The Impact of Pension Funds' Investments in Affordable Multi-Family Housing

Discover the findings of the Federal Reserve Bank of New York's study on pension funds' investments in multi-family housing and their long-term affordability focus.

Affordable multi-family housing has become a significant component of some pension funds' real estate portfolios, but a recent study by the Federal Reserve Bank of New York reveals that many of these investments lack a long-term affordability focus. The FRBNY's research project, which focuses on investments by institutions such as state pension plans in multifamily housing, sheds light on the current trends in the market.

The study, which analyzed investments made by seven pension plans over a five-year period ending in June 2023, found that investor demand for affordable housing has surged, particularly as inflation rates have risen. In contrast, investments in other real estate sectors, such as commercial office space, have waned. The value of investments in affordable multifamily housing has skyrocketed from $75 billion in 2011 to $365 billion in 2022, according to data from CBRE cited by the New York Fed.

On average, the pension funds surveyed allocated $388 million to affordable multifamily housing over the past five years, with plans to commit an average of $178 million before June 2025. Affordable housing, as defined by the FRBNY, caters to households earning up to 120 percent of the median income in the area. For instance, in New York, a two-person household can earn up to $135,000 annually to qualify for affordable housing.

Multifamily affordable housing accounted for an average of 4.4 percent of the respondents' real estate portfolios, a figure expected to remain stable over the next two years. Most of the investments were concentrated in New York, California, and Florida. Interestingly, the study found that pension funds predominantly accessed affordable housing investments through closed-end investment vehicles rather than real estate investment trusts, which could have implications for the long-term affordability of properties.

The majority of investments targeted households in the top quartile of area median income, with 30 percent of the portfolios allocated to this group. Additionally, 27 percent of the portfolios catered to renters earning up to 60 percent of the area's median income.

While pension funds are increasingly turning to affordable multifamily housing as a lucrative investment opportunity, the long-term affordability of these properties remains a concern. It will be crucial for investors to prioritize sustainable and inclusive housing solutions to ensure the accessibility of affordable housing for all income groups.