Developers Tap Municipalities in Attempt To Address Housing’s ‘Missing Middle’

Some Apartment Projects Rely on Subsidies To Offer Teachers, Firefighters Affordable Rents

By Jon Leckie
CoStar News

April 22, 2024 | 3:52 P.M.

The Markson in Austin, Texas, looks like other apartment complexes, with its pool lined with cabanas, outdoor grills, pet spa, fitness center, and views of downtown. But it's also part of a different type of multifamily development appearing around the country.

The 330-unit complex stems from a partnership between NRP Group and the Housing Authority of the City of Austin. Located at 5313 Vega Ave. in Austin near the Barton Springs recreational area, its apartments range from one- to three-bedrooms and rent for $1,487 to $3,182 a month with more than half the units reserved for tenants earning 80% of the area’s median income, according to NRP. It's focused on luring first responders and teachers, including employees at nearby Saint Andrew’s Episcopal School, who are offered a free month's rent.

These workers represent an income bracket that has sometimes been ignored by developers who tend to either accept large subsidies and tax breaks for low-income tenants or rely on high-end, market-rate developments to make deals profitable. As housing costs have risen across the country, some argue that middle-income renters have been left with fewer options.

"I grew up in Orange County, and I've seen a number of my friends who I grew up with move away from California because the cost of living here is too high," John Drachman, co-founder of the Newport Beach, California-based investment and development firm Waterford Property Co., told CoStar News. "And a lot of times the people I see who are moving out are in that middle-income category ... who are the teachers, firefighters, clerical workers ... people who go it's just too expensive to live in California."

Like California, Austin has also faced higher costs of living and a lack of affordable housing. At the same time, apartment developers across the country are increasingly looking to government entities to cater to renters priced out of upper-tier apartments but who earn too much to quality for traditional affordable housing, a group sometimes called the missing middle.

Without programs aimed at this income group, developers haven't often considered so-called workforce or middle-income affordable housing profitable, even though some say demand is there. But Drachman, whose company is behind another middle-income development in Dallas, said that’s changing as governments are feeling pressure from constituents feeling squeezed by rising rents.

Across the United States local municipalities and housing authorities will be "focusing on what we would call the missing middle, true workforce housing,” he said. “That really targets people who make too much to qualify for traditional affordable housing but are having a harder time paying for market rate housing.”

While long-established programs such the Low-Income Housing Tax Credit create avenues to finance projects for renters earning less than 60% of an area’s median income, Drachman said there have been few developer incentives benefiting prospective tenants earning between 61% and roughly 120% of the area’s median income.

These public-private partnerships are still emerging and there's no guarantee they will gather enough momentum to succeed broadly. Developers have an incentive to construct multifamily housing that can produce as much rental income as possible, while government officials often argue that funding for added programs such as these partnerships is tight.

Seeking Solutions

Even so, in the wake of the pandemic that ballooned rents nationally, municipalities are getting more creative in coming up with solutions for this often overlooked type of housing. Waterford has developed more than 4,000 units in California through a partnership with the California Statewide Communities Development Authority that relied on tax-exempt bond financing.

The company’s latest project, dubbed Domain at Midtown Park in Dallas, converted a Class A property into mixed-income workforce housing in a partnership with the Dallas Housing Finance Corporation. Like NRP’s partnership with the HACA, Waterford partnered with the Dallas Housing Finance Corporation that provides rental assistance to projects that meet local revitalization programs.

The Markson reflects the Housing Authority of the City of Austin's "commitment to addressing the affordable housing shortage in Austin,” Michael Gerber, the agency's president and CEO, said in a statement. He said the agency's vision includes providing "stable, affordable housing options to essential workers."

As a result of public entities pursuing these types of goals, there are “more and more creative solutions that local municipalities and groups are willing to utilize to create workforce housing where it requires less subsidies than" the Low-Income Housing Tax Credit, Drachman said.'

Part of the solution reached for Waterford’s Dallas project was a 99-year property tax abatement in exchange for 51% of units being reserved for tenants earning 80% of the area’s median income, much like the Markson. Another 39% of units are marked for tenants making no more than 140% of the local median income, with the remaining 10% renting for market rates.

While the tax abatement costs the city, Drachman said, the cost is far less than much larger low-income subsidies that often include additional benefits such as free land for the developer and other tax credits for financing and construction costs.

Savings from these exemptions and subsidies, albeit smaller, can still significantly improve the performance of a property for developers while saving tenants hundreds of dollars a month in rent — money that can be used to save for a down payment on a house, pay down student loans, or go toward other household expenses.

Complaints of High Rents

Developers are looking to see how these programs, coupled with preferable loan terms from government financing, can help solve cost issues holding down the multifamily market. High interest rates have led to increased operating expenses, and markets such as Austin and Dallas are being hurt by high apartment vacancy rates that can be mitigated through lower rents.

But it’s not just developers and renters who can the upside, Drachman said, adding that elected officials who serve both groups can also reap the benefits of public-private relationships.

“Elected officials are hearing from constituents, specifically in Dallas, that rents are high,” Drachman said, “and that specifically, essential workers, your teachers, your firefighters, your nurses, your clerical workers, people that are on fixed incomes, as inflation has been running rampant, they’re increasingly paying more and more of their incomes towards rent. And that’s a problem.”

The Dallas project marked the first expansion into the Lone Star State for Waterford, but Drachman said his company has plans to continue to look for similar opportunities there. Waterford has already built more than seven income-restricted projects in California and has another 1,200 affordable units in various stages of development.

NRP’s latest project is its eighth collaboration with HACA. Together, the groups have created more than 2,300 affordable units across Austin. NRP is also developing Alameda at Oak Hill, a 334-unit property, in partnership with the Austin Affordable Housing Corporation.

At the Markson, the development’s name is in homage to Dan Markson, a former executive vice president of development at NRP who died in 2019. Markson was important to founding the Cleveland-based firm’s Texas office in San Antonio in 2003. Over his 30-year career, Markson lead the development of more than 29,000 affordable multifamily units.

“The Markson stands as a testament to Dan’s vision and dedication to delivering housing options for essential workers throughout Texas,” Deborah Guerrero, senior vice president of strategic partnerships and government affairs at NRP, said in a statement.

The company has developed more than 50,000 apartments since its founding in 1994 and now manages more than 25,000 units, making it one of the largest developers in the country, according to the National Multifamily Housing Council.