Regulations Account for Almost One Third of Apartment Development Costs

The National Multifamily Housing Council (NMHC) and National Association of Home Builders (NAHB) released the results of research that found that regulation imposed at various levels of government accounts for 32.1% of multifamily development costs. From an article in Multifamily Executive:

These regulatory costs include a broad range of fees, standards, and other requirements imposed at different stages of the development and construction process. According to the study, 7% of regulatory costs come from building-code changes over the past 10 years, 5.9% is attributable to development requirements (such as streets, sidewalks, parking, landscaping, and architectural design) that go beyond what the developer would ordinarily provide, and 4.2% of the costs come from nonrefundable fees charged when site work begins.

Over 90% of developers surveyed in the research typically incur hard costs of paying fees to local jurisdictions, both when applying for zoning approval and again when local jurisdictions authorize the construction of buildings. The typical projects of almost all the respondents (98%) were subject to costs at the zoning-approval stage, costing an average 4.1% of the total development costs.

They go on to note that these costs have a direct impact on housing affordability, which is an issue being addressed by almost every municipality in the country, including here in the Piedmont Triad:

“The current regulatory framework has limited the amount of housing that can be built and increased the cost of what is produced,” said NMHC president Doug Bibby in a statement. “At a time when states and localities are struggling to address housing affordability challenges, public and private stakeholders should work together to streamline regulations and take the steps necessary to expand housing in communities across the country.”

Here’s a link to a more detailed summary of the research on NAHB’s website:

More Good News for Multifamily: Spring Home Sales are Slow

Here at PTAA, we’re often asked why the apartment industry has continued to thrive despite historically low (now rising) interest rates, a strong economy and rising rents, and our answer is, “Well, there are a lot of reasons.” Many of those reasons are highlighted in this article about a lethargic spring home sales season in the US:

Instead, home sales are lackluster. That is locking many young home buyers out of the market when a good job market should give them the opportunity to purchase a first home. First-time buyers made up 31% of sales in May, down from 33% both the prior month and a year earlier, according to the National Association of Realtors. Mr. Khater said that is a missed opportunity for many millennials, who might find it hard to catch up, as prices are growing faster than incomes.

Supply is tight in part because of a lack of new-home construction caused by regulatory barriers, lack of available land, and labor and material shortages. Existing homeowners also have been reluctant to put homes on the market…

The situation could grow more challenging for buyers in the months ahead if mortgage rates continue rising. The average interest rate on a 30-year fixed-rate mortgage in May was 4.59%, up more than half a point from 4.03% in January, according to Freddie Mac.

At the same time, the median sale price for an existing home in May was $264,800, up 4.9% from a year earlier and a new all-time high, according to NAR. Prices have risen 71% from the low in January 2012…

Rising mortgage rates and home prices also help deter existing homeowners, many of whom enjoy historically low rates, from selling because the cost of purchasing a larger home is a significant jump from their current monthly payment.



Get Used to Those Boomers and Xers

Freddie Mac Multifamily has published research results showing that older adults are showing less interest in buying a home. From an article in NAA’s Units:

Specifically, the spring profile finds a total of 67 percent of renters view renting as more affordable than owning a home, including 73 percent of Baby Boomers (aged 53-71). Similarly, 67 percent of renters who will continue renting say they will do so for financial reasons—up from 59 percent just two years ago.

The survey finds half (50 percent) of Baby Boomers currently renting do not anticipate buying a home in the future, up eight points from the previous profile taken six months ago. Of that half, 35 percent have no interest in owning, and 15 percent say they will never be able to afford it.

Similarly, 31 percent of Gen Xers (aged 38-52) expressed that sentiment, up from 28 percent from the previous Profile. Of those respondents, 19 percent lack interest and 12 percent say they will never be able to afford it.

“Perceptions of affordability and cost continue to play an outsized role in the choices of America’s renters, as they overwhelmingly see renting as more affordable and the right choice for them – right now,” said David Brickman, Executive Vice President and Head of Freddie Mac Multifamily.

