The shortage of affordable housing is leaving many poor and moderate-income households locked out.

According to the report Housing Landscape 2015 from the nonprofit National Housing Conference, 25% of households that rent and 17% of those that own put more than half their income toward housing costs. These are households whose income does not exceed 120% of the medium income in the house’s area and whose members work a total of at least 20 hours a week on average.

The global affordable housing gap is also widening. The October 2014 report A Blueprint For Addressing the Global Affordable Housing Challenge from consulting firm McKinsey & Co. projects that by 2025, at least 1.6 billion people, or one-third of the world’s urban population, will occupy crowded, inadequate and unsafe housing or be so financially stretched by housing costs that they forgo other basic needs such as food, health care and schooling.

According to the McKinsey report, replacing substandard housing and building additional units to meet 2025 global demand for affordable housing will require an investment of $9 trillion to $11 trillion for construction, or $16 trillion if the cost of land is also considered. Its authors estimated, in an article they wrote in December in the Harvard Business Review, that 80% of the funding needed to close the affordable housing gap could come from private investment.

The biggest draw for private investors to affordable housing has been the Low-Income Housing Tax Credit program, which was established as part of the Tax Reform Act of 1986.

Meanwhile, New York City mayor Bill de Blasio’s much-discussed $41 billion plan to build or preserve 200,000 units of affordable housing in the city over the next decade seeks to leverage private capital on a greater than three-to-one basis by working with financial institutions, pension funds, financial intermediaries and philanthropy.

And it’s not only community development institutions that are concerned with affordable housing. Last year, 25 mutual funds and 43 separate accounts had a specific mandate to invest in affordable housing or do some investing in affordable housing as part of their broader mandates, according to the US SIF Foundation’s 2014 trends report.

Preserving Affordability
TIAA-CREF, a national financial services organization and the leading provider of retirement plans in the not-for-profit market, has, in aggregate, invested more than $645 million in affordable housing in various investment vehicles. There is nearly $17 million of such investments in the company’s Social Choice Bond mutual fund (the ticker for retail shares is TSBRX) and more than $384 million of affordable housing in the company’s Social Choice Account variable annuity.

TIAA-CREF also has exposure to affordable housing in its General Account—which supports its guaranteed fixed-annuity products—through private real estate equity funds and private mortgages.

The company provides long-term mortgage financing for affordable housing and partners with private real estate investment funds to maintain the availability of affordable housing properties. TIAA-CREF recently invested with Jonathan Rose Companies—a real estate investment, development, planning and project management firm—to launch a private fund whose mission is to acquire and preserve affordable and mixed-income multifamily housing in high-demand markets across the U.S.

TIAA-CREF is beginning to play a more dominant role in this area, says Rekha Unnithan, who manages the social impact portfolio of TIAA-CREF’s general account. “Keeping tenants in place and contributing to not just building new housing but retaining existing housing is very critical to the needs of that population,” she says.

To this end, she says TIAA-CREF often looks for partners who are interested in financing green retrofits for affordable housing and other types of rehabilitation efforts.

The company also invests in affordable housing through publicly traded fixed-income investments such as agency mortgage-backed securities from Ginnie Mae; bonds issued by municipal state agencies to provide funding for low- and intermediate-income individuals; and the debentures of other U.S. government agencies, including the U.S Department of Housing and Urban Development (HUD) and the Overseas Private Investment Corp. (OPIC).

The HUD and OPIC issues currently trade at a discount to U.S. Treasurys, are backed by the full faith and credit of the U.S. government, and enable investors to pick up extra yield, says Stephen M. Liberatore, the lead portfolio manager for socially responsible fixed-income mandates at TIAA-CREF Asset Management.

An OPIC issue held in the TIAA-CREF Social Bond Fund provides funding for the Fleurhof Project, a $350 million real estate development in a poor community near Johannesburg, South Africa. The project will provide housing for about 30,000 individuals, and also build schools, community gardens, business centers and industrial sites. Construction companies have also hired 1,000 unskilled local residents to serve as apprentices to the project’s carpenters, plumbers, masons and electricians.

“At the end of the day, what you’re hoping to get is not only improved quality of life, affordable housing, improved educational opportunities and business opportunities,” says Liberatore, “but also provide additional skill sets for individual residents trying to improve their own economic futures.”
TIAA-CREF also has investments with the Massachusetts Housing Finance Agency, commonly referred to as MassHousing, which focuses on people with low and moderate income, including the elderly.

Careful Vetting
Unnithan and Liberatore emphasize the importance of doing on-the-ground due diligence and stringent financial due diligence for affordable housing projects.

David Sand, the chief investment strategist of Community Capital Management (CCM), a Fort Lauderdale, Fla.-based SEC-registered investment advisor with nearly $2 billion of assets under management, most of which is invested in affordable housing-related securities, also stresses the importance of knowing the underlying holdings in each security.

