Is Affordable Housing the Next Frontier?

Multifamily development ran in high gear through this last cycle, primarily delivering premium product tailored to top earners. Today, a convergence of economic pressures is challenging the viability of market-rate deals. Where will builders and capital pivot next?

Market rate multifamily starts have fallen to their lowest level since 2011. Capital remains constrained. Construction and operating costs keep rising. And the rent growth developers underwrite is being tested by renters’ financial conditions. The math for many projects no longer pencils out. 

These dynamics are drawing new attention to the Low-Income Housing Tax Credit (LIHTC) program, the primary engine of affordable rental production in the U.S. Tax-credit housing may offer more insulation, with reduced reliance on debt, and restricted rents that are more aligned with what renters can afford. 

Signed into law by President Reagan as part of the Tax Reform Act of 1986, LIHTC was designed to channel private capital into the development and preservation of affordable rental housing. Over four decades, it’s financed more than 4 million homes and accounts for the majority of new affordable rental housing in the U.S. 

LIHTC operates through two credit structures. The 9% credit is awarded competitively by state housing finance agencies and is typically used for new construction. The 4% credit is paired with tax-exempt private activity bonds, supports both new construction and rehabilitation, and now finances more than half of LIHTC homes produced each year. Because both are capped (9% credits by per-capita state allocations, 4% credits by bond volume), the supply of credits, not developer appetite, has historically set the program’s ceiling.

A market-driven pivot toward LIHTC has real policy tailwinds. The One Big Beautiful Bill Act, signed in July 2025, permanently increased 9% credit allocations by 12% and lowered the bond-financing threshold for 4% deals from 50% to 25%, stretching each dollar of bond capacity across significantly more projects. Novogradac estimates the changes could finance as many as 1.22 million additional affordable homes over the next decade, directly loosening the constraint that has historically capped tax-credit production.

Housing affordability has also become a rare bipartisan priority. The 21st Century ROAD to Housing Act, which became law in July 2026, targets supply through environmental review streamlining, zoning incentives, manufactured housing reform, and HUD program modernization. The law doesn’t change tax-credit allocations, but its push to reduce regulatory friction could shorten timelines and lower soft costs across the development spectrum. For tax-credit properties specifically, it eliminates a layer of duplicative oversight by allowing LIHTC inspections to satisfy voucher inspection requirements.

Opportunity Zones add a geographic dimension. On November 5, Treasury certified 6,576 census tracts for the program’s next round, effective January 1, 2027, and 39% are rural, according to the Economic Innovation Group. Rural investments also receive enhanced incentives: a 30% basis step-up after 5 years (versus 10% elsewhere) and a lower substantial-improvement threshold. Those incentives are designed to overcome a stubborn pattern. In the program’s first round, rural tracts made up more than a third of zones but drew only about 7% of investment, as capital gravitated toward urban cores and Sunbelt suburbs where demand was proven.

Pairing OZ incentives with LIHTC won’t be seamless. Tax-credit equity comes largely from banks, while OZ benefits reward capital-gains investors. But where the structures can be combined, they could pull capital into overlooked markets where land is cheaper and supply is thin. If market-rate deals remain stalled in primary markets, development talent and capital may follow.

Expanded tax-credit capacity, a bipartisan supply agenda, and a new Opportunity Zone map give market rate developers a potential path to build affordable housing. Because much of the last cycle’s product targeted higher-income renters, this shift could represent a healthy rebalancing of supply toward where demand is deepest.