“Remarkably, half of Baby Boomers who rent do not anticipate owning a home in the future, with a growing number of Generation Xers following suit. Indeed, we are witnessing an historic shift in preference among older Americans, as they increasingly are choosing the size, convenience and affordability that renting offers over ownership.”

This trend could have an interesting effect on the amenities that apartment communities provide in the future…Crossfit might be replaced by pickleball!

Urban Housing Crisis and Politics

In a piece for New York Magazine’s Daily Intelligencer, Jonathan Chait looks at how the urban housing crisis is challenging progressive political stances. The whole article, which is relatively short, is a worthwhile read, but here are a couple of excerpts that hit at the heart of the matter:

Housing is too expensive in many cities because there isn’t enough of it. There isn’t enough of it because zoning and other regulations prevent the construction of high-density housing.


Opponents of allowing more dense housing construction associate the solution with gentrification, but this gets the question backwards. Gentrification is the result of artificially constricted housing supply, which pushes the demand for new housing into poorer neighborhoods, where new entrants outbid existing renters.

You really should read the whole article.

Fewer Apartment Renters Looking to Buy

A recent survey shows that the percentage of apartment renters who aren’t interested in buying a house has recently increased. From the Wall Street Journal:

In all, 20% of renters said they have no interest in owning a home, up from 17% in August and 13% in 2016, according to results of a semiannual survey of renters by mortgage company Freddie Mac in January.

Two-thirds of renters who plan to continue renting said they are doing so for financial reasons, up from 59% two years ago, according to the survey.

 “Housing is becoming less and less affordable. Renting is perceived to be the more affordable housing option,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division.
Here’s another interesting tidbit -Boomers have really lost interest in buying over the last two years:
The preference for renting is being driven in part by baby boomers, who are more likely to have experienced some of the pitfalls of homeownership. Some 35% of baby boomers said they have no interest in owning a home, up from 31% in August and 23% two years ago, according to the Freddie Mac survey.

Housing Affordability a Growing Issue in Charleston, SC

Our friends down in Charleston, SC are facing a real housing affordability challenge:

Renting isn’t any easier. The average rent in the Charleston metro area in September topped $1,600, higher than the national average and other major cities in South Carolina, Georgia and North Carolina, according to a Post and Courier analysis of rental listings data.

Prices are even higher closer to the region’s job centers. As a result, teachers, nurses, police officers and others workers often can’t afford to live in the communities they serve. Many are heading farther into the outskirts in search of cheap housing, and that means more commuters piling onto already congested roads…

Greenville and Columbia are beginning to feel the crunch, as well, but Charleston by far has the most advanced shortage of affordable housing in South Carolina.

Affordability is an issue throughout the country, including the Piedmont Triad, but the attention has mostly focused on major metros like San Francisco and New York. It’s now being noticed in smaller cities like Charleston and it will be incumbent upon the apartment industry to help municipal leaders understand how to address the issue effectively, and not adopt well-intended policies that actually make the problem worse, like rent control and inclusionary zoning.

Is Airbnb Causing a Spike in Rents?

A report commissioned by the Hotel Trades Council and several neighborhood organizations says that Airbnb is driving up home rental prices in New York City.  According to this article about the report, Airbnb listings have removed between 7,000 and 13,500 housing units from circulation in the past three years and have increased the city’s median rent by $380 a year.

The article also points out that it is against the law for landlords to rent out an entire apartment in a multi-unit building for less than 30 days. If landlords do, they face hefty fines meant to deter them from renting to tourists and taking business from hotels and to keep the apartments available for permanent housing.

Last year Airbnb, which disputes the studies results, released its own economic impact study that shows Airbnb rentals in New York last year served 2 million guests and generated $3.5 billion in economic activity.

While this research is focused on New York, it does bring up an interesting consideration for all municipalities. Housing affordability is an issue across the country, including here in the Triad, and while Airbnb is not likely having the same level of impact in our local cities, it is likely to be a cause for concern among local governments, who are already grappling with housing affordability, if they perceive any units being removed from the housing stock to be used as “vacation rentals.” They will be very interested in trying to keep as many units as possible available for permanent housing.