“We came through the financial crisis without the defaults and hiccups that hit other bond managers,” he says, partly because the firm didn’t get involved in jumbo mortgages, second homes or investor-owned properties purchased for flipping.

Single-family and multifamily agency mortgage-backed securities tied to affordable housing account for approximately 70% of the holdings in CCM’s CRA Qualified Investment fund (the ticker for the institutional share class of the $1.6 billion fund is CRANX) and in the company’s separately managed accounts. Even though the agencies guarantee principal, CCM underwrites the securities and looks at the underlying loans, occupancy rates and debt service coverage ratios, says Sand. The CCM Alternative Income Fund also invests in affordable housing-related securities.

Unlike much of the public housing that sprung up in the 1960s, Sand says that today’s affordable multifamily projects tend to be lower-density developments that are better integrated into neighborhoods. They often offer sustainability features, a lower carbon footprint and a greater variety of tenant services, including job training and assistance for older residents, he adds.

Over its 17-year history, CCM has at one time or another been invested in affordable housing in all 50 states, Puerto Rico and the U.S. Virgin Islands, says Sand. Geography depends on shareholder interests. CCM is a big proponent of transparency and reports to clients about the projects it is invested in.

Among the multifamily affordable-housing projects the CRA Qualified Investment Fund is invested in are Canyon Crossing At Riverwalk in Midvale, Utah; Solabella Apartments in Miami Gardens, Fla.; and Heritage Park in Minneapolis. The fund is also invested in the West Virginia Housing Development Fund, which provides low-interest loans to low- to moderate-income home buyers.

Community Development
Boston-based Trillium Asset Management, which has more than $2.2 billion of assets under management, does most of its investing in affordable housing through community development financial institutions (CDFIs). Some focus solely on affordable housing while others sport more diversified portfolios that include affordable housing initiatives.

Randy Rice, who works with Trillium’s community investing portfolio team, notes that it’s easier to invest in CDFIs, which are debt instruments, than to invest directly in affordable housing projects. The CDFIs have on-the-ground experience and investments can be shorter term, he says.

Trillium still invests in the first community investment it made 30 years ago, the Institute for Community Economics, now part of National Housing Trust. Among other things, ICE helps residents of manufactured-home parks buy land from the park owners. Trillium also invests in the New Hampshire Community Loan Fund, whose ROC-NH program also helps convert manufactured-housing parks into cooperatives owned and governed by residents. Most manufactured-home owners don’t own the land under their homes, says Rice, which puts them at risk of being evicted with little warning by landlords.

Trillium’s other affordable-housing investments include national nonprofit Mercy Housing and the Greater New Haven Community Loan Fund. The Connecticut-based organization helped finance a community that provides affordable housing, community spaces and services to grandparents raising grandchildren. “That has always stuck with me,” says Rice. “A building with grandparents all in the same boat.”

Many of Trillium’s clients invest in CDFIs, and those who do often have 2% to 5% of their portfolios allocated to them, he says. Some even have multi-million-dollar CDFI portfolios. The returns on Trillium’s CDFIs were once as high as 7%, but since the economic collapse, the standard return has been 2.25% to 2.5%, he says. “It’s a high social impact target investment,” he says. Investors are “not necessarily looking to make maximum return, but they want their principal back.”

Trillium also has some exposure to affordable housing initiatives overseas through investments in nonprofit social investment funds Shared Interest and Root Capital and global financial cooperative Oikocredit.

The Calvert Foundation, a Bethesda, Md.-based CDFI, has invested in affordable housing for nearly 20 years. It ended 2014 with just over $48 million of investments in affordable housing, nearly 25% of the total assets in its standard portfolio, says Andrew Schlack, director of investments at the Calvert Foundation.

The foundation invests in affordable housing in three ways. First, it makes three-to-five-year unsecured loans to help finance pre-development expenses incurred by developers for projects in their pipelines. This would include costs associated with due diligence, architecture and engineering services and costs for the permits and rezoning required by local governments. It’s critical financing, says Schlack, because banks don’t lend to developers on an unsecured general resource basis. “It helps carry [the borrowers] across the finish line to get permanent financing,” he says.

The Calvert Foundation also makes direct-project loans for new and rehabilitated affordable housing, typically in conjunction with another CDFI, which originates the loan while Calvert does the underwriting and buys a syndicated share.

The Calvert Foundation also provides capital to CDFIs’ revolving loan funds.

Investors can elect to invest in a Calvert Foundation Community Investment Note that is targeted for affordable housing. The minimum investment through the Calvert Foundation’s new online investment portal,, is just $20. Roughly 6% of these targeted notes purchased through are targeted to affordable housing.

“Demand for affordable housing investments far outpaces the supply,” says Schlack.