Sunday, February 28, 2016

Commercial Real Estate Forum, Part 2: Housing

As a commenter pointed out yesterday, we have a super low rental vacancy rate that is driving up the cost of housing.

Separately another commenter last year noted
that without public assistance you probably can't build [affordable housing]. Over the weekend I watched a panel of experts talking about housing needs on CSPAN. They made a lot of very interesting observations including that we are way behind on meeting the needs of housing in all categories except high end single family residences. The reason being that it costs about $1.50 per foot to build and middle-income and of course low-income people can't afford to pay more than $1 a sq ft in rent. So, no one will build such housing without government assistance.
Comments at the Commercial Real Estate Forum point to this exactly, and show the disconnect between the interests of actors on the supply side, the interests of the broader public on the demand side, and the interests of policymakers in bridging the two via an effective market.

The forum booklet
From the piece:
The multi-family sector was firing on all cylinders in 2015. Rents are up, vacancy is low, construction starts are plentiful, and there is still demand in the market. The typical renter profile is changing in our market-it is no longer starter housing for the young and/or lower income demographic. Retirees looking for simpler management of their living expenses and young professionals looking for urban living are diversifying the rental market. Demand for multi-family product remained strong in 2015, with an average time from list to close of just short of four months. Attractive financing packages kept prices up and capitalization rates low.

There are over 900 units under construction or in planning stages for delivery in the next two years. Total deliveries to market in 2012-15 was 973 units (243/year). We’ve absorbed all the deliveries over the past four years, and with vacancy continuing to be below 2.5%, there is still demand in the market. Our market has been absorbing an average of 14 units/month, above the industry standard of 12 units/month.

Transaction volume was robust in 2015 with almost $70M in transactional volume in 25 notable sales. The average price per unit in the 18 properties older than 1990 was $75,500 and for the seven sales of properties newer than 1990, the average price per unit was $75,605. Removing outlier Eola Heights (built in 1985) which sold for $110,000/unit, the average price per unit for older properties was $63,000/unit.

From a sales volume standpoint, most experts are predicting a slowdown in the investment market, partially because of the significant market activity over the past four years and partially because of the interest rate tide shifting. Most investors are banking on increased rent to keep values up, but as capitalization rates shift with rising interest rates, it remains to be seen if rent growth will be enough to keep values where they are now. Nationally, as large REIT investors deal with a rising interest rate environment in their portfolios, net operating income may erode and cause cash flow issues, which could cause the market to shift radically.

According to Co-Star, the current multi-family vacancy continues to be below 2.5% in its survey of over 22,500 units. Asking rents continue to rise, and continued new construction should continue to put upward pressure on rents. Per square foot rental rates for new construction are reaching $1.25 per sq. ft. in high-demand areas of town for one-bedroom units. It is not expected that absorption of these newer projects will negatively impact the occupancy of older, lower-priced units, as most renting in older projects won’t be able to afford to trade to a newer property.
One claim here is a little alarming:

"[C]ontinued new construction should continue to put upward pressure on rents." Wait, what? Shouldn't adding supply put downward pressure on rents? That seems like a violation of "classical economics"!

Apparently this is a hot topic right now. Over at the American Conservative they reference an exchange in the Washington Post that:
debates whether new development aimed at the high-end makes housing markets more expensive or less. Market-oriented writers note that high-end construction reduces competition for lower level buildings by the wealthy, whereas others are concerned that the new construction just turns a neighborhood into a magnet for the well-to-do
I have no idea what is the truth about this, and it seems that professional economists may not either, but it seems like the way the actual market behaves has to be more complicated than blithely saying "continued new construction should continue to put upward pressure on rents."

At the same time, a healthy and just housing market would have lots of choices at different price points and find an equilibrium that way. It would be possible for suppliers (builders or developers) to respond to demand and offer product at low, medium, or high price points.

But that does not seem possible and it seems like we have a major market failure right now.

In this light, the work plan Council just decided on seems like it might be too feeble to make a real dent in things.

Outline of Proposed Workplan for amendments from HNA
And the new task force on homelessness and housing may not adequately see part of their mission (the part that's not involved in the delivery of social services) as addressing the supply side, the market failure in supplying low-cost housing.

Housing is complicated and makes my head spin.

CAN-DO has also been posting quite a bit on housing and the Mid-Willamette Homeless Initiative Task Force.

Here is a discussion of some changes Seattle made in 2011 and the way they had unintended consequences.
And several links from Strong Towns, who have been talking a lot about housing and finance the past couple of weeks.


Susann Kaltwasser said...

What I predict is going to happen with the lack of affordable housing, is that people will begin to double up in existing housing. I know of several people who are renting rooms in their houses. For some home buyers who have found the job market slow or wages too low to afford the mortgage this is how they are staying afloat. For others it is a way to earn extra income. We have seen this pattern before like after WWII when there was not enough housing available.

The "tiny house" movement is not a likely path to affordable housing as much as converting garages into housing will become. If you write a code that allows accessory dwelling units this is what you will get. Many people will build to the lowest common denominator, unless you prohibit it outright. And I do not see that happening.

We might see more of a rush to build mobile home parks.

The economic issues are complex. A major issue is that the HUD funding needs to be increased as well as local governments considering incentives like tax breaks. We are in for some rough years. We also need to see higher wages...minimum and otherwise.

I am worried about what the Planning Department is doing on the issue of implementing the Housing Needs Analysis. Staff told me recently that they plan to come up with a more detailed plan by April and it will include a work group. The composition of the group is going to be vital in what comes out as recommendations. There needs to be a strong representation of neighborhood associations and people who have knowledge about how to fix this situation. A balance of developers and knowledgeable citizens will be needed.

Mike said...

As I have written before, we could probably fit 500 units along Liberty and Commercial south of the Park to where Commercial becomes a stroad. We could also fit hundreds of units along Market St, State St, Center St, 12th SE, Fairgrounds Rd, Silverton Rd, Front St and River Rd (Keizer).

The problem is that so many of these roads are focused on moving cars and the two cities have unnecessarily high parking requirements.

I'm not saying that Salem needs to build apartments on all of the roads in the near future. But if the started building clusters along these roads, especially mixed-use, it would snowball by making Salem and Keizer more desirable while lowering the cost o build and rent.

Or they could keep doing the same things and wonder why things don't change for the better.