NOAH: Everything You Need to Know

The first thing that may come to mind when you think of “affordable housing” is publicly subsidized housing operated by a housing authority or non-profit organization. What you may not think of, though, are the humble apartment complexes scattered across U.S. metropolitan areas which provide affordable rental housing to low and moderate income families without public subsidy.

Referred to as “Naturally Occurring Affordable Housing” (NOAH) or “Unsubsidized Affordable Housing”, these apartments have not traditionally been the focus of housing research, advocacy, or policy. But in recent years, the rental ‘housing squeeze’ in many metro areas has driven the loss of NOAH housing, prompting advocates and policymakers to broaden their work.

This post provides a basic overview of the factors that lead to NOAH housing loss and outlines early efforts to stem this loss. I draw on examples from the Twin Cities region simply because that is where I worked before making my way to the Research Triangle. While these examples are specific to the Twin Cities’ rental market, the loss of NOAH housing is by no means an isolated issue. To that end, this post will also examine the potential for NOAH housing loss in the Research Triangle – a process that may already be underway. Through this discussion, I hope to paint a clear picture of what qualifies as NOAH housing and why it is such a pivotal housing asset to preserve.

Equally important, I hope this post highlights the need for affordable housing practitioners and researchers to broaden their policy agendas. Most rental housing that is affordable to low and moderate income households is provided by the private market, and many of these units fall under the umbrella of NOAH housing. Despite this reality, affordable housing advocacy and research has historically focused on increasing federal subsidies for affordable housing programs and evaluating the outcomes of people who participate in these programs. This work is crucially important and I do not mean to devalue or criticize it through this post. I simply suggest that it is also important to preserve affordable rental units that operate without government subsidy, especially given continued cuts to federal affordable housing subsidies.

What is NOAH Housing?

All advocacy efforts require a shared definition of “the problem” and “the solution” to be successful. To this end, one challenge associated with NOAH housing preservation lies in creating a common understanding of the issue. There no codified definition of NOAH housing, but the term is generally interpreted by advocates and developers as any rental housing that is affordable to low and moderate income households without direct public subsidies, such as Low Income Housing Tax Credits (LIHTC). Albeit broad, this definition represents an increasingly specific type of rental housing.

NOAH properties are commonly defined by their physical characteristics. In the parlance of real-estate investors, NOAH properties are “Class B” and “Class C” properties – large apartment complexes (50 plus units) built between the 1940s and 1990s that are functional but not luxurious. According to CoStar, a national commercial real estate information company, Class B and C properties have “brick, stucco, precast concrete or vinyl siding facades; small and seemingly inadequate windows; below average finishes; no-onsite shared facilities; minimal landscaping and no exterior shared spaces; and are unlikely to be certified green and energy efficient buildings.” These characteristics are certainly not ideal from a design or livability standpoint, but they do help keep rents low and provide the basic living arrangements that people need lead productive lives. That is, NOAH properties tend to be older and have fewer amenities, making them less desirable to renters with higher ability to pay.

As alluded to above, the most important characteristic of NOAH housing is affordability without subsidy. Unlike LIHTC subsidized housing or public housing, the affordability of NOAH housing is not contingent on public subsidy. Many NOAH housing developments are home to large concentrations of housing voucher recipients and social security recipients, but the rent levels themselves are not being subsidized – rents are “naturally” low enough for low and moderate income households to afford.

The terms “low” and “moderate” income are generally used to refer to households that earn between 30 percent and 95 percent of the area median income – a range that aligns with standardized HUD income limit terminology. It is important to point out that NOAH housing is not affordable to extremely low-income (ELI) households which earn less than 30 percent of the area median income. A recent Costar data set related to NOAH housing revealed that, per the National Low Income Housing Coalition, “The average rent of these units is 55% of the average ELI income threshold, meaning that ELI households renting such units would be severely housing cost-burdened.” For these households, there is still a severe shortage of affordable housing.

One benefit of the relatively broad definition and characteristics of NOAH housing is flexibility. Advocates and researchers can use these broad terms to refer to local and regional housing contexts to mold their preservation efforts to local and regional housing contexts. The basic points are that NOAH housing is functional but not luxurious and is affordable without public subsidies.

What’s Causing the Problem?

The severity and pace of unsubsidized affordable housing loss varies by metropolitan area, but a few common factors appear to be driving this phenomenon.

