Affordable apartment projects face delays as construction costs soar
New affordable apartment buildings across Wisconsin are facing delays as developers scramble to fill funding gaps caused by double-digit increases in construction costs since late 2020.
Many of these planned projects in Milwaukee and other cities face uncertain prospects despite securing a primary funding element – state and federal affordable housing tax credits.
“We’re stuck,” said David Weiss, partner and managing director of Fox Point-based General Capital Group LLP, which has affordable apartment developments on hold in Milwaukee, Ashwaubenon and Stevens Point.
“It’s just crushing budgets,” said Ted Matkom, Wisconsin market president for Gorman & Co., an affordable housing developer based near Madison.
General Capital, Gorman and other developers compete for state and federal tax credits for affordable housing every year. In Wisconsin, this process is overseen by the Wisconsin Housing and Economic Development Authority.
In April 2021, the authority awarded approximately $35.1 million in tax credits to help fund 33 housing estates in 19 Wisconsin communities. These projects total 2,343 units, including 2,200 units for low- and middle-income people.
Developers who receive tax credits generally must provide at least 85% of the apartments in a building at below-market rents to people earning no more than 60% of the local median income.
Developers sell the tax credits, often to banks and other investors, to raise capital for their projects. Most additional funds are usually provided through commercial loans.
It is not uncommon for an affordable apartment development to still have a hole in its financing.
These gaps can be filled with options such as federal grants, developer deferrals, and supplemental tax financing districts – which use local property tax revenue generated from new developments.
While not unusual, funding gaps have widened due to soaring construction costs over the past year or so.
Those costs increase by about 10 to 20 percent, Weiss said.
“It creates some pretty big gaps,” he said.
Matkom estimates that overall construction costs have increased by around 25%.
Another affordable apartment developer, MSP Real Estate Inc., typically sees 10% cost increases, said Mark Hammond, vice president of development for the Mendota Heights, Minn.-based company.
These cost increases affect lumber and other building materials, Weiss and Matkom said.
Higher prices are fueled by a big jump in inflation.
Many economists say this is linked to labor shortages as well as supply chain delays to catch up with accelerated growth in 2021 after the sharp downturn in 2020 due to the COVID-19 pandemic.
The country’s gross domestic product, the value of all goods and services produced in the United States, grew 5.7% in 2021, the economy’s highest annual growth rate since 1984.
Meanwhile, the inflation rate last year was 7%, the biggest increase in consumer goods prices since 1982.
Costs dictate design changes
Along with rising material prices, labor costs are higher because masons, electricians, plumbers and other construction trades are retiring – not being replaced by as many younger workers. , said Warren Jones, vice president of construction for the Milwaukee Housing Authority.
Increases in construction costs are particularly difficult for developers of affordable apartments, as their below-market rents are capped by federal regulations related to tax credits.
The Housing Authority’s multi-phase Westlawn Gardens development, south of West Silver Spring Drive between North 60th and North 68th streets, is making design changes to reduce construction costs, Jones said.
These include the use of steel cladding and other finishing materials instead of brick and stone facades, he said.
The authority is also using some of the funds set aside for future phases for more immediate construction at Westlawn, said Fernando Aniban, chief financial officer.
“We will see later how to obtain funds for the next phases,” said Aniban.
MSP Real Estate has delayed construction on two Wisconsin projects, including the second phase of River Parkway Apartments and Townhomes, 6400 River Parkway, Wauwatosa, Hammond said. The other is Madison’s The Heights Apartments.
“Both of these cities have prioritized the creation of additional affordable housing units in their communities.” said Hammond.
“We are actively engaged with both cities to make these two projects financially feasible and hope that we will be able to continue both projects in the near future,” he said.
Gorman has a $25 million project on hold in southeast Wisconsin that faces a $7 million funding shortfall.
Before the 2021 inflation spike, that gap would have been about $2.5 million, Matkom said. He declined to specify the location due to “sensitive” negotiations with local authorities over development funding assistance.
Meanwhile, Gorman in the 2022 cycle is asking for tax credits to help fund developments in Wausau and Green Bay.
Each was originally planned for around 75 apartments. But officials in both cities were worried about filling looming funding gaps.
Thus, Gorman reduced the size of each planned development to around 50 units to reduce these discrepancies.
With the continued need for affordable housing across Wisconsin, he said, such actions amount to “going backwards.”
General Capital is seeking additional funds to help finance two developments in Milwaukee and two others in Wisconsin, which received tax credits through 2021.
In Milwaukee, the company is partnering with KG Development Group LLC to create the 91 Riverwest apartments and food accelerator in the 1100 block of East North Avenue, just west of the University of Wisconsin-Milwaukee.
Additionally, General Capital is partnering with Emem Group LLC to build 93 units in the 2900 block of North King Drive. This includes a four-storey building, on the northwest corner of North King Drive and West Locust Street, with a new King Library on the first floor and 41 apartments on three upper floors.
In addition, General Capital is working on the development of 75 Berkshire units, in Ashwaubenon, and The Grove, a 102 unit project planned for Stevens Point.
Of the four projects, The Grove is the only one to have landed where a 2022 construction start seems certain, Weiss said.
The grove was aided, in part, by using state and federal historic preservation tax credits to help pay for the conversion of a 120-year-old convent into apartments, he said. declared.
The other three projects are seeking additional funding sources.
Weiss said that could include money made available for affordable housing projects in Wisconsin through the American Rescue Plan Act that Congress passed and President Joe Biden signed into law in 2021.
Gorman is also in the running for ARPA dollars, Matkom said.
Grants may not fill all the gaps
Gov. Tony Evers announced Wednesday that Milwaukee is receiving $15 million from the ARPA-funded neighborhood investment fund.
This includes $12.9 million that will be used to help develop more than 400 affordable rental units, according to the announcement.
This includes $6 million for Westlawn Gardens and $2.9 million for the King Library Apartments, as well as $1 million each for the Riverwest project; the five-story, 55-unit Five Point Lofts at North King Drive and West Concordia Avenue; the conversion of the former Edison Middle School, 5372 N. 37th St., into 75 apartments and 30 single-family and duplex units to be developed primarily on North Fifth, Sixth and Seventh Streets between West North Avenue and West Chambers Streets, according to the office of Acting Mayor Cavalier Johnson.
All of these projects had previously received affordable housing tax credits.
Additionally, City Council and then-Mayor Tom Barrett agreed in October to set aside a portion of the city’s ARPA for affordable housing.
Matkom and Weiss worry, however, that the ARPA grants will not be enough to fill the gaps in all the developments that have been delayed by inflated construction costs — or continue to meet future housing needs.
The City of Milwaukee Development Department said it will continue to work with state officials and local developers to identify sources of affordable housing funding.
Meanwhile, the developers face other financial challenges.
The Federal Reserve has indicated that it will likely raise interest rates in March in an effort to reduce inflation. This will make it more expensive to borrow money for business developments.
Additionally, the price investors pay for tax credits has fallen as they face greater economic uncertainty.
All of this paints an uncertain picture for affordable housing developments in 2022, and possibly beyond.
“I’ve never seen it like this before,” Matkom said.