Tag Archives: demand

Supply and Demand in a Hot Market

Posted on by

photo by Subman758

The Asheville Citizen-Times quoted me in Apartment Occupancy Dropping, but Rents Not Budging Yet. It reads, in part,

Tell Marie Kerwin the city’s apartment vacancy rate has dropped a few notches – meaning a lot more units should be available – and she may beg to differ.

“There’s not a lot of options,” said Kerwin, “It took me months to find an apartment. I actually was calling every complex, every day.”

Kerwin and her husband, Christian, relocated to Asheville a year ago from Jacksonville, Florida, both taking jobs with the Earth Fare supermarket. Kerwin said they “got lucky” in finding a place at The Palisades, a 224-unit complex off Mills Gap Road in Arden that opened last summer.

For renters like the Kerwins, it might not seem like it, but the city’s apartment vacancy rate — famously pegged at 1 percent in a consultant’s report published a year-and-a-half ago that looked at Buncombe and three other counties — is dropping, meaning more units are available. That also should mean, theoretically, rents will decline, but that hasn’t happened.

A tight apartment market has dominated local discussions about affordable housing and livability in the Asheville area for nearly two years. But while that vacancy rate is dropping to a more livable range of around 6 percent, rents likely won’t fall over the next couple of years, experts say.

‘A very tight market’

“Typically, Asheville is a very tight market,” said Marc Robinson, vice chairman of Cushman & Wakefield, a global company that tracks apartment trends, including occupancy and rents.

Whether rents will drop with new apartments being built is “a hard call,” he added, “because on the one hand there is a supply entering the system, and that market has really seen lot of supply at one time — more supply than it would have historically seen. But in many markets, including Raleigh, Charlotte and Atlanta, absorption (of new units) has been better than expected.”

Robinson’s company, Multi Housing Advisors, now part of Cushman & Wakefield, issues quarterly reports on the apartment market. Its “MHA Market Insight” first quarter report for Asheville noted:

• “Properties built from the 1980s to the 2000s are maintaining an average vacancy rate in the 6 percent range, compared to 3 percent for properties built in 1970s or earlier.”

• “The average vacancy for properties built after 2009 is approximately 19 percent, which is skewing the vacancy rate upward,” in part because in a smaller market “additions to supply have an amplified effect.”

Robinson said his company’s figures from about two months ago show the Asheville area has “about a 3 percent vacancy, and in real time it may be a little higher.” In North Carolina, the rental vacancy in the first quarter stood at 8.2 percent, according to U.S. Census data.

By some estimates, the Asheville area, including surrounding Buncombe County and Fletcher, has had or will have in coming months about 2,200 new units coming online, well short of the 5,600 units the consultant recommended be built to meet demand.

“The pipeline of new construction (of rental properties) over the next three to five years will still not meet the forecasted demand so for the short-term we can expect to see the rental rates remain high, vacancy rates to remain at record lows,” said Greg Stephens, chief appraiser and senior vice president of compliance for Detroit-based Metro-West Appraisal Company.

Several firms track such information, including Real Data, a Charlotte-based real estate research firm. Using market surveys rather than sample data to compile its statistics, Real Data found the vacancy rate among apartment complexes with at least 30 units in Asheville, Buncombe County and Hendersonville was 6.9 percent in December.

Theoretically, all this should mean rents will come down, as people move from older apartments to newer ones, and apartment companies have to make concessions, such as lowering rents.

Apartments under construction has been a common sight in the Asheville area in the last two years, and that has eased vacancy rates some, experts say. This complex, the Avalon, went up in 2014 off Sweeten Creek Road and is now open.

But this is Asheville, where millennials keep moving in and retirees are drawn to great weather, arts and restaurants. From March 2015 to March 2016, Asheville saw the highest spike statewide in the average cost of renting an apartment, a 7.6 percent jump.

