Can Affordable Housing Help Build a Stronger Portfolio?

By incorporating a few simple ESG practices into property management, including social programs and financial literacy training, affordable rental investors can help tenants stay in their homes, leading to less credit loss (from tenants not paying their rents) and lower turnover rates, further lowering costs.

This can result in a "lower beta" income stream. "Lower beta" pricing of assets are just as attractive as more volatile market rate apartments, which can be much more difficult for property managers to fill, especially in the case of new luxury apartments with sky-high rents.

A recent deal shows how investing in affordable housing is gaining increasing traction among institutional money managers. In July, a joint partnership between L+M and Invesco paid $1.2 billion for a collection of 2,800 rental apartments in New York City, with the plan to convert two-thirds of the units from market rate to affordable housing; typically investment managers buy rental properties in New York with the opposite goal in mind, to convert rent stabilized units to market rate units.

The group may be seeing the investment as more defensive, since, as I believe, they can count on the higher occupancy of affordable units to help mitigate the impact of market cycles. The deal also takes advantage of significant tax breaks offered by the city, another benefit that is often typical of affordable real estate investing.

The deal amounts to a win-win-win that typifies affordable housing investing: Lower rents for tenants making below the median household income, higher occupancy rates and more stable income for the investors and boosted affordable housing in a city where demand for affordable housing far outstrips supply.

It may still be early days as the investing world wakes up to the opportunity represented by affordable housing, but it's clear that some institutional money managers already are taking notice. Perhaps it's only a matter of time before the rest of the investing world realizes that the perceived trade-off in using ESG considerations is nothing more than a myth.

Jonathan Needell is President and Chief Investment Officer of KIMC, an employee-owned, California-based real estate investment company that invests in affordable and workforce housing units that make a positive environmental and social impact. The views and opinions expressed here are his own.