For its part, Airbnb says it supports new state (NY) legislation that would prevent hosts from listing more than one property on Airbnb’s site.

Rent Controls Gaining Support in Cities Throughout the U.S.

The Wall Street Journal has an article about the rising popularity of rent controls as a tactic to address affordable housing issues in cities across the country. Of course, this is not popular with landlords, but it’s also important to note that it is a tactic that has been shown to be ineffective:

Economists generally have a dim view of rent control, which they say restricts supply and drives up rents for tenants who don’t live in regulated buildings.

A working paper released in January by Stanford University economists found that from 1995 to 2012 rent control in San Francisco helped residents in rent-controlled apartments, increasing the likelihood that they would stay at their address by nearly 20%.

But the study also found that rent control hurt the city overall by making landlords more likely to convert their apartments to other uses and deplete the housing stock, leading to a permanent citywide rent increase of 5%.

“Tenants benefited dramatically when they were covered by rent control,” said Rebecca Diamond, an assistant professor of economics at Stanford and one of the authors of the paper. “We don’t really share it as a society.”

In other words, rent control only helps those who live in rent-controlled buildings. For everyone else, it actually drives up the cost of housing, so in the end, it results in less affordable housing, not more.

Charlotte Looking at New Approach for Addressing Housing Affordability

Charlotte is considering a new approach to addressing housing affordability issues in the city, and it involves old(er) apartments. From The Charlotte Observer:

The city of Charlotte has a new strategy for low-income housing: Rather than focusing on building new apartment complexes, city officials want to invest in apartment complexes from the 1960s and ’70s and use deed restrictions to keep rents affordable…

The city’s Housing Trust Fund is usually replenished with $15 million every two years. Last year, City Manager Marcus Jones added $6 million to that fund over five years.

That money usually goes to nonprofit developers like the Housing Partnership, which also seek state tax credits to make their projects financially viable. Trust fund dollars have normally funded new housing units.

But the city has found it’s extremely difficult to bring affordable housing to prosperous parts of the city, where residents could have access to high-performing schools. One problem is the high cost of land. Another is opposition from neighbors, which has derailed some proposals in the past.

When the city subsidizes new construction, it often spends $25,000 per unit. An older complex could be renovated for about $8,000 per unit in city assistance. In exchange for the subsidy, the city could use a deed restriction to keep rents affordable for 30 years.

It’s an interesting approach, one that could also work in other cities that have a stock of older, more affordable units to preserve while Class-A properties continue to sprout up elsewhere.

Surveys Say….People See Renting as Cheaper Than Buying

Recent surveys from Freddie Mac and NMHC had a few interesting findings. Probably of most import, Freddie Mac’s survey showed that an increasing percentage of renters perceive renting as less expensive than buying. From a Wall Street Journal article about the surveys:

A boom in apartment construction in the past few years has caused rent increases to begin to level off in many U.S. cities, while home price gains have accelerated over the past year. As a result, roughly 76% of renters in August said they believe renting is more affordable than owning, up from 65% in September 2016, according to survey results from Freddie Mac expected to be released Wednesday.

“We talk virtually every day about how renting is becoming less and less affordable. I think the answer is just that housing is becoming less and less affordable and renting is the more affordable of the two,” said David Brickman, executive vice president and head of Freddie Mac Multifamily.



Source: Wall Street Journal

One interesting insight from the NMHC survey is that more baby boomers than millennials cite costs of homeownership as a reason to rent:

The National Multifamily Housing Council survey found that baby boomers might be more likely than millennials to rent to avoid the costs of homeownership, perhaps because they have spent decades repairing broken dishwashers and replacing leaking roofs…

The survey found that just 7% of all renters 25 to 34 years old said they choose not to own a home because of the maintenance costs, while 28% of those over 65 years old cited that as the reason.

And this nugget of info might best explain why renting is preferred by an increasing number of folks:

The top reason renters across all age groups said they prefer to rent was convenience and flexibility, with 23% of respondents citing that as the reason…

18% cited lack of money saved for a downpayment as their reason for renting.

It’s definitely worth your time reading the full article; lots of insights into the factors underlying the continued strong rental housing market.