For the first quarter of 2016, MHA Market Insight found the average rent for one-bedroom apartments in Buncombe, Henderson, Haywood and Madison counties was $821, representing a 6.2 percent one-year growth in rent. A two-bedroom went for $964, 4.3 percent growth.

Kerwin said she and her husband are paying $1,095 a month for their two-bedroom, two-bath, 1,125-square-foot apartment. In Florida they paid $1,100 a month for an 1,800-square-foot three-bedroom.

“It’s definitely more expensive to live here,” she said.

Rising vacancy rates combined with rising rents is a national phenomenon, said Jonathan Miller, the New York-based co-founder of Miller Samuel, a residential real estate appraisal company, and the commercial valuation firm Miller Cicero.

“New development that skews to high-end rentals has been overplayed,” Miller said. But moderate rental development stock “has remained largely static.”

*     *     *

Solutions far off

That is not what some members of Asheville City Council want to hear right now. Councilman Gordon Smith, who’s on the city’s Housing and Community Development Committee, said the city has formulated a comprehensive affordable housing strategy and has talked about an “all of the above approach.”

That includes increasing zoning density to allow more units per acre and encouraging developers to use city-backed incentives to build apartments.

The city is also in the midst of calling for a voter referendum on a $74 million bond issue, with $25 million of that potentially earmarked for affordable housing. If passed, it could include a $5 million addition to the existing revolving loan fund for private developers to build affordable rental housing, and $10 million for land banking or repurposing city-owned land, which would involve offering that land to developers for construction of affordable housing.

Rusty Pulliam heads Pulliam Properties, a commercial real estate firm that has become active in the apartment industry in recent years, building the 280-unit Weirbridge Village in Skyland and the 180-unit Retreat at Hunt Hill. This year the company also received approval to build a 272-unit complex on Mills Gap Road in Arden, which will include 41 units designated as “affordable,” a number Pulliam agreed to bump up at council’s urging.

Pulliam said he can still make money at the Mills Gap site because demand is so high that he can build a “premium complex” and charge high enough rents to make it work. But in the long run, he said, solving the apartment crunch does not require a Ph.D.

“If we were building middle-of-the-road apartments, we couldn’t do it. But until we put out there, as the Bowen report stated, 5,600 units in the marketplace, I don’t see that rents are going to come down, especially when see we’ve got a (3.5) percent unemployment rate and rents went up 7.6 percent, even when a lot of units did come on line.”

Unemployment in Buncombe County dropped to 3.5 percent in May, the lowest in the state.

People have always loved moving to Asheville, a trend that essentially never abates. Our region continues to grow not because of the birth rate but because of in-migration.

The U.S. Census Bureau projects Buncombe County’s population to grow to 300,000 by 2030, up from 253,178 in 2015. While the mountains are known as a retirement haven, millennials are coming here, too, with growth in that segment over the past five years outpacing that of baby boomers, people of ages 50 to 69, and Generation X, which includes ages 35 to 49.

In short, that’s a lot of apartment demand.

Other cities the challenge facing Asheville, said David Reiss, a professor of law and the research director at the Center for Urban Business  Entrepreneurship at Brooklyn Law School in New York.

“During the Great Recession nothing got built,” Reiss said. “The same thing happened in New York.”

Some economists believe that “when vacancy rates are below 5 percent, you have the ability to raise rents significantly,” he said.

The MHA Market Insight first quarter report noted that “fewer than 700 units are currently under construction at five properties” in Asheville, so we’re still a long way from that 5,600 units figure.

Reiss said a full-court approach such as the one Asheville is taking can be useful, but he also urged caution.

“Whatever they decide the solution is, it takes years to implement those ideas,” Reiss said. “Whether it’s a developer or the city government, it takes a long time to get a solution in place.”

