Rising interest rates and market volatility will cloud the outlook for affordable housing development in 2023, and a divided Congress will make it difficult to pass legislation to enable more affordable housing. Despite these risks and challenges, Scott Hoekman, president of Enterprise’s Housing Credit Investments business, sees reason for optimism in the New Year.
“Everyone involved with affordable housing is accustomed to finding solutions in a complex environment,” said Hoekman, who oversees Enterprise’s $14 billion Low-Income Housing Tax Credit portfolio as well as more than $1.5 billion annually in new Housing Credit investments. “We’re an industry that perseveres.”
We spoke with Hoekman recently about the year ahead, efforts to reinforce housing tax credits, and promising developments that are poised to improve environmental sustainability and racial equity across affordable housing in 2023.
Interest rate increases and other economic factors have put pressure on development over this past year. How will this environment affect affordable housing deals in 2023?
Two main factors are having big impacts on affordable housing development: inflation — especially dramatic increases in construction costs — and rising interest rates. Those dynamics have caused many affordable housing deals to slip back in their timing, while a few developers have had to abandon developments that didn’t have a realistic shot at feasibility. So far, we’ve seen steady demand from Housing Credit investors, with only minor pricing adjustments heading to next year. Of course, if there is an actual recession, it could be another story, where we could see investors pulling back.
Looking to 2023, there are still big questions and mixed signals around interest rates. Federal Reserve Chairman Powell has said more rate increases will be forthcoming next year to get inflation under control. Still, we’re hopeful there will be a slowing in rate increases as we see prices moderate. And I’m hopeful that construction costs will moderate next year. With interest rates going up, that has cooled market-rate multifamily housing development and single-family homebuilding, which should ease up demand for materials, subcontractors, and construction labor.
Given what you’ve seen with midterm elections, what are your top policy priorities for 2023?
The Housing Credit remains a top priority. Enterprise has been very active trying to expand, preserve and protect the Housing Credit and we’ll continue to do so. Enterprise and the National Council of State Housing Agencies co-chair the ACTION campaign, which is a broad-based coalition that represents more than 2,400 companies and groups around the country. We work very hard to advance legislation that would expand and improve the effectiveness of the Housing Credit.
The Affordable Housing Credit Improvement Act is a bill we’ve been advancing for years, and some of its provisions have been enacted. Right now, our focus is on the lame-duck session. We’d like to see if we can get the Housing Credit into a year-end tax bill. At a minimum, we’d like to restore a 12.5% increase in the Housing Credit, but we’re pushing for more. The housing credit has enjoyed a lot of bipartisan support. We keep plugging away – educating new members of Congress and waiting for opportunities where there’s a tax vehicle to get something done.
Another big opportunity is the Inflation Reduction Act that passed earlier this year. We’re busy figuring out how provisions within the IRA can be used in affordable housing development. These provisions range from renewable energy tax credit enhancements to energy efficiency provisions from Treasury, HUD, and the Department of Energy. Enterprise has long been at the forefront of green building within affordable housing. There will be a lot more to come next year, using these incentives to further drive energy efficiency and climate resilience into how affordable housing gets done.
What kinds of innovations in affordable housing will be most important in 2023?
Enterprise is focused on innovative approaches on all fronts. For example, our Equitable Path Forward, which we launched in 2020, is innovative in its focus on emerging developers of color and supporting their efforts. The Renter Wealth Creation Fund, which launched this year, is a first-of-its-kind innovation designed to provide renters the ability to build wealth in ways that have been traditionally limited to homeowners. We’ll continue to innovate in 2023 as these programs mature – all while we are on the lookout for new ways to create affordable housing and equitable communities in a sometimes-challenging environment.
How do you see Enterprise’s Environmental, Social and Governance (ESG) framework rolling out in 2023?
I’ll start by saying noting that ESG is primarily a risk management framework – a way to identify and manage risks such as climate change or racial discrimination. In this vein, we are finalizing our investment policy, which takes a detailed look at how our ESG framework will impact how we are investing. We plan to announce our ESG framework early next year. This movement is gaining traction, and more investors are asking what we’re doing as they define their own ESG requirements.
What have you seen in 2022 that makes you optimistic for affordable housing in 2023?
We’ve seen continuing strong investment in Housing Credits, and we are very grateful to our investors who make our work possible. We have also seen state and local governments stepping up in major ways to fill gaps and keep affordable housing projects on track. There is the concern that if they’ve spent pandemic relief funding, there might not be enough left for next year’s problems, and that’s a legitimate worry. At the same time, state agencies have been asking how they can help, and their proactive approach has been crucial in keeping developments on track.
I’m also optimistic about the Inflation Reduction Act and I expect that affordable housing developers and owners will tap into those resources for better energy efficiency and climate outcomes. Ultimately, we have no choice but to remain optimistic because there is such a large, ongoing, and growing need for affordable housing in our country.
Learn more about Enterprise’s Housing Credit Investments business and activities.