Balancing returns and responsibility - Strategic innovation in impact investing

Balancing profit with social responsibility and community development

How can investors deploy their funds into projects or funds that not only generate favorable financial returns, but also generate a beneficial social or environmental impact? This question leads us to the topic of “impact investing” – an ever-growing segment of the commercial real estate (CRE) realm that seeks to align private sector capital with development initiatives that benefit society in a measurable way. It is currently estimated that the USD 3 trillion in 2023 with the global impact investing market to reach USD 7.78 trillion in 2033.

As investors increasingly demonstrate a willingness to prioritize environmental, social, and governance (ESG) criteria in the interest of compliance as well as long-term value and risk mitigation, strategic innovation in impact investing is reshaping how institutional capital is deployed across CRE. Now, more than ever, investing in socially responsible and sustainable projects, such as affordable housing funds, is good for business and society at large; CRE success is no longer measured solely by profit, but by the broader impact on communities, stakeholders, and the planet.

Altus Group recently invited a group of esteemed experts in the realm of impact investing to delve into the ways innovative investments are tackling the affordable housing crisis, explore sustainability benchmarks, unpack the challenges and opportunities present in this segment, and more. The discussion, which was moderated by Cole Perry Associate Director of Research at Altus Group featured insights from Niall McSweeney, Head of Development Advisory in Asia-Pacific for Altus Group, Lisa Davis, Partner, Real Estate and Head of Asset Management at The Vistria Group, and Bill Maher, Director, Strategy & Research at RCLCO Fund Advisors.

Impact investing is more than ESG investing

Q: Oftentimes, when people hear the term ‘impact investing’, they only think about the environmental side of things. What other forms does it take

Niall McSweeney: Many assume that having ESG policies in place automatically means they are making an impact, but ESG is simply a measurement tool. True impact investing goes beyond that; it’s about driving meaningful societal change, addressing real needs, and creating a lasting difference. It’s not just about environmental, social, or governance factors in isolation — it’s about making a tangible, transformative impact.

Identifying investor preferences

Q: Do affordable housing funds typically cater to one kind of investor?

Lisa Davis: One of the great things about where affordable housing stands today is its broad appeal. Some investors, such as Community Reinvestment Act-motivated banks, foundations, and endowments, are deeply focused on addressing the needs of low- and moderate-income communities. Others, like pension plans and family offices, are drawn to the asset class for its strong, stable returns. Affordable housing tends to be less volatile than other real estate sectors, and during COVID, it demonstrated remarkable resilience — maintaining lower vacancy rates even compared to traditional multifamily housing and performing steadily across market cycles.

Q: Do investors demonstrate a preference between open-ended or close-ended affordable housing funds?

Bill Maher: Most investors prefer an open-ended fund structure for affordable housing, as it avoids forced sales and ensures continuity in property management. While some investors still lean toward closed-end funds, the performance data overwhelmingly supports affordable housing as a strong investment. Two academic studies — one by Mark Roberts (who is affiliated with SMU) and another by Greg McKinnon (who is Head of Research at PREA) — have shown that affordable housing has outperformed market-rate housing over the past 20 years by up to 100 basis points, with returns driven by both appreciation and income stability.

Historically, there was a perceived risk premium with affordable housing, but as NOI growth has remained strong, investors and managers have recognized that such a premium is no longer justified. Although rising insurance costs have recently put pressure on operating margins, most investors believe affordable housing will continue to match or exceed market-rate returns while offering the benefit of lower volatility.

Q: What is the difference between rent-control and rent-regulated housing?

Lisa Davis: Rent control and rent-regulated housing are often conflated, but they serve different purposes. Rent control typically limits annual rent increases to a set percentage and is generally not means-tested – in other words, it is not necessarily targeted toward low-income households. As a result, rent control does not always align with impact investment goals in affordable housing.

In contrast, federally backed programs like Section 8 and Low-Income Housing Tax Credits (LIHTC) impose both rent and income limits tied to area median income (AMI) growth. These programs ensure that tenants pay no more than 30% of their income toward rent, maintaining long-term affordability. Additionally, various capital subsidy programs support property owners in making necessary improvements while adhering to affordability requirements.

The importance of sustainability data and benchmarks

Q: Given the growing significance of sustainability and affordable housing in investment strategy, why do you think these sectors are often overlooked in discussions about alternative and emerging real estate investments?

Lisa Davis: It's exciting to see more institutional investors entering the affordable housing space —10 to 12 years ago, that simply wasn’t the case. Now, we’re seeing real competition, with at least six open-ended affordable housing funds and around 10 major players. This helps establish affordable housing as a sub-asset class, allowing for benchmarking and standardization of financial and non-financial metrics. But while there is plenty of discussion around benchmarking, sustainability data appears largely absent. In the US context, that means utility benchmarking, climate resiliency, and the impact of rising insurance costs — critical factors for property performance.

When we acquire a property, one of the first things we do is implement water-saving technology, which saves us hundreds of thousands of dollars annually. These sustainability measures directly impact valuations, yet they’re often not explicitly called out. We need to be more intentional about measuring and benchmarking their value.

Q: What role does embodied carbon play in both sustainability metrics and long-term asset performance?

