Tag Archives: SF

Cities With the Worst Rent

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photo by Alex Lozupone

Realtor.com quoted me in Cities With the Worst Rent: Is This How Much You’re Coughing Up? It opens,

Sure, rents are too dang high just about everywhere, but people living in Los Angeles really have a right to complain: New analysis by Forbes has found that this city tops its list of the Worst Cities for Renters in 2018.

To arrive at these depressing results, researchers delved into rental data and found that people in L.A. pay an average of $2,172 per month.

Granted, other cities have higher rents—like second and third on this list, San Francisco (at $3,288) and New York ($3,493)—but Los Angeles was still deemed the worst when you consider how this number fits into the bigger picture.

For one, Los Angeles households generally earn less compared with these other cities, pulling in a median $63,600 per year. So residents here end up funneling a full 41% of their income toward rent (versus San Franciscans’ 35%).

Manhattanites, meanwhile, fork over 52% of their income toward rent, but the saving grace here is that rents haven’t risen much—just 0.4% since last year. In Los Angeles, in that same time period, rent has shot up 5.7%.

So is this just a case of landlords greedily squeezing tenants just because they can? On the contrary, most experts say that these cities just aren’t building enough new housing to keep up with population growth.

“It is fundamentally a problem of supply and demand,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “Certain urban centers like Los Angeles, San Francisco, and New York are magnets for people and businesses. At the same time, restrictive local land use regulations keep new housing construction at very low levels. Unless those constraints are loosened, hot cities will face housing shortages and high rents no matter what affordable housing programs and rent regulation regimes are implemented to help ameliorate the situation.”

High Rents and Land Use Regulation

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The Federal Reserve’s Devin Bunten has posted Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation. It is a technical paper about an important subject. It has implications for those who are concerned about the lack of affordable housing in high-growth areas. The abstract reads,

Highly productive U.S. cities are characterized by high housing prices, low housing stock growth, and restrictive land-use regulations (e.g., San Francisco). While new residents would benefit from housing stock growth in cities with highly productive firms, existing residents justify strict local land-use regulations on the grounds of congestion and other costs of further development. This paper assesses the welfare implications of these local regulations for income, congestion, and urban sprawl within a general-equilibrium model with endogenous regulation. In the model, households choose from locations that vary exogenously by productivity and endogenously according to local externalities of congestion and sharing. Existing residents address these externalities by voting for regulations that limit local housing density. In equilibrium, these regulations bind and house prices compensate for differences across locations. Relative to the planner’s optimum, the decentralized model generates spatial misallocation whereby high-productivity locations are settled at too-low densities. The model admits a straightforward calibration based on observed population density, expenditure shares on consumption and local services, and local incomes. Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation. Abolishing zoning regulations entirely would increase GDP by 6%, but lower welfare by 5.9% because of greater congestion.

The important sentence from the abstract is that “Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation.” Those are significant effects when we are talking about  real people and real places. The introduction provides a bit more context for the study:

Neighborhoods in productive, high-rent regions have very strict controls on housing development and very limited new housing construction. Home to Silicon Valley, the San Francisco Bay Area is the most productive and most expensive metropolitan region in the country, and yet new housing construction has been very slow, especially in contrast to less-productive large cities like Houston, Texas. The evidence suggests that this slow-growth environment results from locally determined regulatory constraints. Existing residents justify these constraints by appealing to the costs of new development, including increased vehicle traffic and other types of congestion, and claim that they see few, if any, of the benefits from new development. However, the effects of local regulation extend beyond the local regulating authorities: regions with highly regulated municipalities experience less-elastic housing supply. (2, footnotes omitted)

The bottom line, as far as I am concerned, is that localities that are attempting to deal with their affordable housing problems have to directly address how they go about their zoning. If the zoning does not support housing construction, then no amount of affordable housing incentives will address the demand for housing in high growth places like NYC and San Francisco.

Small Multifamilies and The Affordability Illusion

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Fannie Mae’s September Multifamily Market Commentary repeats a common misunderstanding about small multifamily properties that is worth addressing. By way of background, it opens,

Multifamily rental units can be found in high-rise structures or in garden-style buildings, but there are a number of properties that house between just five and 50 housing units. These properties are usually identified as small multifamily and can be found in many different metros across the country. In many places, they can also be a key source of affordable rental units. (1)

While the data is not definitive, there appears to be somewhere between “296,000 and 360,000 small multifamily properties” with between 2.3 million and 4.4 million units of housing among them. (1) These units appear to be concentrated in about ten states that contain three quarters of the stock.  California and NY have the most small multifamilies by a wide margin and the cities with the most come as no surprise:  LA, NYC, SF-Oakland, Chicago and San Diego.

