Sign Up For Novogradac Industry Alert Emails

Considerations for LIHTC Market Studies After Two Years of COVID

Published by H. Blair Kincer on Wednesday, March 2, 2022

Journal Cover March 2022   Download PDF

Changes brought about by the COVID-19 pandemic hit nearly everything, including market studies for low-income housing tax credit (LIHTC) properties.

Two years into the pandemic, market study fundamentals are the same, but certain issues have arisen since March 2020 that developers and investors should consider. The past 24 months have seen the emergence of trends that are worth extra consideration while looking at the market for a LIHTC property.

Things always change and the past 24 months provided more than usual. Knowing that, here are four considerations while examining or ordering market studies.

1. Question 2022 AMI Increases

There has been a lot of focus (from Novogradac and elsewhere) on issues related to the 2023 LIHTC income limits that will be set by the U.S. Department of Housing and Urban Development (HUD), mostly due to difficulties with the 2020 American Community Survey data on which they would normally be based. Problems attributable to the pandemic meant that the 2020 ACS data is insufficient, so HUD will likely rely on five-year figures to set 2023 income limits.

But that’s 2023. The 2022 income limits–due around April 1–will be based on AMI calculations from the 2019 ACS, which was before the pandemic. A January Novogradac estimate forecasts that we’ll see a national AMI increase of nearly 8%, with more than 92% of areas for which Novogradac can make an estimate seeing an increase in income limits.

Simple, right? Not so much.

While income limits might increase, the market may not bear that increase. Simply put, the national AMI may increase nearly 8%, but many areas are incapable of supporting such an increase in LIHTC rents. This is a change from the past decade or so, when an increasing number of markets have seen LIHTC rents reach maximum levels. Expect to see that trend reverse in 2022–not that rent will decrease, but that it will increase at a lower rate than in recent years. Developers should not assume they can achieve maximum rents and should consider working with an analyst to make sure a market study accurately represents what’s likely to happen, not what’s possible.

2. ACS Data Less Reliable

The aforementioned issue concerning 2020 ACS data means that information is less robust and reliable than normal–not a criticism of the Census Bureau, but a recognition of the limitations of the available data.

If, as expected, HUD uses a five-year data set to determine 2023 income limits, those figures will be an estimated 3.5% lower than they would otherwise. And that change won’t affect 2023 in a vacuum, it will have echoes beyond that year–especially when you consider that there’s no guarantee the 2021 ACS data will be sufficient: There remains a possibility that the 2024 income limits will face the same issue.

A reminder that income limits are forecast to be 3.5% lower in 2023 than they would be otherwise. That’s not a decrease, it’s a lower rate of increase. That’s important, but so is the realization that the limitations of the data’s completeness extend beyond income limits.

LIHTC stakeholders should work with the understanding that ACS data may be insufficient in describing populations and renters and other issues that affect the market. Incomplete data is completely incomplete–the inadequacies of it go beyond simply setting income limits. More than ever, wise participants should be willing to challenge information from surveys. Don’t be afraid to seek estimates and projections outside the ACS data and to follow up on information that seems questionable.

3. Be Aware of More New Properties

One result of the early months of the pandemic, with related shutdowns and supply chain problems, was a slowdown in property development. A pause, not a stop. That means that some properties originally scheduled to open in 2020 or 2021 were delayed for several months and opened later.

Meanwhile, other properties got started and are still scheduled to open in 2022. The result? A higher-than-normal number of properties opening in 2021 and 2022 (and perhaps beyond), due to delays in 2020. That means in some markets, properties will face more new competition than they would in a “normal” period. That’s a supply-and-demand issue that should be accounted for in market studies.

4. Employment Trends and Residents

Every recession causes an employment shock and COVID-19 is no exception. The brightest spotlight has been on office workers adopting to hybrid schedules or working permanently from home, but the changes that will affect LIHTC properties are more basic.

During the past two years, many lower-income jobs went away. While many LIHTC residents tend to be “essential” workers with strong employment stability, some work in jobs that decrease in hours or disappeared as restaurants and other service industries closed or reduced their workforce. That could lead to repercussions for the properties where they live.

As rental properties evolve out of a period eviction moratoriums and rent forgiveness, there is a real possibility that many tenants will have lost their jobs or seen hours reduced. That also means that in the higher end of LIHTC tenants–those earning 60% of the AMI, for example–there is an increased possibility of moves to get closer to a new job.

While preparing and examining market studies, consider the state of employment for potential tenants and deepen your understanding of how changes in the economy and service industry reverberate through your property.

Account for Changes

Market studies should reflect the present and provide insight into the future of the area in which a property exists or is proposed. In the wake of COVID-19 and all the cultural and economic shocks related to it, LIHTC stakeholders should take particular care to ensure that their studies take into account changes that have happened in the past two years. Consult an expert to make sure your market study is an accurate reflection of what’s happening and an accurate estimate of what is coming. 

Learn more about Novogradac's expertise and many services