Tag Archives: supply and demand

Supply and Demand in a Hot Market

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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.”

New Housing and Displacement

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Lsanburn

The Institute of Governmental Studies at UC Berkeley has issued a research brief, Housing Production, Filtering and Displacement: Untangling the Relationships. It opens,

Debate over the relative importance of subsidized and market-rate housing production in alleviating the current housing crisis continues to preoccupy policymakers, developers, and advocates. This research brief adds to the discussion by providing a nuanced analysis of the relationship between housing production, affordability, and displacement in the San Francisco Bay Area, finding that:

• At the regional level, both market-rate and subsidized housing reduce displacement pressures, but subsidized housing has over double the impact of market-rate units.

• Market-rate production is associated with higher housing cost burden for low-income households, but lower median rents in subsequent decades.

• At the local, block group level in San Francisco, neither market-rate nor subsidized housing production has the protective power they do at the regional scale, likely due to the extreme mismatch between demand and supply.

Although more detailed analysis is needed to clarify the complex relationship between development, affordability, and displacement at the local scale, this research implies the importance of not only increasing production of subsidized and market-rate housing in California’s coastal communities, but also investing in the preservation of housing affordability and stabilizing vulnerable communities. (1)

This brief takes on an important subject — the relationship between new housing and displacement — and concludes,

There is no denying the desperate need for housing in California’s coastal communities and similar housing markets around the U.S. Yet, while places like the Bay Area are suffering from ballooning housing prices that are affecting people at all income levels, the development of market-rate housing may not be the most effective tool to prevent the displacement of low-income residents from their neighborhoods, nor to increase affordability at the neighborhood scale.

Through our analysis, we found that both market-rate and subsidized housing development can reduce displacement pressures, but subsidized housing is twice as effective as market-rate development at the regional level. It is unclear, however, if subsidized housing production can have a protective effect on the neighborhood even for those not fortunate enough to live in the subsidized units themselves.

By looking at data from the region and drilling down to local case studies, we also see that the housing market dynamics and their impact on displacement operate differently at these different scales. Further research and more detailed data would be needed to better understand the mechanisms via which housing production affects neighborhood affordability and displacement pressures. We know that other neighborhood amenities such as parks, schools, and transit have a significant impact on housing demand and neighborhood change and it will take additional research to better untangle the various processes at the local level.

In overheated markets like San Francisco, addressing the displacement crisis will require aggressive preservation strategies in addition to the development of subsidized and market-rate housing, as building alone won’t protect specific vulnerable neighborhoods and households. This does not mean that we should not continue and even accelerate building. However, to help stabilize existing communities we need to look beyond housing development alone to strategies that protect tenants and help them stay in their homes. (10-11, footnote omitted)

The brief struggles with a paradox of housing — how come rents keep going up in neighborhoods with lots of new construction? The answer appears to be that the broad regional demand for housing in a market like the Bay Area or New York City overwhelms the local increase in housing supply. The new housing, then, just acts like a signal of gentrification in the neighborhoods in which it is located.

If I were to criticize this brief, I would say that it muddies the waters a bit as to what we need in hot markets like SF and NYC: first and foremost, far more housing units. In the absence of a major increase in supply, there will be intense market pressure to increase rents or convert units to condominiums. Local governments will have a really hard time overcoming that pressure and may just watch as area median income rises along with rents. New housing may not resolve the problem of large-scale displacement, but it will be hard to address displacement without it. Preservation policies should be pursued as well, but the only long-term solution is a lot more housing.

I would also say that the brief elides over the cost of building subsidized housing when it argues that subsidized housing has twice the impact of market-rate units on displacement. The question remains — at what cost? Subsidized housing is extremely expensive, often costing six figures per unit for new housing construction. The brief does not tackle the question of how many government dollars are needed to stop the displacement of one low-income household.

My bottom line: this brief begins to untangle the relationship between housing production and displacement, but there is more work to be done on this topic.

The Land Use Report of the President

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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

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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.

What Makes NYC Crowded

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"Manhattan from Weehawken, NJ" by Dmitry Avdeev

NewsDocVoices quoted me in What Makes NYC Become More and More Crowded. It reads, in part,

Yuqiao Cen, a graduate engineering student at NYU, makes sure to shower before 10pm every night, otherwise she is criticized for making too much noise in her apartment. She lives with her landlord and his family of five in a 3-bedroom apartment on 11th Avenue in Brooklyn.