Gentrification in NYC

Posted on by

Manhattan-plaza

The NYU Furman Center released its annual State of New York City’s Housing and Neighborhoods (2015). This year’s report focused on gentrification:

“Gentrification” has become the accepted term to describe neighborhoods that start off predominantly occupied by households of relatively low socioeconomic status, and then experience an inflow of higher socioeconomic status households. The British sociologist Ruth Glass coined the term in 1964 to describe changes she encountered in formerly working-class London neighborhoods, and sociologists first began applying the term to New York City (and elsewhere) in the 1970s. Since entering the mainstream lexicon, the word “gentrification” is applied broadly and interchangeably to describe a range of neighborhood changes, including rising incomes, changing racial composition, shifting commercial activity, and displacement of original residents. (4)

The reports main findings are

  • While rents only increased modestly in the 1990s, they rose everywhere in the 2000s, most rapidly in the low-income neighborhoods surrounding central Manhattan.
  • Most neighborhoods in New York City regained the population they lost during the 1970s and 1980s, while the population in the average gentrifying neighborhood in 2010 was still 16 percent below its 1970 level.
  • One third of the housing units added in New York City from 2000 to 2010 were added in the city’s 15 gentrifying neighborhoods despite their accounting for only 26 percent of the city’s population.
  • Gentrifying neighborhoods experienced the fastest growth citywide in the number of college graduates, young adults, childless families, non-family households, and white residents between 1990 and 2010-2014. They saw increases in average household income while most other neighborhoods did not.
  • Rent burden has increased for households citywide since 2000, but particularly for low- and moderate-income households in gentrifying and non-gentrifying neighborhoods.
  • The share of recently available rental units affordable to low-income households declined sharply in gentrifying neighborhoods between 2000 and 2010-2014.
  • There was considerable variation among the SBAs [sub-borough areas] classified as gentrifying neighborhoods; for example, among the SBAs classified as gentrifying, the change in average household income between 2000 and 2010-2014 ranged from a decrease of 16 percent to an increase of 41 percent. (4)

The report provides a lot of facts for debates about gentrification that often reflect predetermined ideological viewpoints. The fact that jumped out to me was that a greater percentage of low-income households in non-gentrifying neighborhoods were rent burdened than in gentrifying neighborhoods. (14-15)

This highlights the fact that we face a very big supply problem in the NYC housing market — we need to build a lot more housing if we are going to make a serious dent in this problem. The De Blasio Administration is on board with this — the City Council needs to get on board too.

Lots more of interest in the Furman report — worth curling up with it on a rainy afternoon.

 

The Land Use Report of the President

Posted on by

900px-Seal_of_the_President_of_the_United_States.svg

The Economic Report of the President contains an important analysis of local land use policies in a section titled “Constraints on Housing Supply:”

Supply constraints provide a structural challenge in the housing market, particularly in high-mobility, economically vibrant cities. When housing supply is constrained, it has less room to expand when demand increases, leading to higher prices and lower affordability. Limits on new construction can, in turn, impede growth in local labor markets and restrain aggregate output growth. Some constraints on the supply of housing come from geography, while others are man-made. Constraints due to land-use regulations, such as minimum lot size requirements, height restrictions, and ordinances prohibiting multifamily housing, fall into the man-made category and thus could be amended to support more inclusive growth. While these regulations can sometimes serve legitimate purposes such as the protection of human health and safety and the prevention of environmental degradation, land-use regulations can also be used to protect vested interests in housing markets.

Gyourko and Molloy (2015) argue that supply constraints have worsened in recent decades, in large part due to more restrictive land-use regulations. House prices have risen faster than construction costs in real terms, providing indirect evidence that land-use regulations are pushing up the price of land.

According to Gyourko and Molloy (2015), between 2010 and 2013, real house prices were 55 percent above real construction costs, compared with an average gap of 39 percent during the 1990s. Several other studies note that land-use regulations have been increasing since roughly 1970, driving much of the real house appreciation that has occurred over this time (Glaeser, Gyourko, and Saks 2005; Glaeser and Ward 2009; Been et al. 2014). This pattern is noteworthy because of the positive correlation between cities’ housing affordability and the strictness of their land use regulations, as measured by the Wharton Residential Land Use Regulation Index (Gyourko et al. 2008). Cities to the lower right of the figure which include Boston and San Francisco, have stringent land-use regulations and low affordability. Cities at the upper left, which include St. Louis and Cleveland, have low regulation and high affordability. Supply constraints by themselves do not make cities low in affordability. Rather, the less responsive housing supply that results from regulation prevents these cities, which often happen to be desirable migration destinations for workers looking for higher-paying jobs, from accommodating a rise in housing demand.