Here’s where I have issues with the analysis:

Fewer Small Multifamily Properties in the Pipeline

According to data from the Dodge Data & Analytics Construction Pipeline, the number of new multifamily projects being started has been declining since peaking in the second quarter of 2015, falling to 678 projects during the first quarter of 2016 . . . . The average number of units rose, however, to about 117 units per project.

Given the high land acquisition and construction costs in most metros, this trend of maximizing square footage in multifamily development, rehabilitation, and renovation should not be surprising. Unfortunately, it does have implications for the small multifamily segment, which in many places tends to offer more affordable rents when compared to newer properties.

An Uncertain Future for Small Multifamily

Over the next decade, the nation’s multifamily stock will likely see an influx of higher unit count properties. As older small multifamily rental properties age and/or fall into disrepair, they will likely be replaced with properties with more density per square foot. Developers will likely create more, but much smaller, units on the same size lot. As a result, these small multifamily properties may end up moving out of the 5-50 unit category and push up into the 50+ unit category, making preservation of the existing stock of small multifamily rental properties offering more affordable rents even more critical.(6)

The logic of this last sentence is faulty, but it is also oft-repeated by sophisticated housing market commentators. Small multifamilies are not cheap because they are small, they are cheap because they are old. Old housing is generally cheaper than new housing. So this notion that we should preserve old housing for its own sake is faulty. Generally, we would want to see an expansion in the supply of housing, so replacing an aging small building with a bigger new one would generally be a positive development. We also would like to see investments in upgrades to the housing stock, either through rehabilitation or replacement. Effectively, this Fannie Mae Commentary is saying that we should preserve very old small multifamilies instead of upgrading those properties. That is short-sighted because while it may keep particular units affordable, it will also tend to raise rents more generally (by restricting supply) and lowering the overall quality of the housing stock (by disincentivizing investment).

The Commentary acknowledges that “it seems that there are a variety of financing sources available in the financing of small multifamily rental properties, indicating there is sufficient and ongoing liquidity for this property type. ” (5) Perhaps it is best to treat small multifamilies just like the bigger ones and let the market determine the highest and best use of each parcel zoned for multifamily construction.

Urban Income Inequality

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photo by sonyblockbuster

The union-affiliated Economic Policy Institute has released a report, Income Inequality in the U.S. by State, Metropolitan Area, and County. The report finds that

The rise in inequality in the United States, which began in the late 1970s, continues in the post–Great Recession era. This rising inequality is not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets. It affects every state, and extends to the nation’s metro areas and counties, many of which are more unequal than the country as a whole. In fact, the unequal income growth since the late 1970s has pushed the top 1 percent’s share of all income above 24 percent (the 1928 national peak share) in five states, 22 metro areas, and 75 counties. It is a problem when CEOs and financial-sector executives at the commanding heights of the private economy appropriate more than their fair share of the nation’s expanding economic pie. We can fix the problem with policies that return the economy to full employment and return bargaining power to U.S. workers.

The specific findings are very interesting. They include,

  • Overall in the U.S. the top 1 percent took home 20.1 percent of all income in 2013. (4)
  • To be in the top 1 percent nationally, a family needs an income of $389,436. Twelve states, 109 metro areas, and 339 counties have thresholds above that level. (2)
  • Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent. (3)
  • Between 1979 and 2013, the top 1 percent’s share of income doubled nationally, increasing from 10 percent to 20.1 percent. (4)
  • The share of income held by the top 1 percent declined in every state but one between 1928 and 1979. (4)
  • From 1979 to 2007 the share of income held by the top 1 percent increased in every state and the District of Columbia. (4)
  • Nine states had gaps wider than the national gap. In the most unequal states—New York, Connecticut, and Wyoming—the top 1 percent earned average incomes more than 40 times those of the bottom 99 percent. (2)
  • For states the highest thresholds are in Connecticut ($659,979), the District of Columbia ($554,719), New Jersey ($547,737), Massachusetts ($539,055), and New York ($517,557). Thresholds above $1 million can be found in four metro areas (Jackson, Wyoming-Idaho; Bridgeport-Stamford-Norwalk, Connecticut; Summit Park, Utah; and Williston, North Dakota) and 12 counties. (3)

