It was wonderful to be at the California Housing Consortium conference in Anaheim on September 7. Kudos to CHC for their great work. While the panels were engaging and the awards richly deserved, much of the benefit of attending these comes from the conversations at breaks, over coffee, and at lunch. Among my takeaways, here are three:
# 1 I don’t think people have fully digested the bank stress that is current and looming. Please see my last post and the WSJ on 9/6. The risk posed by CRE exposure (think empty offices) is not yet fully ring fenced. Sometimes in banking you know you probably won’t get repaid but you kick the can down the road (“extend and pretend”) and make believe you still have a performing loan on your books. Also coming for the banks are tougher capital requirements, internal spending challenges as regulators seek further IT upgrades, and CRA reform. Affordable housing will feel the impacts. Please don’t think our sector is immune. I think people are already feeling some of these effects, but the real hit of a full blown credit crunch isn’t here yet and what’s coming hasn’t fully registered. As I said in my LinkedIn post last week, be proactive in reaching out to your banking team including the more senior people you know and have explicit conversations about your banker’s appetite.
# 2 Pipelines are and have been severely challenged. Inflation has of course been brutal in many realms including insurance. Public subsidy for many reasons has become less available. Also bank appetite (see # 1 above) has been constrained. A gusher of subsidy via the 2024 ballot would help a ton but won’t hit till 2025 if the measures pass. There remain lots of issues to resolve including multiple ballot questions wanting to get on the ballot and voter fatigue if too many affordable housing ballot questions hit at the same time.
# 3 We are still in early innings figuring out how to manage the PSH challenges. Clearly some jurisdictions and some sponsors are feeling lots of pain now, but this seems like a systemic issue and not a couple of one-offs. If this is systemic it will require a state or federal solution. I think the development of a wider solution may be hindered by the reluctance of owner/operators to air their dirty laundry, but it seems like a challenge that calls for a coordinated, industry wide solution. I realize exposure to PSH varies materially by sponsor but if lots of these deals go on bank watch lists, bankers may be having tougher internal conversations to get new deals approved, even those with minimal PSH exposure. For years, many of us sold reluctant credit committees on affordable housing by telling them once we got past construction they didn’t need to worry. Stabilized periods were incredibly stable. Those assurances may find a more skeptical audience now.