Allentown’s Apartment Shortage

Randy Kraft at WFMZ had a useful piece over the weekend on the increased demand for apartments in the three Lehigh Valley cities. There’s still no data on what the actual rental vacancy rates are, but the article is basically describing a housing shortage. One interesting finding was that the number of rental units has increased in Allentown, even though very few new apartment buildings have been constructed.

This is exactly what you’d expect to see under housing shortage conditions: people seeking out squalid illegal living arrangements in basements and bathrooms by the hundreds, and developers converting single family homes into rentals:

The city has more than 25,000 known rental units, according to David Paulus, director of building standards and safety in Allentown [...]

Paulus recently reported to City Council that the number of rental units increased by nearly 1,000 in the last year. That is a higher-than-average annual increase, said Moore [...]

And:

On Dec. 4, Paulus told City Council: “We have been very successful at finding illegal units. We found over 300 illegal units this year.”

Paulus said more than 400 illegal apartment units were found in 2011. He hopes that number is going down because landlords are getting the word that they can’t put people in basements, attics, garages and other unsafe places.

Basements, attics and garages were not constructed for human habitation, explained Moore.

Now we’ve known for a while that Allentown, and the Lehigh Valley more generally, have a shortage of rental housing because the Philly Fed reported on this last year. Nationally, rents have been rising faster than incomes, and it would be surprising if we didn’t see this trend also playing out in the Lehigh Valley.

The demand for rental housing has been increasing but few new apartment buildings have been constructed, so folks on the low end of the income spectrum are opting to live illegally in bathrooms instead of renting studio and 1 bedroom apartments. Owners of single family homes are seeing a profit opportunity to rent them out, since there is more demand for apartments than single family.

The solution is clear: it’s time to build more apartments in the LV cities.

Increasing the supply of market-rate apartment units will push down the median rent for a 1 bedroom apartment, and allow more people to afford a legal apartment instead of an illegal conversion. Building more apartments will also reduce some of the market pressure to convert single-family homes into rentals, leaving some lower-priced options for people who actually want single-family.

And as more market-rate apartments get built, some higher income renters will trade up for better apartments, and this will free up their old apartments for lower income renters. Over the years, as better apartments get built and this filtering process continues, the average quality of the apartments low-income people can afford will improve.

LVCI thinks that this trend is a problem, but I disagree. Many cities manage to have dynamic, successful economies with a high proportion of renters. In fact, there’s every reason to believe that Allentown’s economy would be stronger with lower rents. Across the country, housing and transportation costs are eating up a larger and larger share of people’s income, and not just poor people, but also moderate-income people.

People who are interested in reducing inequality and raising living standards need to think harder about ways to reduce the prices of people’s big expenses, not just ways to boost paychecks.

I read lots of people who say they’re concerned about whether the service sector jobs created as a result of the NIZ tax district will be good-paying jobs, but that’s only half the issue. The other half is whether the development will increase the cost of living and getting around in Allentown through higher land prices (rents), traffic congestion, etc.

If people get $8-10 an hour working in restaurants, but their housing and transportation costs eat up 60% of their pay, that’s a “bad job”. But if Allentown can bring rents in line with construction costs through policies that promote rental housing construction, and lower transportation costs (how about a free trolley bus loop paid out of a half-mill land tax increase on downtown land?), then maybe combined housing and transportation costs can be held down around 40% of income, freeing up more disposable income for low- and moderate-income residents to spend in the local economy.

Comments

  1. LVCI says:

    Homeownership in Allentown has gone steadily down since the 50′s. Allentown’s economy right along with it. Then there’s this…
    The homeownership rate from 2007 to 2011 in Allentown is 48.2%. While in the rest of Pennsylvania’s is 70.6%. Therefore it stands to reason if having twice as many rentals as the rest of the state, we should be sitting at top of the heap. That simply is not the case.

    Allentown’s problem is not with having enough rentals, but rather too many. Having 2 or 3 families in the same building can in no way be interpreted as a financial advantage to the city or the school district as having just one in each of 2 or 3 separate homes. While it can be said this will result in greater density… density will not result in tax revenue increases nor decrease crime under this scenario.

    Your speaking of what might possibly benefit and encourage further low income families to move into Allentown. But will do little (if nothing) to benefit the school district or the city of Allentown itself. Pride of ownership is the key to increasing the quality of life and home values. Density itself is not a solution. It’s a matter of quality over quantity. So yes I do indeed think “that this trend is a problem.”

    • Jon Geeting says:

      Why would it stand to reason that having a lot of rentals would make Allentown prosperous? Simply pointing out that there are a lot of rentals doesn’t tell us anything, because it’s the relative number that matters. How many apartments does Allentown have versus the number that people want?

      As for tax revenue, you are always complaining that property taxes are too high. Adding more multifamily buildings is a good way to reduce property taxes per household, by spreading the bill across more people. Instead of one family having to pay the property tax bills for that lot, the property tax bill is bundled into monthly rents for a bunch of people. Building more expensive multifamily buildings would increase property tax collections, but the bills would be divided among more people.

      Density’s only part of the solution, yes, but it is an important part of bringing down housing costs and improving the service economy downtown.

  2. GDub says:

    Jon,

    Too much correlation, not enough causation. Your comparison would be more illuminating if it contended with how Allentown differs with other cities with high renter populations, rather than just trying to draw a conclusion based on one data point.

