Apartments developed under the Section 42 Low-Income Housing Tax Credit (LIHTC) program have historically offered rents well below those of comparable market-rate units to fulfill the program’s mandate of creating affordable rental housing. This “rent gap,” often 20% to 40% lower in high-cost cities, has driven consistently strong demand and high occupancy for LIHTC properties. Recently, however, steadily rising median incomes have caused market rents and LIHTC caps to converge in many markets. This shift creates an opportunity for developers and investors to achieve higher revenues while still meeting affordability goals, improving project feasibility and making new LIHTC development more attractive even in high-cost environments.
LIHTC rents are capped at a percentage of area median income (AMI), typically 60%, which historically kept them well below market levels in expensive metros. In 2025, for example, the maximum 60% AMI rent in New York City was roughly 40% lower than the metro’s average market rent, with similar 30%+ discounts common in Boston, San Francisco, and other Gateway markets. Today, that rent gap has narrowed. HUD reported national median income grew 6% from 2024 to 2025, while average market rents rose just 1%, a divergence that has been ongoing since the pandemic. Because LIHTC rents are tied to AMI, allowable rents have surged, and in some markets they now match or even exceed prevailing average market rents.
Markets with LIHTC rents near or above market levels present compelling opportunities for developers and investors. With the ability to capture market-level pricing while still receiving the program’s benefits, projects can generate stronger operating income and secure financing more easily. Higher achievable rents improve debt coverage, make development more feasible, and enhance long-term investment returns. Combined with the resilience of affordable housing demand, these conditions make many of these markets highly attractive for institutional investors seeking stable, long-term performance.
Using published maximum Section 42 rents and average market rents as reported by CoStar, we identified which of the 50 largest metropolitans in the U.S. have the smallest gap between LIHTC maximum rents and market rents. These are markets where the traditional LIHTC rent discount has largely disappeared, with affordable rents now at or near market levels. It is worth noting that LIHTC rents are gross (not adjusted for tenant-paid utilities) and the market rents used reflect averages across all product classes, which can slightly skew the comparison.
Of the 50 largest metros, there were 15 with a minimal variance (7% or less) between the LIHTC rent maximums for that region and its average market rents in the most recent quarter.
The 15 metros with the smallest LIHTC-to-market rent gaps present a prime opportunity to capture near-market revenues while still benefiting from LIHTC’s consistent demand and favorable financing. These markets enable developers to maximize allowable rents, strengthen cash flow projections, and deliver much-needed affordable housing. For investors, this means achieving rent revenues that are closer to market-rate multifamily assets while maintaining both occupancy stability and mission alignment.
To evaluate how these top 15 markets are performing, we reviewed three key indicators: effective rent growth, stabilized occupancy, and HUD median income growth. Together, these metrics point to strong underlying demand and improving economic capacity in many of these metros, a favorable backdrop for LIHTC development.
While some markets have seen flat or modest overall rent declines over the past year, several are outperforming the national annual average (0.9%). Cincinnati and Pittsburgh lead with average effective rents up about 2.6% annually, followed by Kansas City, Minneapolis, Indianapolis, Cleveland, and St. Louis, which all posted gains of 2.0% to 2.4%. These rent trends suggest healthy renter demand for all housing types throughout the market.
Overall average occupancy rates across most of the leading metros remains solid, ranging from the low-90s to mid-90s, close to the U.S. average. Although these overall average rates include both conventional and income-restricted apartments, they provide a general gauge of demand in a given market. Minneapolis and Pittsburgh stand out near 95%, signaling exceptionally tight conditions, while Cincinnati, Columbus, Kansas City, Louisville, and Indianapolis all held average rates near the national benchmark of 93.7%.
Rising area median incomes are a powerful tailwind for LIHTC investors. Most of the top 15 metros posted 5% to 8% year-over-year AMI growth, with Raleigh, Kansas City, St. Louis, Indianapolis, and Memphis leading the way. These income gains expand LIHTC rent caps, allowing projects to generate higher revenues while still receiving program benefits. This combination of rising incomes and steady demand bodes well for long-term financial performance and makes these metros attractive for new LIHTC development.
The fundamentals across these no-gap metros are encouraging. Cincinnati, Kansas City, Pittsburgh, Indianapolis, and Minneapolis stand out for combining rent growth, strong occupancy, and rising incomes, a powerful combination that supports both operational stability and future revenue growth. Even the softer markets provide strategic opportunities for well-positioned projects that can capture demand as market conditions improve.
Next, we compared property valuations and cap rates across the top 15 no-gap metros to identify where investors can secure attractive entry pricing and strong potential yields. These metrics highlight markets where acquisitions or new LIHTC development are well-positioned to deliver strong financial performance alongside meaningful community impact. Because capital market data specific to LIHTC assets is limited, average rates for conventional apartments were used as a proxy.
Several metros combine below-replacement-cost pricing with above-average cap rates, offering standout opportunities:
Several metros combine below-replacement-cost pricing with above-average cap rates, offering standout opportunities:
On the other end of the spectrum, some of the top markets for minimal LIHTC rent discounts trade at higher price points, reflecting their growth-market status, but still offer strategic value:
On the other end of the spectrum, some of the top markets for minimal LIHTC rent discounts trade at higher price points, reflecting their growth-market status, but still offer strategic value:
Bringing it all together, which metros offer the most compelling value for institutional LIHTC investors and developers? Ideally, we are looking for markets where the rent variance is minimal, ensuring LIHTC units can charge near-market rents, the rental market fundamentals are strong, median incomes are rising significantly, and pricing is attractive, allowing investors to buy or build at a reasonable basis with healthy yields. Based on our analysis, several markets check all those boxes:
It should be noted that the closing of the LIHTC rent gap is a double-edged sword for investors. On one hand, in these no-gap markets an affordable project can achieve nearly the same rents as a market-rate property, boosting revenue potential. On the other hand, the competitive moat has narrowed, LIHTC owners must work harder to differentiate their product and maintain high occupancy. The best bets are markets where strong fundamental demand intersects with favorable pricing, so that even without a big rent advantage, the LIHTC asset can perform well, and the investment economics are sound. The data suggests many of those opportunities lie in heartland cities and secondary Sun Belt metros.
Looking ahead, investors should remain attuned to the evolving dynamics in these markets. If LIHTC rent caps continue to rise with HUD median incomes, market-rate landlords might respond with more concessions to avoid losing tenants. In markets where LIHTC and market rents are already close, any influx of new LIHTC units from the planned program expansion could put additional competitive pressure on occupancy levels.
For now, the outlook for well-selected LIHTC investments remains broadly positive. The demand for affordable housing continues to be significant, and even a reduced rent advantage still offers a competitive edge in many communities. Institutional investors with a long-term horizon can leverage the resilience of LIHTC assets by focusing on markets that provide stronger revenue potential, attractive yields, and durable growth prospects compared to headline “hot” metros. By targeting the metros highlighted above, where rent gaps are narrow, fundamentals are robust, and pricing remains favorable, investors and developers can position themselves to achieve strong returns while still benefiting from participating in the LIHTC program.