Similar to Cen, Yanjun Wu, a newly admitted graduate student at Fordham University, barely stays in his living room because she feels uneasy wearing pajamas while her male roommates are around. She lives with 4 roommates in a 4-bedroom apartment on the Upper West Side.

Cen and Wu are not the only ones forced to share an apartment. Many of their classmates and friends living in New York are also doing the same thing. In fact, a recent study conducted by the New York City Comptroller Office suggested that NYC has become much more crowded in the past 10 years with the crowding rate being more than two and a half times the national average.

The study “Hidden Households” was conducted by Scott Stringer, New York City Comptroller, highlighting the growing crowding rate in housing in NYC. According to the study, New York City’s crowding rate has rose from 7.6 percent in 2005 to 8.8 percent in 2013. The number of crowded housing units grew from 228,925 in 2005 to 272,533 in 2013, representing an increase of 19 percent.

The increase in the crowding rate is city-wide. The Comptroller’s study indicates that the proportion of crowded dwelling units increased in all of the five boroughs except Staten Island during this time period. Brooklyn has the largest increase with 28.1 percent, Queens has 12.5 percent and 12.3 percent in the Bronx.

*     *     *

“Fundamentally, this is a story about supply and demand,” said David Reiss, professor of Law in Brooklyn Law School, and research director of Center for Urban Business Entrepreneurship. “The increase of the housing supply has been very slow, while the increase of the population was very fast, and that is the recipe for crowding. Because people can’t afford to live where they want to live, their choices would be continuing to live where they want to live and be crowded, or to switch to location with more space for your dollar.”

The data confirm Reiss’s observation. According to the U.S. Census Bureau, NYC’s population in 2013 was 8.43 million, increasing from t8.2 million in 2005. However, the 2014 Housing Supply Report, conducted by New York City Rent Guidelines Board, also indicates that the number of permits issued for new construction of residential units had reached its peak – 34,000 in 2008, but the number decreased greatly to 6,000 in 2009. Although the number kept gradually going up, and reached to 18,000 in 2013, the market is no longer as hot as before the financial crisis of 2008.

Contrary to common belief, income does not in itself drive crowding. Although “Hidden Households” shows that 23.6 percent of crowded households reported household incomes in the City’s bottom quartile, it also revealed that 18.5 percent of crowded households have incomes in the City’s top quartile and 5.2 percent of crowded households have incomes in the 90th percentile or higher.

In the beginning of apartment hunting, Wu and her roommates wanted to rent a five-bedroom apartment so that everyone could have their own private space. “The market is too busy in New York,” said Wu. “Once we were going to pay the [lease] for an apartment on Roosevelt Island, but someone was ahead of us by just a few minutes.”

After weeks of apartment hunting, Wu and her roommates decided to make a compromise – two of them would have to share a bedroom, in order to get a decent apartment at an acceptable price – $4,900 per month, with neither an elevator nor a laundry room.

“Land is very expensive, and there is not much left for residential development but a tremendous number of people want to live in New York,” said Albert Goldson, Executive Director of Indo-Brazilian Associates LLC, A NYC-based global advisory firm. “Real estate prices started to go up, so you have people who are middle class or who have modest salaries who can no longer afford [to pay a] mortgage. And what many of them would have done, either single people or a family, was ‘double up’. Like single people who bring in a roommate, now have several roommates in a unit.”

Most experts in the urban planning industry believe that the underlying cause of the growing crowding rate is the affordability of housing. Goldson argues that the city needs to be more available for middle-class people who are actually working here and potentially leaving the city if it is too small or uncomfortable to live here anymore.

From Reiss’ perspective, the way to solve affordability of housing is to amend its zoning code to encourage the construction of housing. Vertical construction is a trend and a solution to the crowding situation. But in the meantime, with more people living in taller buildings, the density would definitely increase. “If the city is really committed to increasing the affordability of housing, you have to be committed to increase the housing density as well,” said Reiss.