The first is increased competition for affordable rental housing. It’s no secret that people, many of whom are young, are moving to cities and living in rental housing rather than purchasing a home. While the rental housing stock has increased in many metropolitan areas, new development has not kept pace with renter population growth. NYU’s Furman Center of Real Estate and Urban policy reports that, “between 2006 and 2014, the renter population grew faster than the stock of rental units in the 11 largest metro areas, and in metro areas nationwide, pushing the average rental household size up and putting pressure on the affordability of rental housing.” Equally important, only a fraction of newly developed and recently vacant units in metropolitan areas were affordable to median and low income renter households.[1] Not only has the mismatch between renter growth and new rental development pushed rents up and vacancy rates down,it has also pushed people into different types of rental housing.

Many renters are now living in single family homes and apartment buildings that have traditionally served low income households. The previously cited Furman Center report also shows that, “In six of the 11 largest metro areas, and in metro areas nationwide, the increase in the number of single-family rental units between 2006 and 2014 was larger than the increase in multifamily rental units.” This finding is important not only because it highlights the movement of renters into single family homes, but also because it highlights the sluggish pace of multifamily rental development in most metro areas. The lack of new-multifamily development coupled with growing demand for rental housing is making it increasingly profitable for investors to purchase NOAH housing complexes, make basic renovations, and increase rent.

Finally, the low-cost of capital during and following the Great Recession made it much easier for investors to purchase NOAH housing. As with all other parts of the economy, the recession brought the housing market to a screeching halt. In response, the Federal Reserve slashed its Federal Funds Rate – which serves as a benchmark interest rate — to nearly zero. Many banks followed suit and decreased interest rates for 30-year fixed rate mortgages, which bottomed out at about 3.5 percent. This made it made it much more affordable for people,  and also investment companies to purchase residential property throughout the country.

In this market environment, NOAH housing was a particularly attractive investment. Because I am far from a finance expert, here is a comprehensive explanation of the phenomenon that a mortgage expert provided me with while I was doing research on NOAH housing in the Twin cities:

When over the past several years interest rates and returns on alternative investments fell, the cap rate for apartments also declined. In this environment investors can pay higher prices for apartment buildings without increasing rents. However, currently the cost of capital (reflected in the cap rate) has stabilized and higher building prices will be based on expectation of higher future rents. For purchase of existing property, the greatest increase in value will go to those properties where investors believe that they can most increase rents…. real estate investors have been drawn to apartment buildings in general, and older Class-B and Class-C apartment buildings in particular. Many buyers believe that putting money toward upgrades in properties built in the 1960s, 1970s and 1980s will yield significantly higher future rents in the market. By renovating kitchens, baths and common-area amenities, many buyers believe they can increase rents to more than compensate for the investment.

The simple explanation is that low-interest rates created the opportunity for buyers to leverage more money out NOAH properties than was previously possible. Likewise, with renter population growth outpacing rental housing development, it is increasingly profitable for investors to purchase NOAH properties which have the capacity to fetch higher rents.

How Much NOAH Housing is out there?

The question of how much NOAH housing is out there is difficult to answer, but early empirical analyses show that the NOAH housing stock accounts for a significant proportion of the nation’s rental housing. The most comprehensive analysis of the nation’s NOAH housing stock was completed by ULI’s Terwilliger Center for Housing. This study combines Census data and CoStar data to estimate the total number of “one and two star” units – a classification analogous to Class B and C– in the Country. If at least a small fraction of these units can in fact be classified as NOAH, this report demonstrates that NOAH makes up a sizeable proportion of the affordable rental market.

The main finding of the study is that there are about 5.6 million one and two-star rental units across the county, which accounts for roughly 13 percent of the country’s total rental housing inventory. More striking, about 75 percent of all multifamily properties – not units – are considered NOAH properties under the CoStar classification system. Almost half of the one and two star units are in large apartment complexes (50 plus units) and located in large metropolitan areas, such as Los Angeles and New York, where these properties account for upwards of 10 percent of the total rental housing stock. In smaller metropolitan areas, such as Minneapolis and Portland, one and two star properties accounted for less than 2 percent of all rental properties.

A more targeted analysis entitled The Space Between presents findings that fall in line with ULI’s study. This report highlights a key finding from the Joint Center for Housing Studies’ “State of the Nation’s Housing Report” which reported that in 2009, “unsubsidized properties accounted for more than 75 percent of the affordable rental housing stock in the country.” Looking only at the Twin Cities, this report finds that, “57 percent of the total rental housing stock (or over 122,000 of the 182,000 total rental units) is comprised of privately-owned unsubsidized rental housing with rents affordable at 50% of AMI.”