The income threshold of the top 1% for individual counties is also interesting.  For example, New York County (Manhattan) comes in second, at $1,424,582 (following Teton, WY at $2,216,883) and San Francisco County comes in 24th at $894,792. (18, Table 6)

Income inequality is a fact of life for big cities and affects so many aspects of American life — housing, healthcare, education, to name a few important ones. The Economic Policy Institute focuses on union-movement responses to income inequality, but urbanists could also consider how to respond systematically to income inequality in the design of urban systems like those for healthcare, transportation and education. If the federal government is not ready to do anything about income inequality itself, states and local governments can make some progress dealing with its consequences. That is a far better route than acting as if income inequality is just some kind unexpected aspect of modern urban life and then bemoaning its visible manifestations, such as homelessness.

 

 

Walkers in the City

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photo by Derrick Coetzee

The Center for Real Estate and Urban Analysis at The George Washington School of Business has released Foot Traffic Ahead: Ranking Walkable Urbanism in America’s Largest Metros for 2016. The Executive Summary opens,

The end of sprawl is in sight. The nation’s largest metropolitan areas are focusing on building walkable urban development.

For perhaps the first time in 60 years, walkable urban places (WalkUPs) in all 30 of the largest metros are gaining market share over their drivable sub-urban competition—and showing substantially higher rental premiums.

This research shows that metros with the highest levels of walkable urbanism are also the most educated and wealthy (as measured by GDP per capita)— and, surprisingly, the most socially equitable. (4)

This strikes me as a somewhat over-optimistic take on sprawl, but I certainly welcome the increase in walkable urban places over a broad swath of metropolitan areas. The report’s specific findings are that

There are 619 regionally significant, walkable urban places—referred to as WalkUPs—in the 30 largest U.S. metropolitan areas. These 30 metros represent 46 percent of the national population (145 million of the 314 million national population) and 54 percent of the national GDP.

The 30 metros are ranked on the current percentage of occupied walkable urban office, retail, and multi-family rental square feet in their WalkUPs, compared to the balance of occupied square footage in the metro area. The six metros with the most walkable urban space in WalkUPs are, in rank order, New York City, Washington, DC, Boston, Chicago, San Francisco, and Seattle.

Economic Performance: There are substantial and growing rental rate premiums for walkable urban office (90 percent), retail (71 percent), and rental multi-family (66 percent) over drivable sub-urban products. Combined, these three product types have a 74 percent rental premium over drivable sub-urban.

Walkable urban market share growth in office and multi-family rental has increased in all 30 of the largest metros between 2010-2015, while drivable sub-urban locations have lost market share. The market share growth for 27 of the 30 metros is two times their market share in 2010. This is of the same or greater magnitude as the market share gains of drivable sub-urban development during its boom years in the 1980s, but in the reverse direction.

Indicators of potential future WalkUP performance show that many of the metros ranked highest for current walkable urbanism are also found at the top of our Development Momentum Ranking—namely, the metros of New York City, Boston, Seattle, and Washington, DC. This indicates that these metros will continue to build on their already high WalkUP market shares and rent premiums.

There are also some surprising metros in this top tier of Development Momentum rankings, including Detroit, Phoenix, and Los Angeles.

The most walkable urban metro areas have a substantially greater educated workforce, as measured by college graduates over 25 years of age, and substantially higher GDP per capita. These relationships are correlations, and determining the causal relationships requires further research to prove.

Walkable urban development describes trends resulting from both revitalization of the central city and urbanization of the suburbs. For nearly all metros, the future urbanization of the suburbs holds the greatest opportunity; metro Washington, DC, serves as a model, splitting its WalkUPs relatively evenly between its central city (53 percent) and its suburbs (47 percent).

Social Equity Performance: The national concern about social equity has been exacerbated by the very rent premiums highlighted above, referred to as gentrification. Counter-intuitively, measurement of moderate-income household (80 percent of AMI) spending on housing and transportation, as well as access to employment, shows that the most walkable urban metros are also the most socially equitable. The reason for this is that low cost transportation costs and better access to employment offset the higher costs of housing. This finding underscores for the need for continued, and aggressive, development of attainable housing solutions. (4, footnote omitted)

There is a lot of import here. Is there more than a correlation between walkability and the educational level of the workforce and, if so, why? Why don’t more housing affordability studies take into account transportation costs when evaluating the affordability of a given community? What is the trend line of this new direction toward urbanism and how far can it go in the face of decades of investment in car-based communities? This annual study will help us answer those questions, over time.

