November 28, 2023

Housing Finance Development

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Aaron Pechota leads the development activities and is head of affordable housing at The NRP Group, one of the largest affordable housing developers in the country. He has been with the Ohio-based company since 2004 and became executive vice president of development in 2021.

Aaron Pechota
Aaron Pechota

Over the past decade, he has been the creative driving force behind launching “healthy housing” partnerships between The NRP Group, health care providers, and nonprofits in an effort to build on affordable housing as a platform for improving a broader range of social determinants of health.

AHF: A major issue for developers is rising construction costs. What have you seen in the field this year?

Pechota: Overall, we’ve been seeing around a 30% cost increase year over year across the board. The biggest line item is your hard costs on construction, but I think it applies to everything, especially when you layer in the interest rate environment on top of those costs. At the end of the day, if you have a 30% increase in costs and you have a finite amount of resources, which we do in affordable housing, it’s reasonable to assume that eventually you are going to see a reduction in units produced. In the absence of new resources coming, that’s what we’re looking at in the medium to long term.

AHF: What’s a move that The NRP Group has made to manage rising development costs?

Pechota: Within reason, we spend a lot of time on our horizontal and vertical design, trying to make the highest-quality products as efficient as possible. That’s part of our process. With an extra focus on costs right now, we’re approaching our public partners, including housing finance agencies, local municipalities, and regional jurisdictions that have access to funding and need affordable housing. We’re making sure they understand the challenges we’re facing and if the projects that have been in progress for two or three years are going to go forward and, if not, how they can go forward. At times, those developments can look different than they did 12 months ago. We’re also trying to be more prudent about the developments we’re undertaking. Part of that is asking, “Does this development have the different components that will allow it to progress forward in this environment 24 months from now?”

The affordable housing industry continues to mature and become more experienced. Other developers similar to NRP have tried to take a long-term view on projects. There used to be a time when people would say, “I’ve got an award of tax credits and need to get this project built right away.” We certainly want to move things as fast as possible, but we’re also taking a long-term view on developments. Sometimes, we’re working with our partners to say, “This project is almost ready, but if we’re able to get one or two more things to happen then we can move it forward.” We’ll keep working as opposed to throwing in the towel. We’re keeping projects on track, but that track might need to be longer than we planned.

AHF: What’s a creative solution that you’ve seen from a state or local jurisdiction to help fill a funding gap or accelerate housing production?

Pechota: Leading up to the last 12 months, we saw a lot of municipalities start to issue bonds with the eye toward getting more units produced, using 4% housing credit financing, and coming in with gap funding. In addition to the housing credits, they were playing a larger role. Instead of more production of units, they were maintaining the production that they had before. Columbus, Ohio, is looking at passing a $1.5 billion bond, with $200 million for affordable housing. San Antonio recently passed $150 million, and there are other examples. The cities that understand what it takes to fill the gap are going to continue to see units produced, albeit not as many as they want. The ones that haven’t done that are going to see a drop in new units produced going forward. In another move, a number of states have also passed state credits that will help production in those states.

AHF: What’s your forecast for affordable housing in 2023?

Pechota: In 2023, we’re going to see a reduction in units produced. There’s no way around it anywhere in the real estate sector with a 30% cost increase year over year. While we likely won’t experience a reduction in 30% of units produced, every development that we do is going to take a little longer on the front end. Every construction period for a building is going to take a little bit longer. The longer anything takes, the more expensive it will be. That scares us from an industry perspective. What’s even scarier is the impact this can have on the local level where it’s felt. Most major cities where we have a presence already have a gigantic deficit of affordable housing, and it’s just going to get worse over the next 24 months. Anything we can do to bring more resources to the table, the better.

AHF: What will be the next trend or evolution of affordable housing?

Pechota: We’re starting to see folks dial in and look at how affordable housing fits in from a market perspective, going beyond just the affordability need and number of units. We’re starting to see folks looking at this and saying, “This is a real estate transaction that needs to work, and how do we make it work? How do we create sustainable, vibrant, mixed-income communities that serve our extremely low-income populations, that serve the market, and at the same time can help these communities see investments in neighborhoods that haven’t had them?”

We love to see deals that are simple transactions, but the reality is the more partners that you bring into developments, the more complex the transactions get. I don’t see deals getting less complex in terms of their execution, but I do see people taking a market-based approach in terms of the costs and the rents. If you have good real estate and you have a good opportunity in a neighborhood, those things seem to be moving forward. I see this interesting confluence of, “We want to continue to do our best to create as many affordable housing units as possible, and one of the ways to do that is to not separate affordable housing from the overall market.” You’re probably going to continue to see more mixed-income development, especially with some of the guidance we’ve gotten from the federal government.