Challenges of accessing sufficient financing for buying, rehabilitating and refinancing smaller rental properties could threaten the supply of affordable rental housing in Chicago, according to a new working paper by the Institute for Housing Studies (IHS) at DePaul University.

Access to financing for small multifamily properties (typically those with between five and 49 units) is critical for the preservation of the local rental housing stock. Financing allows building owners to acquire and rehabilitate properties, which can preserve existing rental units or return units previously offline to the rental housing supply, said James Shilling, co-author of the working paper, and Michael J. Horne chair of real estate studies at DePaul. It also helps building owners pursue projects, such as improving energy efficiency or other types of building repair, which help control building ownership costs. Access to financing also makes it possible for building owners to refinance maturing debt and take advantage of lower interest rates.

Small loan size and the relative complexity and high cost of underwriting and servicing mortgages on small multifamily buildings have made it difficult for a secondary market to develop for loans to these types of properties, the study shows. As a result, the lending market for small multifamily properties is served largely by portfolio lenders whose ability and willingness to lend—particularly during times such as the recent financial crisis—may be limited by factors such as access to lending capital, changes in the performance of their loan portfolios, and tighter regulatory safety and soundness requirements.

“One of the challenges in the near term will continue to be how to get more active secondary market participation for loans for small multifamily buildings,” Shilling said. “Having private commercial mortgage-backed securities or Fannie Mae and Freddie Mac participate more actively in the market for these types of loans could reduce credit constraints for many small multifamily property investors.”

Other key findings from the working paper, titled “Small Unit Rental Properties’ Financing Needs” by Shilling and Jin Man Lee, research director at IHS and adjunct professor in the department of economics, include the following:

● Multifamily buildings with fewer than 50 units are critical to the rental housing stock. Nationally, buildings with between five and 49 units accounted for more than 31 percent of the rental housing stock in 2010. In Cook County, buildings with between five and 49 units accounted for more than 35 percent of the county’s rental units.

● Small multifamily buildings are a critical part of Cook County’s affordable rental housing supply. In Cook County, buildings with between 10 and 49 units contribute more than 30,000 rental units to lower income areas, which are the communities most often in need of affordable rental housing. Units in these types of buildings account for nearly half of the multifamily rental units in lower-income communities in the county. In communities such as Albany Park, Auburn Gresham, Austin and Roseland, small multifamily properties make up more than 65 percent of the rental housing stock.

● The vast majority of small multifamily rental buildings in Cook County are considered credit constrained. This means the estimated demand for credit for these properties exceeds the estimated supply of credit available to them, the study found. Nearly 93 percent of properties with 10 to 49 units that received a mortgage between 2005 and 2010 were considered credit constrained. Conversely, only 34 percent of buildings with more than 100 units were considered credit constrained.

● The depth of credit constraints for small multifamily properties is much greater than it is for larger properties. The credit available to the typical credit-constrained 10- to 49-unit property investor is 19.8 percent less than the expected demand. By comparison, the estimated credit available to the typical credit-constrained 50- to 99-unit property investor is about 8.5 percent less than the expected demand. For properties with more than 100 units, the expected credit available is 3.9 percent less than expected demand.

The working paper and accompanying research brief, both of which can be found at https://ihs.depaul.edu, are part of a series of IHS reports designed to provide affordable housing practitioners, government housing agencies and community organizations with reliable, impartial and accessible data about the state of affordable rental housing in Cook County. This work helps guide collaborative efforts to preserve this type of housing and understand conditions affecting the recovery of neighborhood housing markets in the wake of the foreclosure and economic crises.

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About the Institute for Housing Studies (IHS)

IHS is a multidisciplinary academic and applied research center situated in the Real Estate Center at DePaul University. IHS provides data and analysis to inform affordable housing-related policy and resource allocation decisions. More about IHS and its research can be found at ihs.depaul.edu.

About DePaul

With more than 25,000 students, DePaul University is the largest Catholic university in the United States and the largest private, non-profit university in the Midwest. The university offers approximately 275 graduate and undergraduate programs of study on three Chicago and three suburban campuses. Founded in 1898, DePaul remains committed to providing a quality education through personal attention to students from a wide range of backgrounds. For more information, visit www.depaul.edu.