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.

Airbn-Beffudled

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MainStreet quoted me in Is Airbnb Making It Impossible For You To Rent That Dream Apartment?. It opens,

The accusation is blunt: Airbnb, say some, is sucking up apartment units that otherwise would be available to renters. In San Francisco, that claim is spoken so loudly – by so many politicians – a city agency just filed a report on it.

Similar claims are heard in Santa Monica, Calif., in Manhattan and some Brooklyn neighborhoods, a few areas in Seattle and also a sliver of Boston and adjacent Cambridge. True? False? Is that Airbnb host putting vacationers up in what should be your prime Greenwich Village flat?

Some think such accusations are just distracting from the main issue at hand: housing inventory shortages.

“It’s a diversion,” says Richard Green, the Lusk Chair in Real Estate at the University of Southern California. “Politicians are not dealing with what they should be dealing with to address housing unavailability so they are singling out Airbnb.” His nuanced point is that in most markets the number of Airbnb units is trivial and so whatever impact it has on apartment availability is minimal.

The San Francisco government report does not disagree: “the Budget and Legislative Analyst estimates that between 925 and 1,960 units citywide have been removed from the housing market from just Airbnb listings. At between 0.4 and 0.8%, this number of units is a small percentage of the 244,012 housing units that comprised the rental market in 2013.”

Read the San Francisco report. It said that under 1% of apartments have been removed from rental channels due to Airbnb. How important is that? What does it mean?

What is unique about San Francisco – also Manhattan and a few other places – is that apartment vacancy rates are fiercely low. In a recent survey, it stood at 4.1% in San Francisco and that means this is the type of town where would-be renters get in line early whenever a decent unit goes up for rent. Add back in those Airbnb units and, yes, that might be a happy day for some tenants. But not many.

The other unique feature: San Francisco, Manhattan and a very few other places attract large tourist populations, especially Millennials, and that has been a sweet spot for sharing economy rentals. Take tight supply, add in high hotel prices and a flood of tourists and there is the recipe for cries about any apartment that seems to be lost to the longterm tenant market.

In a lot of markets – from Phoenix to Houston – vacancy rates are already high, tourist numbers are low and nobody really thinks Airbnb is having any impact on local rentals.

But in some cities it just may be. Harry Campbell, TheRideShareGuy.com, said of Airbnb: it is “having a huge impact in coastal communities [of Los Angeles] like Venice/Santa Monica where mid level chain hotels can run upwards of $300-$400 a night. It just doesn’t make much sense for landlords to rent their apartments out traditionally when the profits are so much higher using Airbnb.” (Santa Monica, in mid May, enacted legislation banning short-term rentals such as Airbnb. Nobody knows how it will be enforced or if it will withstand legal challenges.)

At least one Portland, Ore. Airbnb host emailed Mainstreet to admit that two apartment units that had been rented to regular tenants are no longer. Explained that host: “From the point of view of a former landlord, the Airbnb experience is far superior. Airbnb guests are, on the whole, responsible, considerate and never late with rent since this is collected in advance by Airbnb.”

Either way, however, the calculus is not one-sided, not even in those premium markets like San Francisco. Green added: “You could also say that Airbnb is increasing the stock of affordable housing units by letting some keep their apartments by occasionally renting them out. It’s entirely possible Airbnb produces as many units as it loses.”

In that regard, listen to Kip (last name withheld) — a self-described 60+ woman living alone in Beverly Hills in a two bedroom apartment. A few times a month, said Kip, she rents it out through Airbnb. “That helps me with the cost of living,” she said. She stressed she would never take in a roommate but is happy with having guests a few nights a month. “It’s helped me boost my flagging income,” she said.

Christopher Nulty, an Airbnb spokesperson, had fighting words in response to the San Francisco report in particular.

“This comes from the same people who want to ban new housing in the Mission [a San Francisco neighborhood], ban home sharing and make San Francisco more expensive for middle class families,” he said. “Home sharing is an economic lifeline for thousands of San Franciscans who depend on the extra income to stay in their homes.”

So, who’s telling the truth?

“When evaluating claims about Airbnb, it is important to keep in mind whose ox is being gored,” said David Reiss, a professor at Brooklyn Law School. His point: In some cases, maybe Airbnb brings some harm. In other cases, it does good. Matters just aren’t simple or black and white.