Combined, these studies highlight that class b and c properties do not simply account for a large proportion of the nation’s housing stock – they account for a significant proportion of the nation’s affordable housing stock and represent a crucial form of affordable housing.

The Displacement Process and its Affects

It is important to keep in mind that the loss of NOAH housing has a human impact. Low and moderate income households across the country are now being forced out of their apartments and into a state of personal and financial instability using, I argue, discriminatory tactics. . To make this point, I think it is most appropriate to examine a real-world example, one which I became familiar with while working as a housing researcher in the Twin Cities.

The Crossroads at Penn was once an apartment complex that provided 2,300 residents with affordably priced rental housing. Located in Richfield, Minnesota, an inner-ring suburb of Minneapolis, the 698-unit complex provided low and moderate income people with the opportunity to live close to amenities and in a high-performing school district. The apartment complex needed basic repairs and facility upgrades, but it provided basic living arrangements to residents and, as such, represented an important source of affordable housing for the region.

But in 2015, the Crossroads was sold to an investor with a new vision for the complex. Shortly after purchasing the property, the new owner notified residents that their apartment would undergo renovations, be rebranded as the Concierge Apartments, and that rents would increase. Equally important, the new property owner implemented an array of new lease-up requirements, such as minimum credit scores, and discontinued Section 8 Housing Choice Vouchers.

These changes made it difficult, if not impossible, for many of the residents to remain in their units and, by the end of the year, about 80 percent of the 2,300 residents were displaced. To put that in perspective, and as one housing advocate in the Twin Cities noted, “the conversion of the 698 apartments at Crossroads, by itself, offset virtually all of the production of new affordable housing in the metro area in 2014.” While the degree of displacement is reason for concern alone, it is particularly troubling given the new challenges that displacement presented to residents.

For many residents, displacement did not simply mean losing their home – it also meant that they had to move to a more expensive apartment and live further away from jobs, services, and amenities located in central city areas. The Twin Cities is undergoing a housing squeeze characterized by falling vacancy rates and increasing rents, particularly in central city neighborhoods and inner-ring suburban communities like Richfield. With affordable apartments  like the Crossroads in short-supply, former residents faced a no-win situation: either they had to pony up more money to afford rent in their community or move to an outlying suburb and increase their commute time to work.

The Response

Early efforts to preserve NOAH housing in the Twin Cities have largely been led by non-profit affordable housing developers, financiers and advocacy organizations. Together, these organizations have worked not only to assemble the money needed to purchase and preserve NOAH housing, but also to push forward important policy reforms that may help curb the conditions driving NOAH loss. Given that NOAH loss is a relatively novel phenomenon, these responses are still in their infancy. That being noted, efforts underway in the Twin Cities do provide promising policy options for other metropolitan areas dealing with NOAH housing loss.

One obvious challenge to preserving NOAH housing is coming up with the equity needed to purchase NOAH properties. In response to this challenge, the Greater Metro Housing Fund (GMHF) – a major non-profit affordable housing lender – created the NOAH Impact Fund, which brings together both public and private money to provide, “equity investments to developers of existing affordable rental housing in the seven-county metro area that is at risk of becoming market rate.” NOAH Impact funds are specifically meant to help developers cover down payment costs for NOAH properties. While non-profit developers have employed other tactics to finance NOAH acquisition, GMHF’s NOAH Impact fund is a particularly powerful tool because it allows to developers aggressively pursue NOAH acquisition by providing seed funding which helps them cover down payment costs and leverage money from traditional financiers.

Another challenge that non-profit developers faced was putting in place the requisite business and management practices needed to successfully acquire and preserve NOAH properties. Rather than paraphrase these steps, provided below is GMHF’s summation of best practices for NOAH acquisition, which were gleaned through interviews with major non-profit developers including listed in the endnotes.[i]

  • Securing lower-cost capital results in lower, more affordable rents for tenants.
  • Due to the speed at which speculators and national investors acquire properties, it is essential to have the readily available capital and professional capacity to close deals within 60 days, or NOAH properties will not be secured for preservation.
  • NOAH property management requires highly engaged property management complemented with fund-level asset management to oversee budget conformance, leasing, staffing, etc. Robust asset management is key to a successful portfolio.
  • Cost effective scale requires transactions to be at least 45 rental units or more in one or more buildings and/or locations.
  • Strategic property improvements include modest upfront and ongoing repairs to address tenant needs and provide curb appeal to reposition property. The need for large-scale improvements in a potential acquisition is generally cost-prohibitive and deleterious to the success of a NOAH project.
  • Energy-saving, green improvements may help increase cash flow by lowering operating costs.
  • Acquiring properties in opportunity areas near transportation, jobs, and quality schools increases quality of life and outcomes for low-income individuals, families and children.

