Construction spurred by tax credits now accounts for about one-fifth of all U.S multifamily starts, says Mark Obrinsky, chief economist of NMHC. In 2007, the most recent year for which tax credit data is available, 52,382 of the 277,000 multifamily starts, or 19%, were aided by the tax credit program.

“It's a higher percentage of new multifamily construction than it was a few years ago simply because the other part of the market has tanked,” explains Obrinsky.

Starts of all U.S. multifamily buildings with at least five units dropped to 266,000 in 2008, Obrinsky says, and he predicts they will plunge to 150,000 in 2009. Employment declines are the key reason for the drop.

David Cooper, a principal with the Woda Group, a developer based in Westerville, Ohio, sees firsthand the fallout from an inadequate supply of modestly priced housing. Woda builds about 15 affordable apartment projects a year across 10 states.

“If we don't have someone to buy those credits, then we cannot generate the funding necessary to build the development,” says Cooper. “We manage about 4,300 units and we've never had more demand for our units than we do right now.”

Deals are dying

“A lot of deals that were awarded tax credits and can't find an investor are dying. In many cases, developers are even returning the tax credits awarded to them to the state housing finance agency because they can't find an investor to make the deal work,” says Bob Greer, president of Michaels Development, which has built 40,000 affordable housing units over three decades and has about 4,000 under construction.

Since the recession began, many syndicators have vanished or had trouble securing investors, says Greer. Frustrated, he started a costly syndication department within Michaels, hiring tax specialists and approaching potential investors directly.

Greenbelt, Md.-based Bozzuto Group often partners with nonprofits to build housing, says CEO Tom Bozzuto. The developer is completing the $53 million Jericho Residences in Landover, Md. with Jericho Baptist Church to create 110 affordable and 160 market rate seniors units. “They just don't have the technical skills to put together a real estate project, any more than I would have the skills to run a church.”

Some observers see encouraging signs for affordable housing. “Some economic investors are coming back, because the yield on the tax credit has increased as the price has dropped. That is a new trend,” says Robert Sheppard, senior vice president of investments for real estate services firm Marcus & Millichap, based in Encino, Calif. Such signs are helpful to an industry that Sheppard says has withered from a robust $10 billion in 2007 to less than $4 billion annually.

Stimulus offers hope

In February, the American Recovery and Reinvestment Act of 2009 was signed into law, allocating $2.25 billion for the Tax Credit Assistance Program administered by the Department of Housing and Urban Development (HUD) for Section 42 properties. The act also allows states to exchange housing credits for cash, which could yield an additional $3 billion for housing credit property, says Rieman of the state housing agencies group.

The Obama Administration also is spending $330 million to spur affordable housing in the Midwest and Puerto Rico. In Canton, Ohio, a vacant three-story tenement will be torn down and replaced by 40 new apartments.

In Detroit, the aging Across the Park Apartments will get a $13 million facelift. And in Osawatomie, Kan. a seniors housing complex that lost its funding and was halted when three-fourths complete will get the needed funds to finish the job.

Although some analysts are skeptical about government efforts to prop up Section 42, Fischer of CBRE is cautiously hopeful that stimulus funds will increase affordable housing transactions. Milwaukee and Omaha developers have told him they can't even get quotes for deals, while a client in Great Falls, Mont. got three rejection letters, Fischer adds.

“If things happen the way it's been laid out, deals will get closed that otherwise would not have gotten done.”

Denise Kalette is senior associate editor.