Niall McSweeney: Traditionally, most projects are assessed based on three key drivers: time, cost, and quality. But internationally, we’re seeing a shift — energy use is becoming a major factor, not just for planning approvals but also for asset valuation in both residential and commercial real estate. Sustainability standards like LEED and Green Star already influence commercial property values, but we’re also seeing increasing scrutiny on how assets can withstand climate change. Some early assessments by the TCFD suggested that properties could be downgraded if climate risks materialized, which wasn’t always well received.

Now, with rising costs, the focus has shifted to minimizing waste — not just as a cost-saving measure but also as a way to lower carbon footprints. We're also advising developers on material choices, how they affect energy performance, and the need to reduce embodied carbon, as some jurisdictions are now requiring a 20% reduction from benchmark levels in planning approvals.

Q: What progress has been made in measuring social impact in real estate and is there a benchmark emerging for this type of work?

Niall McSweeney: The unfortunate thing is, it's a bit of a 'yes and no' situation. We're really good at measuring energy consumption of an asset, as it's a low bar to clear. As we move towards higher levels of electrification to reduce fossil fuel use, it becomes even easier. But it gets grayer when we talk about embodied carbon in a building. Property and construction account for about 40% of global emissions, and of that, 15 to 20% comes from the construction cycle.

Embodied carbon across the asset's life is significant, and governments are starting to look for ways to improve it and are even willing to pay for it. However, the assessment of embodied carbon is still in early stages — while it's possible to estimate it using open-source data, the accuracy is still off by about +/-30%, which makes it less useful. What we're trying to do differently is to drill down to the material level, using individual data for each component, and advising on alternatives to reduce the carbon footprint.

Opportunities and challenges in the realm of impact investing

Q: Bill, what would you say are some of the major challenges, as well as the major opportunities, within impact investing?

Bill Maher: The opportunities in affordable housing are enormous – if not almost unlimited. That said, there are a few challenges. Until recently, only a handful of managers or operators could really do anything in this space, though it's improving. The local government situation is always complicated when it comes to allowing affordable housing development.

Another challenge is the red state-blue state divide regarding the willingness to invest in affordable housing and social impact investing. We work with pension plans from both sides of the political spectrum, and while both are interested, those in red states often require us to reframe the language, finding a euphemism that aligns with their values. The investment teams get it — this is a solid investment thesis — but the state legislatures are making it harder for them to move forward.

Q: Are there some governments that are easier to work with than others?

Niall McSweeney: One of the biggest challenges is the regulatory hurdles, particularly with planning and approvals, which can vary significantly across regions. For instance, in the English-speaking world, like the UK, Ireland, and even Australia, the regulatory issues are similar, but they differ from places like France or Italy, where public housing regulations play a larger role.

In Australia, the issue persists across different states and local councils, with each having their own approach. The state government tries to address this by offering a faster process for major projects under what they call 'state significant' applications, but this often leads to design competitions, which can add another layer of uncertainty.

A significant challenge in many countries is that taxes and charges account for 30 to 40% of the total cost of delivering a unit, which really impacts affordability. However, there’s an interesting trend in Southeast Asia, Australia, and the Pacific, where nonprofits and churches (large landowners) are partnering with operators to develop social housing.

Q: Shouldn’t affordable housing be a bipartisan issue?

Lisa Davis: I think affordable housing is one of the true bipartisan issues we have. In fact, if you look at the funding for affordable housing across Democratic and Republican administrations, it shows a steady upward trajectory. Some of the largest increases in affordable housing funding, particularly through Low Income Housing Tax Credits and Section 8, came during the [last] Trump administration.

At the federal level, it's truly bipartisan. On top of that, we also rely heavily on state and local tax abatement programs to create and preserve permanent affordable housing. These programs are pretty equally distributed across both red and blue states. Texas, for example, has one of the best programs, which used to be called a public facilities corporation structure but now uses a housing finance corporation structure. It’s a public-private partnership offering tax abatements in exchange for creating long-term affordability for households at various income levels, from moderate to low and very low income.

Q: How has the U.S. housing finance system impacted the affordable housing sector, especially during periods of rising interest rates and limited credit availability?

Lisa Davis: One of the major public investments in the US is the housing finance system, particularly Fannie Mae and Freddie Mac. For those of us in affordable housing, they’ve provided a continued source of credit and liquidity, even during challenging credit markets in recent years. While people have been talking about the pain of rising interest rates and the shortage of credit availability, we’ve found this to be a great investment opportunity.

Fannie and Freddie have what’s called a 'duty to serve’, meaning they are required to continue lending and providing credit to affordable housing. At least 50% of their lending must go toward affordable housing. In many ways, the US housing finance system has been the envy of other countries — not only for the wealth it creates for individual homeowners but also for its ability to provide credit liquidity across market cycles to multifamily owners. However, valuing below-market debt remains a challenge, especially when interest rates are so volatile. Luckily, Fannie and Freddie tend to offer more steady, fixed-rate, lower-cost debt, which helps mitigate some of the issues that come with rising interest rates.

Conclusion

Impact investing in commercial real estate is rapidly evolving, and affordable housing is – undeniably – is a primary social need at the forefront of this shift. As the sector continues to grow, investors are realizing that making a meaningful social or environmental impact by aligning capital with purpose is the best path forward, and the future of impact investing holds immense potential for those ready to take action.

References:

1. The Brainy Insights (2024, January). Impact Investing Market Size by Sector

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