Primer on NYC Affordability Crisis

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"2014 July NYC's 432 Park Avenue" by The Hornet

Enterprise has released a report, 2015 New York City Housing Security Profile and Affordability Housing Gap Analysis. Its conclusions are not shocking, but they are sobering:

  • Of 2 million renter households in New York City, nearly 640,000 are low-income and severely cost-burdened.
  • There is not a single neighborhood in NYC that provides enough affordable housing to match the number of very low-income households in that community.
  • Both the regulated and unregulated rental housing markets of NYC are not meeting the affordable housing needs of low-income renters.
  • Even though the market added rent stabilized units between 2011 and 2014, the stock affordable to lower income families declined.
  • Competition exacerbates the gap between the number affordable units and the number of low-income renters, forcing many to pay beyond their means. (33)

As with many such studies, it offers a cogent analysis of the problem but offers very little by way of possible solutions. It hints at one such solution when it notes that

By any measure, the demand for affordable housing in New York City outstrips supply – even on the rent regulated market. Low-income households are squeezed even further by competition from higher income households for the cheapest units. The acute shortage forces the majority of lower income households in housing that costs beyond their means. (27)

Increasing the supply of housing will, if everything else is equal, reduce the cost of housing. The de Blasio Administration is certainly on board with an approach to increase density in NYC but many other elected officials are not — or at least resist it when it comes to their own backyards.  While more housing is not a sufficient solution to the affordability problem in NYC, it is certainly a necessary component of a solution.

The report also does not deal with the big elephant in the affordable housing policy room — the social demographics of NYC are undergoing a secular shift as the city gets hotter and hotter for global elites. It is unclear how much government can affect that trend, particularly at the local level.

Inclusionary Housing and Equitable Communities

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The Lincoln Institute of Land Policy has released a policy focus report, Inclusionary Housing: Creating and Maintaining Equitable Communities. The Executive Summary opens,

After decades of disinvestment, American cities are rebounding, but new development is often driving housing costs higher and displacing lower-income residents. For cities struggling to maintain economic integration, inclusionary housing is one of the most promising strategies available to ensure that the benefits of development are shared widely. More than 500 communities have developed inclusionary housing policies, which require developers of new market-rate real estate to provide affordable units as well. Economically diverse communities not only benefit low-income households; they enhance the lives of neighbors in market-rate housing as well. To realize the full benefit of this approach, however, policies must be designed with care. (3)

The report uses the term inclusionary zoning to refer to

a range of local policies that tap the economic gains from rising real estate values to create affordable housing—tying the creation of homes for low- or moderate-income households to the construction of market-rate residential or commercial development. In its simplest form, an inclusionary housing program might require developers to sell or rent 10 to 30 percent of new residential units to lower-income residents. Inclusionary housing policies are sometimes referred to as “inclusionary zoning” because this type of requirement might be implemented through an area’s zoning code; however, many programs impose similar requirements outside the zoning code. (7)

The report notes that

Policy makers are understandably concerned that affordable housing requirements will stand in the way of development. But a review of the literature on the economics of inclusionary housing suggests that well-designed programs can generate significant affordable housing resources without overburdening developers or landowners or negatively impacting the pace of development. (4)

The report is obviously addressing two of the most important issues facing us today — the housing affordability challenge that many households face as well as the increasing stratification of communities by income and wealth.

There is a lot of value in the survey of the academic literature on inclusionary housing policies that is provided by this report. At the same time, there is some fuzzy thinking in it too. For instance, the report states that, “As the basic notion of supply and demand suggests, the addition of new units in a given market will inevitably put some downward pressure on the cost of existing units. But the larger effect tends to be upward pressure on housing costs because new homes are primarily built for higher-income residents.” (12)

This analysis ignores the well-accepted concept of filtering in urban economics. Filtering describes the process by which occupants of housing units go from higher-income to lower-income as the unit ages, becomes outdated and is subject to wear and tear. If higher-income households move to the newest housing, then other another household, typically of lower-income, can move into the vacant unit. If the number of households remains constant, then housing prices should decrease as housing development increases.

Because the real world does not look like an economic model, many people think that new housing causes increased housing prices. But the cause of the increased housing prices is often the same thing that is causing new housing construction:  increased demand.

Take NYC for instance. In recent years, it issues permits for 10,000-20,000 or so new units of housing a year, but its population has grown by about 60,000 people a year. Combine this with the fact that new housing construction is both a sign and result of gentrification in a particular neighborhood, it is no wonder people think that housing construction pushes prices higher. While this is an understandable line of thought for the man or woman in the street, it is less so for the Lincoln Institute.

My bottom line: this is worth a read, but read with care.