    I agree that homeownership is a poor single source of determining how healthy a community is. High rates of ownership can also indicate a community with relatively few young people or with poor prospects of selling a home.

    Allentown’s problem is that it lost the core of its high-paying jobs over the past 50 years, not that it lacks transportation or rental units. Cities like NY or Washington have high rental percentages–but at the same time younger workers are willing to exchange floor space and ownership for a high-earning job in a hotter sector (government, law, finance, etc.)–but the key is those cities is that the jobs are there, not just the rental units or the metro.

    Encouraging nicer apartments or having a trolley might be a good thing to do, but Allentown isn’t going to grow out of its current predicament by lowering living costs for people making $10 an hour.

    • Jon Geeting says:

      What do you think is a plausible alternative explanation for people illegally renting bathrooms as apartments. Why would they do that if they could afford a studio apartment?

  3. GDub says:

    By the way, what is up with data collection in Lehigh Valley cities? Allentown can’t figure out a figure on its rental occupancy, Bethlehem can’t figure out how much people pay for trash pickup, but a poor city like Allentown has $500k as (apparently) “seed money” for a highly speculative trash venture? And people talk about this mayor being a governor?

  4. John says:

    The only person who talks about this Mayor being Governor is this Mayor. He has no chance, won’t even make it to the Democratic primary let alone through it.

    • Jon Geeting says:

      He’s probably going to run to increase his name recognition statewide for 2018. There’s nothing to run on this time, just a lot of buildings that aren’t built yet. Bad idea

  5. GDub says:

    I wouldn’t ask for precise, up-to-the-minute data, but I would think a solid, credible estimate would give city policymakers a sense of where the city is. How do you conceptualize problems without an idea of what the problem might be? This seems to be a trend.

    The squatting/rental problems are more reflective of the poverty of the city’s residence and the lack of better-paying jobs to fund better city services. In a city where 24% of the population is at or below the poverty line, it is unlikely that the amount of construction required to lower rents significantly will occur. Labor costs remain high, so it is difficult to make your investment back unless buildings are enormous (unlikely) or if rents increase. Its hard to point to building restriction or tax rates as the primary challenge.

    The problem with this set of city leaders is that they are clearly looking to take a bunch of bold, but entirely short-term, measures to appear to “solve” difficult, long term problems–and then jump ship before the challenges of execution appear. The legislative crew has done this (moving into “consulting”), members of city council are doing this, and it is likely the Mayor will do this.

    In fact, the water/pension gamble (like the trash plant) is beginning to appear as this kind of move, where the Mayor would have a “signature” move and “credibility” to solve a challenging problem at the state level. The fact that no one really knows what this “cash infusion” would look like or how exactly it would solve anything is, unfortunately, secondary.

    • Jon Geeting says:

      Yes lots of people are poor, but the cost of the materials to make an apartment is not that high. The cost of the labor is not that high. If we’re just talking about the cost of the inputs, there’s no reason somebody couldn’t make a profit building apartments and renting them out for $500-700/month. There’s got to be some other reason high rents and high demand for rental housing aren’t translating into more housing construction. Maybe it’s the financing issues like John keeps pointing out. Maybe it’s the fact that you can’t build taller than 35 feet in a “high density residential” zone. Maybe it’s high tax rates on property improvements and minimum parking requirements. We are seeing some developers interested in rehabbing apartments or doing loft conversions, so clearly there’s some money to be made there. But it’s not happening at the pace needed to bring rents down.

      As usual my favorite idea is for the Allentown School District to drop the millage rate on property improvements down to zero, and raise all their revenue from the land value tax. Or maybe over 5 years it could go from zero up to the city’s millage rate on improvements, to try to pull some construction projects from the future into the present.

      • John says:

        Industry standards are that it costs $65 – $80k/unit for apartment construction, plus land and off-site improvements.

        Just for giggles, let’s assume $100k/unit all in cost. A 20 unit apartment building will cost $2,000,000 (this is low, but it makes the point).

        Assuming a 10% cap rate, the investor would need $200k/year in cash flow out of the building. That means, even assuming a 0% vacancy factor, rents of $850/month/unit would have to be charged.

        $500-$700 rents just don’t work in new construction unless they are heavily subsidized.

        • Jon Geeting says:

          Thanks for the correction John. I guess I’d go back to the “filtering” point. Building more market rate apartments in the $850-1000 range is still going to bring average rents down, as some of the people who can afford higher rents opt for newer better apartments, and leave behind apartments with fewer amenities for lower-income people.

          • Joe Public says:

            “some of the people who can afford higher rents opt for newer better apartments, and leave behind apartments with fewer amenities for lower-income people.”

            word switch…….
            “some of the people who can afford higher prices may opt for single family homes in the suburbs, and leave behind apartments in the Cities with fewer amenities for lower-income people.”

            Jon, do you still hold a favorable view if we use the suburb comparison?

          • Jon Geeting says:

            I wasn’t making a value judgment, but sure. Nothing wrong with buying suburban housing. I just don’t think governments should mandate suburban land use patterns or subsidize it through Ponzi scheme financing for greenfield infrastructure, mortgage interest deduction, mandatory free parking, etc.

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