In addition to creating tools for financing NOAH acquisition, housing advocates in the Twin Cities have also taken steps to preserve NOAH housing. In 2015, the Housing Justice Center filed a fair housing lawsuit which claims that the displacement of residents from the Crossroads Apartments is discriminatory because unfairly pushed out tenants who were disproportionally people of color and people with disabilities, both of whom are protected under the Fair Housing Act. According to HJC, “This is a groundbreaking application of the Fair Housing Act, as there is little precedent applying the Act to this kind of private party wholesale displacement of a tenant population.” While this suit is still in the early stages of litigation, one positive progression came in July 2016 when the Federal District Court for the region denied defendants motion to dismiss the fair housing complaint. The denial is particularly important because it highlights that the Court will at least consider the possibility that displacement of residents from the Crossroads does in fact represent a “disparate impact” on “protected classes.”

Many affordable housing advocates are also beginning to seek out policy solutions, not just legal action, to stem the loss of NOAH housing. One promising solution that is being proposed by advocates is “right of first refusal” policies, which would allow tenants to purchase their NOAH property if it was going to be sold to a new property owner who planned to “upgrade” the property and, thus, eliminate affordable rental units. Typically, non-profit developers, government agencies, and tenants associations have implemented and used right of first refusal policies to purchase subsidized rental housing if the owner decides to terminate their participation in subsidy programs. However, many advocates believe that the same policies could also be used to support NOAH preservation.  To date, Washington D.C. is the only political jurisdiction with such a policy. Under this policy, per D.C. Urban Turf, “tenants get the right of first refusal, which means that they have the opportunity to match an offer that the owner is considering.” While this policy does not solve a key challenge with preserving NOAH housing – assembling the equity needed to purchase a given property – it does give tenants some legal standing to prevent the loss of NOAH housing.

As previously noted, some of the solutions presented in this section may not be appropriate for all metropolitan areas. But many of these policies highlight the key challenges that local leaders must address to preserve NOAH housing. With adequate financial resources, appropriate business and management practices, and targeted legal and policy interventions, affordable housing advocates in any metropolitan area can begin efforts to preserve NOAH housing.

Preserving NOAH Housing in the Triangle

Many of the factors that contribute to affordable housing loss are particularly severe in major metropolitan areas. However, the demand for rental housing and shortage of affordable rental housing seem to be issue affecting all metropolitan areas throughout the United State, including the Raleigh-Durham metropolitan area.

In the Summer of 2013, the General Service Corp. (GSC), a real-estate company based in Richmond VA, announced that it would no longer accept Section 8 vouchers in 9 of its orange county properties. As a resident of one of these properties, Royal Park, I can attest that at least one of these properties can be described as NOAH housing, with respects to both physical characteristics and rent level, and say that GSC is currently in the process of upgrading many of the amenities within units to fetch higher rents – I was not surprised that my rent was significantly higher when I recently went to re-sign my lease.

While my evidence is only anecdotal, refusal to accept Section 8 vouchers is one of the primary tactics that owners of NOAH housing use to displace low and moderate income tenants and make way for tenants with higher incomes. Indeed, GSC’s refusal to continue participation in the Section 8 program may be an early indication that NOAH housing is under threat in the region.

[1]In 2014, metropolitan areas across the country saw median income renters only able to afford 35 percent of recently available units (vacant or newly constructed) and low-income households only able to afford 10 percent of recently available units.

[i] Mercy Housing (Chicago); Eden Housing (Hayward, CA); National Housing Trust (Washington, D.C.); Homes for America (Annapolis, MD); Adobe  Housing (Fremont, CA); Hispanic Housing Development (Chicago, IL); MidPen Housing (Mountain Valley, CA); Community Preservation & Development Corporation (Norfolk, VA).

Atticus Jaramillo is a Ph.D. student at UNC Chapel Hill. His research interests focus on how personal characteristics (such as gender, age, and ethnicity) impact the degree to which low-income people benefit from affordable housing programs. Before moving to Chapel Hill, he worked as a researcher for a non-profit affordable housing advocacy organization based in the Twin Cities, where he also earned a master’s degree in planning from the University of Minnesota’s Humphrey School of Public Affairs.  

Featured image: Class C apartment development in Carrboro, NC. Photo credit: Google Maps.