For affordable housing developers, this year brings more resources—and many familiar challenges.
As always, shifts in the debt and equity markets will be critical as they piece together financing for their developments.
“We believe the affordable housing debt market is trending more positively this year compared to the past two years, though there are market and political variables that indicate that there may be volatility,” says Jeffrey Goldberg, CEO and co-founder of Fairstead, a national developer and owner. “We’re also optimistic on the interest-rate side as there is continued pressure to bring rates down and tighten spreads, while demand for affordable housing debt remains strong, due to large direct buyers.”
At this time, he expects to see lower interest rates and a better ability to find debt options.
“That said, the market remains dynamic, and conditions can become volatile and change quickly given larger economic and political factors,” Goldberg says.
Welton Jordan, chief real estate development officer at EAH Housing, a California-based nonprofit, adds that he expects the demand for debt to “remain strong and relatively steady” this year.
“Based on conversations late last year, the overall amount of capital available is unlikely to grow significantly, but there continues to be meaningful interest in the sector,” he says. “In this environment, well-planned projects with responsible underwriting and experienced sponsors should continue to attract financing.”
The industry heads into 2026 bolstered by recent federal legislation that expanded opportunities for low-income housing tax credit (LIHTC) and bond deals. There’s also a greater awareness about the need for affordable housing.
“The affordable housing crisis and the rent burden on working families, seniors, and others have been highlighted to the point where it’s on everyone’s mind,” says Stephanie Wiggins, managing director and head of production for agency lending at PGIM. “It’s no longer a partisan issue. No matter where you stand, everyone acknowledges we have a housing issue. It’s encouraging that people have joined together from across the aisle to put forth legislation that helps us get closer to our goals.”
At the same time, significant headwinds such as elevated construction costs and limited state and local resources remain, so cobbling together deals will be complicated.
“It will be more challenging even with the new federal support, but everyone is joined together and understands how important this is, so I’m feeling optimistic,” Wiggins says.
LIHTC Market
The biggest change is the expansion of the LIHTC program through the recent One Big Beautiful Bill (OBBB). The legislation provided a permanent 12% housing credit allocation increase to boost needed financing to develop more housing and lowered the bond financing threshold test to 25% to reduce barriers for projects utilizing bonds. Both provisions take effect this year.
These changes mean important progress for the industry, but they are expected to introduce new pressures.
“2026 marks a turning point for LIHTC and will create unprecedented opportunities to accelerate preservation and new development,” says Lisa Gutierrez, senior vice president and director of business development at U.S. Bancorp Impact Finance, a major LIHTC investor. “With the 25% bond test and a 12% boost in 9% allocations now in effect, we expect elevated deal volume and more innovative financing structures. The key to success in 2026 will be sustaining investor appetite and ‘normalizing’ pricing as supply expands, while disciplined underwriting and strong public-private partnerships ensure impact for communities.”
Jordan says he is cautiously optimistic about the LIHTC and broader equity markets, noting that while a growing number of LIHTC deals are expected to come to market in 2026, the size of the typical investor pool doesn’t appear to be expanding at the same pace. “As a result, competition for equity could increase, and some awarded deals may face challenges securing an investor, particularly if they’re not well positioned,” he notes.
The market will remain active but disciplined in 2026, shaped by limited new development, elevated operating costs, and tighter underwriting standards, according to Paul Weissman, senior managing director and head of affordable housing at Lument, a major commercial real estate finance company.
“We expect the primary constraint to development will be the demand for LIHTCs after passage of OBBB,” he says. “Activity should continue to build as demand fundamentals remain exceptionally strong. Policy tailwinds—including targeted LIHTC enhancements—should help offset some feasibility challenges, particularly for preservation. Sponsors and lenders will need to be pragmatic, emphasizing resilience of cash flow, insurance risk mitigation, and execution certainty. Overall, the market appears to be stabilizing and gradually transitioning toward a healthier, more active environment.”
Agency Expectations
Fannie Mae and Freddie Mac are poised to have a more prominent role in 2026. Shortly after the OBBB was signed into law, federal officials doubled the amount each government-sponsored enterprise (GSE) can invest in LIHTCs, raising the cap to $2 billion apiece this year.
The increase is expected to help the market absorb some of the additional credits and maintain their values.
In addition, the 2026 multifamily loan purchase caps for Fannie Mae and Freddie Mac are $88 billion each for a combined $176 billion to support the multifamily market. The caps are up from the combined $146 billion for 2025.
“The big change is volume cap,” says Wiggins of PGIM, a Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) lender. “With the increased caps, I am optimistic that there will be continued leaning in on mission-rich deals across the affordability spectrum—from affordable to workforce housing. This, coupled with a focus on efficiency and innovation, means that we’ll be getting more deals done through our partnerships with Fannie and Freddie.”
And, FHA is continuing to work on several initiatives to support affordable housing and to streamline operations, reduce processing times, and lower transaction costs to buyers.
Goldberg also cites the increased cap limits for the GSEs.
“Their expanded appetite for affordable housing debt is creating competition, which is improving the debt market and continues to make both entities a great partner for Fairstead,” he says. “We also expect access to a diversified portfolio of debt products this year, including Freddie Mac, Fannie Mae, and FHA.
“Overall, we expect to see lower interest rates this year and have a better ability to find debt options. That said, the market remains dynamic, and conditions can become volatile and change quickly given larger economic and political factors.”
