Mention the term “scattered-site development” to an affordable housing developer in the past and you might have been met with a raised eyebrow or two. But today, several developers are using the approach to help repair damaged communities and recapitalize old, small apartment properties.
“Scattered-site affordable housing development is becoming more common,” says Scott Hoekman, senior vice president and chief credit officer for Enterprise Community Partners. “It’s more accepted.”
The sector hasn’t always been so well-received. Indeed, scattered-site development has had a bad reputation for years among affordable housing developers. Until recently, the communities were expensive and inefficient to manage. And in some troubled neighborhoods, residents didn’t always feel safe traveling from one part of the community to another.
More recently, affordable housing developers have racked up a number of successful redevelopments that include collections of small apartment buildings or single-family homes scattered through their neighborhoods. Large, for-profit companies like Invitation Homes are also experimenting in technologies that have made it efficient to manage large portfolios of rental houses.
A Growing Need
Today, some affordable housing developers are using scattered-site properties to fill a pressing need.
“There’s more of a recognition that we need to take on some of these smaller properties,” says Hoekman of many crumbling apartment buildings that could be fixed and preserved as affordable housing but are often too small to be fixed up efficiently one deal at a time.
Affordable housing developer Leon N. Weiner & Associates has successfully redeveloped and recapitalized aging apartment properties originally built under federal Rural Development programs by combining small properties containing a few dozen units apiece into larger, scattered-site developments financed with federal low-income housing tax credits (LIHTCs).
“We try and do these [deals] under single-ownership entities,” says Kevin Kelly, managing principal with Leon N. Weiner, based in Wilmington, Del. That cuts down on the work needed to structure the redevelopments and keep up with the compliance requirements of affordable housing programs. “I don’t have to do nine cost certifications for nine separate properties.” (Not all states permit developers to assemble different affordable housing sites into a single LIHTC partnership, however.)
Scattered-site developments can also be more efficient to operate when they’re packaged together. “I can operate them as one property, so we achieve some economies of scale there,” says Kelly.
The individual properties need to be close enough to each other so that property managers can reasonably physically visit each site once or twice a week. Weiner also chooses sites that have more than a few dozen affordable units apiece. “Twenty units in one and then another 20 in another … it just wouldn’t work.”
Neighborhood Revitalization
Scattered-site development can help revitalize neighborhoods that suffer from vacant and abandoned homes—but the work is very difficult. To succeed, these developments need strong local sponsors and a plan that includes local officials.
“It’s a daunting task,” says Chickie Grayson, president and CEO of Enterprise Homes, which partnered with Bon Secours Health System to redevelop abandoned single-family homes close to Bon Secours Hospital in West Baltimore. Starting in the 1990s, the partners redeveloped close to 90 three-story, Victorian row houses in three phases. The properties, renamed the Bon Secours Apartments, have now been operating smoothly for more than a decade, but their success reveals the difficulty of completing this kind of development.
“There needs to be a city plan for the block or the neighborhood,” says Grayson. The plan should help developers gather a critical mass of small properties to redevelop. It should also be able to prevent new properties from becoming distressed or abandoned. “Otherwise, you can do the scattered-site properties, and by the time you’re done there’s another, new troubled property.”
Struggling areas are being revitalized with new scattered-site affordable housing, as well. The Cleveland Housing Network (CHN), for example, has transformed collections of vacant lots in Cleveland into developments of scattered-site, single-family rental houses.
“It’s a neighborhood-revitalization strategy for neighborhoods that have missing teeth,” says Rob Curry, executive director of CHN. Over the past two decades, the organization has developed 2,300 scattered-site rental houses using LIHTCs.
Challenges Have Plagued the Approach
Scattered-site development has had a bad reputation in the affordable housing industry for years. A number of such properties developed in the 1970s and 1980s under housing programs such as HUD’s Sec. 8 ran into severe problems.
“There certainly were a bunch of folks who thought scattered site [was] what not to do,” remembers Ethan Handelman, vice president for policy and advocacy at the National Housing Conference. He worked with several deals like these as a young underwriter early in his career.
“They all had really high per-unit operating expenses. It was a really ineffective form of affordable housing,” recalls Handelman. Today, property managers work hard to standardize setups as much as possible in scattered-site communities.
Scattered-site properties can also be a challenge to manage when individual rental units aren’t close together. “It’s more difficult to have eyes on the property all the time—if someone leaves in the middle of the night or trashes a unit [for example],” says Handelman.
Scattered-site developments can also be compromised by poorly managed neighboring homes that aren’t part of the community. If a neighboring house is vacated or becomes the site of illegal activity, there’s relatively little a property manager can do.
Once again, CHN’s success illustrates the difficulty of managing a property without having control of a contiguous site. “You need to have incredibly strong asset management,” says Curry.
Indeed, the difficulties inherent in redeveloping scatted sites is part of the reason cities such as Baltimore, Philadelphia, and Detroit still have thousands of vacant and abandoned properties nearly a decade out from the Great Recession.
New Technology Helps
Affordable housing developers interested in scattered-site development may be able to learn something from other companies that have begun to manage large portfolios of rental houses.
During the recovery from the Great Recession, giant private equity firms like Blackstone began to buy single-family houses that had been seized by banks in foreclosures. In 2012 and 2013, these companies bought as many as a thousand houses a week.
These profit-minded firms seem to have figured out how to manage their portfolios efficiently. They largely bought their foreclosed houses in strong neighborhoods, so they don’t have to contend with certain kinds of distress. But these investors still faced the challenge of managing their rental houses efficiently.
Blackstone has turned its portfolio of single-family rental houses into Invitation Homes, a real estate investment trust (REIT) traded on the New York Stock Exchange. In August 2017, Invitation announced its plan to merge with another giant REIT that owned rental houses, Starwood Waypoint Homes. The two had a combined portfolio of about 82,000 single-family homes. Other giant companies that rent single-family houses include American Homes 4 Rent, another REIT, and Progress Residential.
“We’ve proven this is a sustainable business model capable of producing strong operating margins and financial results while providing exceptional customer service,” says Jason Chudoba, a spokesperson for Starwood Waypoint.
One way owner–operators remain profitable running scattered sites is through technology. Smart systems can help property managers keep an eye on their communities without visiting each building in a portfolio, alerting personnel when a washing machine in a common laundry room needs attention, for example. And keyless-entry technology enables managers to enter a home requiring assistance without having to drive all the way back to the office to pick up a key.
Some technologies might be too expensive for a neighborhood nonprofit. “Community development corporations don’t have the money to give everyone an iPad,” says Handelman. However, with smartphones becoming more common, and “smarter,” seemingly by the day and other web-enabled technologies becoming more affordable every year, the future of scattered-site development is looking bright.
