NOAH Risk Analysis: What, Where, Who, and When

NOAH Risk Analysis 

Recent rental housing affordability challenges both nationally and in Chicago have been driven by a loss of the affordable rental supply. Research from the Joint Center for Housing Studies of Harvard University highlights the national loss of the lowest-cost rental units and the growth of higher-cost rentals.  These trends can also be seen in Chicago. IHS analysis developed for the Preservation Lab shows the city lost nearly 10 percent of its affordable rental stock between 2012 and 2019. Over the same period, Chicago’s overall rental supply increased by over 4 percent. Newly added units are largely found in new construction multifamily properties concentrated in high-cost neighborhoods. These types of new developments are not likely to be affordable to low- and moderate-income residents. At the same time, the loss of lower-cost rentals highlight the declining NOAH supply.

Lower-cost rental units are lost from the NOAH supply in different ways. In many cases, the unit may still be in the rental stock, but rising market rents push rents above what is considered affordable for low- or moderate-households. This type of market-related pressure is most common in Chicago’s higher-cost neighborhoods where gross rents increased by 18.8 percent between 2010 and 2019, and the share of units with gross rents below $900 declined from 40.4 percent in 2010 to 18.1 percent in 2019.

In Chicago, ownership turnover in higher-cost markets may also be a factor in the loss of NOAH. Since 2013, 24 percent of properties in Chicago’s higher-cost markets have changed hands at a time when price per unit has also increased substantially. IHS research indicates that the declining number of long-term owned properties paired with rising prices in higher-cost markets may translate to rent increases as new owners seek return on their investments. The analysis builds on research in other cities that conclude properties with long-term ownership are more likely to have affordable rents.

Another way that lower-cost rental stock can be lost is through demolition. IHS research has highlighted how different types of market pressures in high- and lower-cost neighborhoods can lead to the loss of the 2 to 4 unit rental stock, a core component of Chicago’s NOAH supply. The 2-4 stock data can also be reflective of trends and dynamics found in the multifamily stock. Between 2013 and 2019, Chicago lost 4.2 percent of its 2 to 4 unit parcels. In lower-cost neighborhoods, the loss of 2 to 4 unit properties is tied to demolition and replacement with a non-residential use, most often vacant land. This represented 65.2% of the loss in lower-cost neighborhoods between 2013 and 2019. In both higher- and lower-cost neighborhood contexts, market pressures are driving the permanent loss of 2 to 4 unit properties and affecting the current and future supply of lower-cost rental units.

The likelihood of a property being lost as affordable and the way that the property is lost can be connected to a number of factors, including the type of property and the neighborhood market context.

Stock and Market

The NOAH supply is generally found in older, smaller rental buildings, and the stock can be divided into two categories, properties with 2 to 4 units and properties with 5 or more units. Even though both types of properties serve as rental housing, 2 to 4 unit properties often are owner occupied and are financed more similarly to single family homes, while 5+ unit properties are more typically financed like commercial real estate and owned and operated by investor owners. In addition to property type, the market context is also critical to understanding the availability of lower-cost rental housing and the overall pressures on the existing stock.

In lower-cost areas, values and rents are more affordable, but pressure on NOAH owners comes from a range of market factors including ongoing population loss, concentrated poverty, higher-vacancy rates, and long-term disinvestment. These challenges highlight why properties in lower-cost neighborhoods have been more vulnerable to foreclosure, seen higher rates of turnover, and have a lower share of long-term owners. Lower prices may point to the opportunity for new NOAH owners in these markets, but new owners may still struggle with the above challenges in addition to the need to invest in property rehab to reverse years of deferred maintenance and add unit amenities to attract tenants. Lower prices may also attract bad owners, speculation and fraud, which could further destabilize the NOAH stock in these areas.

“When I started, there were many vacant buildings and a challenge of getting financing on the front end. I had to use cash for everything – rehabbing half the building, occupying those units, then using the rent to rehab the second half of the building.”

Ghian Foreman, Emerald South Economic Development Collaborative

In the city’s highest-cost neighborhoods, increased demand for housing, a growing number of higher income households, and rising prices are the key drivers behind the loss of the NOAH stock.

In both lower- and high-cost markets, rising operating costs, including energy and property taxes, can make it difficult to maintain affordability.

Owners

Responsible NOAH owners tend to be smaller and local, but the complexity and number of issues facing owners can be overwhelming for smaller owners with limited capacity. Rising costs affect both 2-4s and multifamily owners, including operating expenses like energy, water and property taxes, as well as expenses related to rehab and materials costs. The loss of population, particularly more moderate-income, stable households in lower-cost neighborhoods, adds to the pressure on the existing NOAH stock; compounding challenges facing owners.

“The complexity of running buildings can be overwhelming and undermine the ability of small NOAH owners to do a good job. Lower capacity owners are not bad landlords, but they need help.”

Steve Thomas, 5T Management

In addition to the dynamics noted above, predatory investors also approach senior owner-occupants of two-flat properties and may scare or intimidate them into selling at an unfair price. Seniors and other low- and moderate-income owner occupants may need additional supports and technical assistance to preserve and maintain their properties.

While Community Investment Corporation and some other community banks serve multifamily NOAH owners with market-rate financing, government financing tools and grants can be restrictive, and generally carry regulatory and compliance requirements that smaller owners do not have the capacity to meet. Responsible for-profit NOAH owners have the motivation to properly manage their buildings to ensure strong blocks and neighborhoods, but more attractive financing tools and subsidy would enable them to expand acquisition activity, and better maintain existing properties. Both for-profit and non-profit owners noted they lacked access to sufficient equity sources to acquire and preserve more buildings in high- and lower-cost markets.

In markets where values and rents are rising, for-profit owners are less likely to seek out special rental subsidies to serve lower income households. In these types of markets, mission-driven developers are uniquely positioned to play a critical role as stewards of affordability over the long term – presuming they have the tools and support to be able to compete.