In addition to housing affordability, these regulations have a range of impacts on the economy, more broadly. Reduced housing affordability—whether as an ancillary result of regulation or by design—prevents individuals from moving to high productivity areas. Indeed, empirical evidence from Molloy, Smith, and Wozniak (2012) indicates that migration across all distances in the United States has been in decline since the middle of the 1980s. This decreased labor market mobility has important implications for intergenerational economic mobility (Chetty et al. 2014) and also was estimated in recent research to have held back current GDP by almost 10 percent (Hsieh and Moretti 2015).

Land-use regulations may also make it more difficult for the housing market to accommodate shifts in preferences due to changing demographics, such as increased demand for modifications of existing structures due to aging and increased demand for multifamily housing due to higher levels of urbanization (Goodman et al. 2015). A number of Administration initiatives, ranging from the Multifamily Risk-Sharing Mortgage program to the Affirmatively Furthering Fair Housing rule, try to facilitate the ability of housing supply to respond to housing demand. Ensuring that zoning and other constraints do not prevent housing supply from growing in high productivity areas will be an important objective of Federal as well as State and local policymakers. (87-89, figures omitted and emphasis added)

It is important in itself that the Executive Branch of the federal government has acknowledged the outsized role that local land use policies play in the economy. But the policies that the Obama Administration has implemented don’t go very far in addressing the problems caused by myopic land use policies that favor vested interests. The federal government can be far more aggressive in rewarding local land use policies that support equitable housing and economic development goals. It can also punish local land use policies that hinder those goals.

Edward Glaeser and Joseph Gyourko get much of the credit for demonstrating the effect that local land use policies have on federal housing policy. Now that the President is listening to them, we need Congress to pay attention too. This could be one of those rare policy areas where Democrats and  Republicans can find common ground.

Buying Into The Sexiest Real Estate

Posted on by

Metropolitan Transportation Authority of the State of New York - Construction at Hudson Yards

Newsmax quoted me in How to Buy and Sell in the Sexiest of Real Estate Markets. It opens,

With the opening of the 7 subway station at 34th Street last year, more than 100 shops and 5,000 residences, the Hudson Yards neighborhood in Manhattan is creating new demand for housing.

“We’ll likely witness a progression of rising prices as the entire development grows both residentially and commercially,” said Brad Malow, licensed real estate broker with Charles Rutenberg, a real estate firm in Manhattan.

Stretching from West 30th to 34th Streets and 10th to 12th Avenues, Hudson Yards is just one example of how supply of inventory impacts pricing in the world of real estate.

“The problem right now in the sales market is that supply is not catching up fast enough to pent up demand,” Malow told Newsmax Finance. “If supply increases and demand stays the same, what usually results is lower pricing.”

The New York housing market is very different from most others in the U.S. The vacancy rate in New York has hovered at 2% on average, according to a Douglas Elliman/Miller Samuel data and new development inventory is up 101% with supply and demand fluctuating from season to season.

That makes proper pricing important to the marketing of all types of property given the extraordinarily low vacancy rate.

“The supply of new housing is very low given the size of the market and the rental market is heavily regulated, depressing the rents for many units,” said David Reiss, professor of law with the Brooklyn Law School in Brooklyn.

Wednesday’s Academic Roundup

Posted on by

Home Buyers & Home Sellers

Posted on by

Jkirriemuir

The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that

Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)

This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.

I was particularly intrigued by one finding about sellers,

Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)

This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.

The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.

 

Monday’s Adjudication Roundup

Posted on by