Income (per unit/yr) $600
Tes est Sc Scenario io – 20% 20% Affordab ability ty at t 80% o of f SMI What might the typical multi-family development in Norwalk look like if required to provide 20% affordability? Total Development Costs $29.5 million Gross Income $2.8 million Operating Expenses ($1.1 million) Net Operating Income (stabilized year) $1.7 million Net Present Value = $1.1 million Project IRR = 8.7%
Tes est Sc Scenario io – 20% 20% Affordab ability ty at t 80% o of f SMI What might the typical multi-family development in Norwalk look like if required to provide 20% affordability? Existing Proposed Change 10% at 80% SMI 20% at 80% SMI Stabilized NOI $1,800,000 $1,700,000 -5.6% NPV $2,320,000 $1,060,000 -54.3% IRR 10.0% 8.7% -1.3%
Analysis: Expect cted Retu turns 20% 12%+ more speculative, one-off projects 15% Base forecast 10.0% IRR 9%-12% 10% of units affordable For 80% SMI higher-risk, emerging urban market multi-family 10% Proposal forecast 6%-9% (2017 avg. = 7.3%*) 8.7% IRR 20% of units affordable low-risk, institutional-grade multi-family For 80% SMI 5% 5-6% and below unlikely to attract profit-seeking investment
Key take keaways • Norwalk multifamily development returns today: profitable, but no home runs • 20% Affordability requirement drops expected returns into “risky” range • Likely would require subsidy – via tax credits (typically easiest & most influential) • Opportunities for Town-owned land • Inherent risks beyond scope of this model • Absent subsidy, Norwalk should examine its housing goals against alternative affordability requirements • 10% of units at 50% of SMI is more feasible, but perhaps less impactful • Building for 50% of SMI is building for ~33% of Norwalk AMI.
Thank y you.
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