QuickDrive
Impact Investing in Multifamily and Affordable Housing
with Bob Simpson
Bob Simpson is the founder of Simpson Impact Strategies and President of the Multifamily Impact Council. Previously, he was a longtime leader in Fannie Mae’s Multifamily business focused on affordable and sustainable rental housing finance, following a distinguished career in government. We spoke with him recently about the affordable housing and multifamily markets, and how impact investors can find opportunities in those areas.
Andrew Wilson: What are you doing with the Multifamily Impact Council and the framework for investing you’re putting together? What are you trying to accomplish?
Bob Simpson: The Multifamily Impact Council is comprised of rental housing leaders from across the capital stack: investors, property owners, lenders, service providers. We have three goals:
The first is to establish a framework of impact investing principles and reporting guidelines for the multifamily industry. Our aim is to attract more global impact driven capital into the affordable rental housing sector in the United States. There are trillions of dollars of assets globally looking for a place to invest that are being driven by impact motivated investors and we think that the multifamily sector is the best place to do that.
Goal number two is to make sure we’re working together with industry trade associations and ESG certification organizations both here in the United States and across the world to ensure that multifamily impact framework that we’re developing can be of value to those ESG certifications. Right now, ESG certifications are very broad, especially around commercial real estate. It’s hard to distinguish between a shopping mall or a data center and an apartment building.
The third goal is to ensure that we are creating a platform to share information, best practices and research around impact investing in the multifamily industry.
Right now, we’re very focused on building out the framework; we’ve spent the last eight months diving in with our members, our research partners and our advisory board to create version 1.0 of the framework that we will be releasing at the end of March.
AW: What are you telling owners of multifamily assets, commercial real estate companies or investors in those assets about this social impact investing? What’s your message to them about what the opportunity is?
BS: We try to boil things down to five key questions that you should be asking as an investor, an owner or a lender when you are making an investment in a property (see sidebar).
If you’re looking for a stable rate of return in a proven asset class that consistently performs well across the economic cycle, in good times and bad, multifamily makes sense. If you’re thinking about how to invest in a way that also creates positive impact, there’s no better place than a multifamily asset.
Bob Simpson’s Five Impact Questions for Investors, Owners and Lenders of Multifamily Properties
- Is my investment helping to improve the life of the person living in the property, whether they are leasing or owning?
- Is the property being built or managed in a way that builds a healthy environment for the renter, but also helps address climate change by reducing greenhouse gas emissions?
- Through the way in which I operate my business, am I walking the walk? Both in terms of my social impact as a company and my impact on the environmental side, but also am I helping to strengthen the industry by encouraging new people to get engaged with the business, increasing opportunities for diversity, equity and inclusion (DEI) and making sure that my company and the industry looks like the people I’m serving, which is a broad, diverse population.
- Am I meeting my fiduciary responsibilities to my investors? Does the investment achieve the rate of return that I have promised to my investors and am I doing it in a way that allows me to continue to operate and do more?
- Can I prove it? How do I demonstrate and report back to my investors on a regular basis about the impact we’re having, in the same way I report back to them on the financial metrics?
AW: What’s your take on rental housing affordability? Are you seeing any breakthroughs?
BS: First, it’s not intractable. It is a finite problem and finite problems have finite solutions. We could solve this. Right now, there’s just a lot of uncertainty in the economy. It looks like rent prices are declining and are going to continue to decline over the next year. A lot of that is a function of the disruption we saw in 2020.
We’re also seeing a significant level of income growth over the last two to three years in the lower tiers of income bands. Low- and moderate-income households have seen pretty positive income growth. Savings rates are higher, and I think the general condition is nuanced, but generally speaking, balance sheets are a little better. But affordability continues to get worse and rent prices aren’t declining at any level that’s compensating for the area of need out there. We still have more than 50% of our renters spending 30% of their income on rent – that’s a challenge.
The quickest way to get around that on the affordability side is to reduce the cost of new construction and build more units. Vacancy rates are really low and we have more demand than we have supply. We have to build more across all income levels.
There are some really interesting things going on in the market that potentially could help lower these building costs. One is that people are starting to understand that there is a significant level of cost that is incurred in the development process through unnecessary or highly complicated regulations. Local governments – and the federal government acting as an incentive provider – can streamline the regulatory process for approving and constructing new affordable units. That is significant, and I think there is movement on that end.
I think people are looking at municipalities that have a streamlined process and wondering: why are 3,000 units being built there and I can only build 100 in mine?
I think the second is that technology is making it easier and more affordable to construct units. You’re starting to see some really interesting opportunities to scale up factory and modular built homes and be able to deliver those units at a discount to what the traditional process might be, and with a time advantaged market.
If it takes me 12 months to build a ground up, multifamily property, but I can get a guaranteed three- or four-month delivery of a factory-built unit, all of a sudden my costs go down significantly, and I have less carry cost on my interest rate. All of those things I think are happening right now.
Times of uncertainty and times of crisis are the best times to innovate and to test out whether something works. If something works in this environment, it will work for the long run. I’m really optimistic about where innovation is going, especially on the new construction side.
AW: Are there any other trends you see in multifamily housing that are worth noting?
BS: It’s not just about reducing the cost of buildings, but also how do you reduce your operating costs, and how can you do it in a way that adds value and impact to the person that lives in that property.
One really good way to lower your operating expenses on a property is to make sure that your renters live there longer and that they’re not frequently moving and that they’re not housing unstable. Studies have shown that if you stay in the same school for four years and you graduate from the school you entered as a freshman, then you’re more likely to go to college or trade school. You will also make more money over the course of your life by having that stability.
If people don’t move for four years versus moving every two years, as an apartment owner, your vacancy costs go down; I don’t have to replace the carpet, I don’t have to repaint the walls, I don’t have to remarket the apartment, I don’t get lost rent when the apartment is vacant. If I’m helping people avoid the eviction process, I avoid paying legal fees associated with evictions. If I help folks who are having trouble paying rent on time, I have fewer bad debt costs. All of those things add up.
If you can do that you can save a lot of money. The longer a person stays, the better it is. There are a lot of things going on in that space to help people stay in their places longer. You want people to pay on time if they can, and if they can’t you want them to have access to programs where they can make flexible payments or get support, like emergency rental assistance programs.
The second piece is there is a tremendous amount of inefficiency in the way in which we do compliance and reporting. There will always be an ongoing compliance and monitoring requirement, but the way in which property owners are handling that right now is very antiquated and inefficient. The more we can use technology to solve those problems for property owners, the lower their operating costs are, the more viable their buildings will be, and they will have less pressure to raise rent. I think there is a significant amount of opportunity in those spaces.
AW: What did you learn from your time at Fannie Mae that you are applying now?
BS: If you work in a place like that, you have a tremendous opportunity to learn, and I viewed my time there as going to the best graduate school in the country for affordable and workforce housing.
If you just stop talking and listen to people, then you build a relationship with your customers, serve them well and get deals done. But you also have this tremendous opportunity to learn how they do their business, what makes them tick and how they think about markets and business.
I took every opportunity I could, whether it was our lender customers or borrower customers, to ask them questions: how do you do your business? How do you think about this or that? And I got to know them at a personal level; they are all diverse, interesting people and I learned a ton.