More Bond Deals
Perhaps the most significant change is the permanent reduction of the bond test requirement from 50% to 25% of aggregate basis for 4% LIHTC projects this year. This is expected to help alleviate bond cap pressures in many states and increase the number of deals that can access financing.
Approximately two dozen states have been oversubscribed, and roughly a dozen others are at parity on the available private-activity bond volume, says bond attorney Wade Norris, a partner at the Dinsmore & Shohl firm in Washington, D.C.
“I think there is no question that lowering the 50% test to 25% will allow more 4% LIHTC financings to go forward in 2026 and beyond,” he says. “Of course, states are differing in how quickly they are moving to a lower maximum tax-exempt private-activity bond allocation for multifamily.”
For example, California is a state leading the charge from 54% or 53% down to 30% or so, offering borrowers incentives to reduce their requests and potentially imposing scoring penalties for borrowers who request higher amounts than the new lower targets, according to Norris.
Other states are taking a slower approach and moving the threshold down gradually.
Norris says he believes having a higher percentage of debt being taxable as well as more LIHTC volume in the market will raise interest rates on the debt side and lower LIHTC pricing, which would decrease both debt and equity proceeds on most projects.
However, an increase in the LIHTC caps for Fannie Mae and Freddie Mac will help offset the increase in the housing credit volume this year, and the gradual lowering of the bond threshold in states will also help reduce any potential impact on deals, he adds.
Norris adds that he expects to see more use of “recycled volume,” but there are only a handful of states, including California, Colorado, New York, and Washington, that have really active programs. Bond recycling is a tool that some states use to recapture tax-exempt bond volume from completed developments and reallocate them to new housing projects.
Overall, he says, the outlook for the tax-exempt bond market is very good this year.
Potential Threats
While most people are optimistic about the year ahead, developers Goldberg and Jordan were asked to name potential hazards that could disrupt the capital markets and affordable housing.
“We are closely watching for any proposals that could threaten the long‑term stability of the Section 8 program—an essential foundation of affordable housing in many communities—as well as for staffing gaps that could hinder the effectiveness of our government partners,” says Goldberg. “Both factors are critical to our ability to support residents and must remain protected moving forward. Finally, on a more macro level, we continue to monitor what impact global political uncertainty might have on the housing market.”
The biggest threat will be continued uncertainty around policy and funding, according to Jordan.
“When there’s a lack of clarity in those areas, it becomes more difficult for capital providers and developers to plan and move projects forward. That uncertainty can slow decision-making and ultimately impact the pace at which affordable housing gets built and preserved,” he says.
Lender Focus
When lenders evaluate potential deals, they will be focusing on a number of factors. Wiggins points out three.
“First is going to market dynamics and conditions,” she says. “Lenders will be hyper-focused on good deals in good markets and ensuring that there are adequate mitigants to any and all apparent weaknesses. For affordable deals, the argument for more supply is pretty easy since there is great need in most markets. But even with sufficient demand drivers, lenders will be digging deep to ensure that they are structuring the best deals that meet the specific needs in communities.”
Second is the strength of the sponsor, and their track record of executing on their business plan is more important than ever. Lenders are digging deeper.
“The third point we are looking at when we are evaluating deals is the overall stability of the resources that are being cobbled together to structure the deal,” notes Wiggins. “Affordable deals are known to utilize an ‘alphabet soup’ of federal, state, and local resources to structure transactions. So, we’re looking closely at how stable every single resource on the sources and uses list is. The big question is ‘will those resources be available in the future?’”
Looking at what PGIM may do differently this year, Wiggins says her team will be “expanding the lens” through which it evaluates bridge-to-affordable opportunities. “A lot of times, affordable deals, whether they are just coming out of the ground or a business plan that helps preserve properties, need extra time before they’re agency eligible,” she says. “So, we will be expanding how we look at these deals.”
Wiggins is also seeing an uptick in the group’s pipeline for Department of Housing and Urban Development Section 221(d)(4) deals. “We went through a few years when we didn’t see any because they didn’t pencil out. Now, they do because interest rates have come down, and some banks have also pulled back on construction lending,” she says. “We are gearing up to process, underwrite, and close those deals in the pipeline while gearing up to originate more new 221(d)(4) business.”
The housing leaders were also asked about the emergence of any new financing structures or strategies.
“It is less about the introduction of new products and more about refinement in how existing tools are utilized,” Weissman says. “After two years of waiting for rates to normalize, most borrowers have accepted where the market is and are moving forward with refinancing, acquisition, and development decisions accordingly.”
That acceptance is driving greater use of gap-filling and flexibility-oriented structures, including commercially focused subordinate financing, which can increase proceeds but require deeper, longer-term underwriting and a clearer view of asset durability, he explains.
Wiggins is also monitoring several trends, including activity on the senior housing front.
“Now that we’re five years past a very difficult period for senior housing—COVID—we’re starting to see a resurgence and more supply,” she says. “We’re starting to hear owners and operators talk about acquiring senior housing portfolios and more interest in operating these portfolios as staffing cost issues and occupancy issues have stabilized.”
Another trend to watch is overall affordability challenges for families.
“As costs continue to rise for the everyday resident, I’m keeping my eye on affordability metrics,” she says. “Homeownership is still out of reach for so many Americans. That’s important for the multifamily sector. There’s a lot of pressure to bring rates down, so what happens if there is significant downward pressure on rates making homeownership more affordable?”