Navigating Headwinds: Exploring Solutions to Address Texas Affordable Housing Crisis

By Zachary Cavender, Regional Vice President at Pennrose

Affordable housing stands at a critical crossroads in Texas. While the state continues to attract new businesses and residents in droves with its economic opportunity, it simultaneously faces a staggering shortage of more than 650,000 affordable rental homes, according to the National Low Income Housing Coalition.

As developers, we’re increasingly caught in the perfect storm of rising property taxes, construction costs, and insurance premiums, combined with a complex regulatory framework – unfortunately hindering efforts to build the robust housing infrastructure essential for sustaining and capitalizing on Texas’s economic momentum.

While the challenges facing the real estate industry are significant, they are not insurmountable. Below, we explore key factors impeding affordable housing production and discuss solutions to help communities address the housing gap.

Property Taxes: A Growing Burden

Texas maintains one of the nation's highest property tax rates, creating significant pressure on affordable housing development and operations. This high-tax environment directly impacts project feasibility, particularly for developers already managing complex capital stacks with extremely tight margins.

One solution to help reduce the property tax burden was the implementation of the Public Facility Corporation (PFC) structure, which granted multifamily developers a 100% property tax exemption in exchange for an affordability component in mixed-income developments.

Unfortunately, this widely used program became a hot button issue in 2023 due to concerns about misuse, ultimately resulting in major reforms. These reforms, enacted in the 88th Legislature through HB 2071, added stricter affordability and compliance requirements.

The program remains controversial with calls to curb abuses reaching a fever pitch. Most recently, Governor Abbott signed House Bill 21, which adds new constraints for “traveling” housing finance corporations that operate outside their local jurisdictions.

A 2024 report by Novogradac found that Texas has the lowest LowIncome Housing Tax Credit (LIHTC) allocation per low-income home in the country.

It’s clear the PFC program needs improvement, reform, and clarification to safeguard its use. However, it’s important we don’t let political backlash and bad actors threaten one of the few mechanisms affordable developers have for delivering high-quality, mixed-income housing.

Private sector developers, state lawmakers, local municipalities, and housing advocates need to work collaboratively to advance statewide tax relief and incentive programs, while also refining and standardizing programs that have demonstrated success.

Challenging Economic Conditions

Today’s economic climate presents unprecedented challenges for residential real estate developers. At the macro level, high interest rates have dramatically increased borrowing costs and inflation continues to drive construction fees upwards. The volatile market is further compounded for the affordable housing industry with low pricing on tax credit equity requiring developers to increasingly rely on soft funding sources, which are limited and competitive.

At the micro level, insurance premiums in Texas have skyrocketed alongside the rise in climate-related natural disasters, rapidly outpacing rents. Projects also face significant risk as costs can escalate substantially between initial underwriting and construction completion, further complicating deal feasibility.

A 2024 report by Novogradac found that Texas has the lowest Low Income Housing Tax Credit (LIHTC) allocation per low-income home in the country. Expanding and implementing new gap financing tools across state and local levels is critical to getting deals across the finish line.

For example, as Texas rolls out its state LIHTC, we can follow the model from other successful states, such as Missouri, to ensure the program is effective and impactful. Additionally, exploring a state-backed collective for affordable housing insurance could help stabilize premiums, improve negotiating power, and mitigate risk.

Zoning & Regulatory Barriers

Local developers face significant upfront costs navigating complex zoning processes. To even apply for tax-exempt bonds, developers must have the correct zoning in place – which can require heavy investment in architectural and engineering designs, site plans, traffic studies, fees, and more – all without any guarantee of approval.

This system makes affordable housing development risky, expensive, and inefficient, with more time and funds spent on consultants than on providing high-quality housing to our local communities.

It’s imperative we work hand-in-hand with local governments and finance agencies to identify a more streamlined approach. For example, Atlanta’s mayor recently announced the goal of building and preserving more than 20,000 affordable units over

the next several years. While lofty, this effort has been wildly successful so far because the local administration has taken significant steps to help expedite approval processes, reduce development timelines, and fast-track building permits.

One solution to consider is Senate Bill 840, which was recently sent to Governor Abbott. The bill would permit residential and mixed-income conversions on the sites of vacant office buildings, strip malls, and warehouses, while circumventing the lengthy and costly rezoning process.

Exploring thoughtful approaches to cutting some of the red tape can make a huge difference to ensure we aren’t losing meaningful development opportunities to bureaucracy.

The data is clear: Texas is growing. If we want to continue to reap the benefits as a business-friendly state with a high quality-of-life reputation, ensuring access to housing and reducing the rent burden for employees at all rungs of the income ladder is essential. The current shortage of affordable housing – both for low- and middle-income families – is not just a housing issue, it’s a social need and economic imperative.

Without addressing these challenges and the headwinds against developers, we risk stunting job growth and limiting economic prosperity across the state.

At the end of the day, there will always be factors impacting the housing landscape that are beyond our control. But what we can control is how we work collaboratively to implement innovative solutions. By addressing property tax burdens, identifying new financing tools, and reforming regulatory processes, we can make sure that thoughtful, streamlined housing solutions are possible within our communities.

With more than a decade of affordable, multifamily, and mixed-use development experience, Zachary Cavender leads Pennrose’s development activities and oversees the continued growth of Pennrose’s development pipeline in the state of Texas.

As Regional Vice President of the region, Zach is responsible for the execution and continued growth of Pennrose’s development pipeline, including all aspects of the real estate development process from initial conception through construction, to lease-up and stabilized occupancy or sale.