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- Housing affordability is plummeting and the high cost of real-estate can make new middle-income development financially untenable.
- At Nuveen’s Real Estate Roundtable 2020 event last week, James Martha, managing director and head of housing sector in the Americas for the firm, highlighted middle-income rentals as a sector of concern.
- Martha spoke about rent control, construction technology, and coliving as potential parts of the solution for affordability, but said that there will be a “long runway” for any significant change.
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As the gap in income widens between high earners and the median household, a similar dynamic has played out in the housing market.
After a glut of development, one in four luxury apartments in New York have not been sold, while almost 30% of the apartments that have been built since 2013 have been sold to investors, who now rent them out. In attempts to stand out, luxury apartment buildings are competing to grab tenants and buyers with outlandish amenities.
Simultaneously, Americans are spending 37% of their income on housing expenses, seven percent higher than the standard measure of housing affordability. Housing affordability is plummeting, inventory is declining, and the high cost of labor and construction makes building new middle-income housing financially untenable for developers.
These factors have led to a squeeze in middle-class housing, one that’s led venture capitalists to invest in construction tech that drives the cost of development down, and activists to push for rent control measures across the country.
At Nuveen’s Real Estate Roundtable 2020 event last week, James Martha, managing director and head of housing sector in the Americas, highlighted middle-income rentals as a sector of concern. Simply put, there isn’t enough affordable housing, and developers aren’t incentivized to build more affordably-priced stock.
While this may be good for the current value of Nuveen’s multi-family holdings, it is not a great sign for the economic future of the country. As of the end of last year, the TIAA asset manager subsidiary had $17 billion in multi-family debt and equity holdings.
“Our country is based on middle-income households,” Martha said.
Rent growth is outstripping GDP and CPI (though it is a large factor in calculating CPI), gradually eating up larger portions of the economy. Martha sees both technology and regulation as ways to increase density, making it more profitable to develop multi-family housing for middle-income rents.
“There’s some moderation going on, but we have a long, long runway,” Martha said.
The affordability crisis is clustered into urban areas that Martha said were once considered safe havens. New York and San Francisco are prime examples of this, leading some potential employers to open up offices outside of these main cities.
The types of housing in a city dictate what types of employers and retailers come to a city. With the crunch on affordable housing, employers are looking to alternative areas for growth. Martha gave Austin, Orlando, and Raleigh-Durham as examples on the tech side, and Nashville as an example in healthcare. By moving to these locations with lower costs of living, the companies can pay less for real estate and pay lower salaries.
Martha said that this phenomenon has positive effects on the crunch in supply for middle-income housing, but it is not enough on its own.
How to build for the middle
While Martha’s prepared remarks outlined the crisis, he delved into potential solutions in a question-and-answer session after. The challenge for developers, Martha said, is that the economics don’t line up to develop new middle-income housing stock.
“They can’t build to the middle,” Martha said.
The spread between an affordable cost for rent (30% of income) and average rental costs is almost $500. With construction labor costs continuing to increase and construction productivity flat for decades, it’s too expensive to build housing that much of the country would find affordable.
Martha has seen some developers try to cut costs by nixing plans for balconies, switching from hardwood to cheaper carpeting, and swapping in formica countertops for granite or marble. Still, he said this will only save 10-15% of the cost of production. Development will need to continue to change to make it financially tenable to build middle-income housing.
“Part of that answer,” according to Martha, is prefab and manufactured housing, a subsector of contech (construction tech). These sectors have fallen out of favor since the days when you could order a bungalow out of the Sears catalog, but recent investment in the space from Amazon and startups like Katerra show a renewed interest.
“This is something we’re very interested in,” Martha said. “We look at properties with low density, and how can we increase density in a most efficient manner.”
While Nuveen may be watching the contech space, Martha characterized current implementations as “testing.” He sees potential for the federal government to incentivize growth in this space by streamlining building regulations that make prefab construction more expensive.
Another trend, coliving, also prioritizes density. Martha sees it as a “natural progression” between dorm-living and stable family housing, but one whose growth potential is limited.
“It will be a bit of a disruptor, but likely only in the most expensive markets,” Martha said.
In expensive cities, the tradeoff between less space but lower rents and more amenities and opportunities for socialization may make sense. In other locations, coliving may be “marketed as a preference,” but this is far from a universal preference.
“For a lot of people, their aspiration is ultimately have their own space,” Martha said.
Martha sees the possibility of government regulation that works for landlords and tenants. With multiple states passing rent control laws, and Senator Bernie Sanders proposing a national rent control in his campaign for president, strict regulation on renting has become a salient political issue.
The mainstream view in economics is that rent control is bad, because it reduces the incentive for developers to add new housing stock. New York, Oregon, and California have enacted laws that either create statewide rent control laws or allowing municipalities to create their own.
Martha focused specifically on Oregon, where rent increases were capped levels that landlords could accept: seven percent plus the cost of inflation (California’s law capped increases at five percent plus inflation.) This became even more favorable to landlords when paired with legislation that was passed this year that that effectively banned single-family zoning.
“What it does, it really opens up the landscape for rental housing in what used to be called exclusive neighborhoods,” Martha said.
Martha said that the “jury is still out,” but those sort of zoning changes could create incentives to build more housing stock even when rent control is in place.
Martha doesn’t see this becoming policy in many other locations in the short-term, though he expects to hear a lot more debate on the topic from lawmakers and from the Democratic candidates for president.
If more laws are enacted, he hopes that Oregon, instead of “more problematic” New York, will be the model.
New York’s laws don’t enact a statewide rent control, but they do allow municipalities to opt in to rent stabilization — a program that is similar to rent control. New York City has both rent stabilization and control.
The new laws have ended multiple programs that allowed landlords to take apartments out of rent control, prompting landlord groups to file a lawsuit claiming the new laws are in violation of the US Constitution’s Takings Clause.
Rent increases in New York City are decided by the city’s rent guidelines board, with capped increases by 2.5% for one-year leases and 1.5% for two-year leases, far lower than the increases allowed in Oregon and California.
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