The Looming Rental Boom, Cont’d.

Time to check in on the hypothesis that the fundamentals point to a rental/condo boom in urban housing.

Here’s rental vacancy rates:

Bill McBride comments:

A record low number of multi-family units will be completed this year (2011). Only 8,700 apartments came on the market in Q1 (in the Reis survey area). This is the second lowest quarter since Reis has been tracking completions – the lowest was 6,000 last quarter…

Multi-family starts are increasing, and that will help both GDP and employment growth this year. These new starts will not be completed until 2012 or 2013, so vacancy rates will probably decline all year.

Here’s multi-family starts and completions:

We would expect declining vacancies to continue putting upward pressure on rents, creating demand for new multi-family construction and downtown office capacity. And we are already starting to see this happen in some metros. The LV cities can preempt the squeeze on renters by zoning for greater density in and around their central business districts.

Bethlehem in particular is guilty of maintaining current density in its new zoning ordinance proposal, when increasing net density would make housing more affordable and increase the number of property owners and jobs (aka taxpayers).

Obviously a few loud people are going to have crazy things to say when you approve density-increasing development near where they live, but planners and zoners need to ignore these people and focus on getting the macro-level housing policy right.

Hotels and Residential Density

Daryl Nerl has a good piece on what boosters are saying about the Sands hotel:

Visitors who stay overnight, on average, spend three times as much during their visit as those who make day trips, Stershic said. In 2009, the Lehigh Valley had 3.9 million visitors who came to Pennsylvania as part of an overnight or multiple-day trip and 10 million day-trippers, Stershic said.

“One of the things we really want to do is convert more of those day trips into overnight stays because that’s where the real money is and that’s where we can really make a huge impact on employment and on tax base,” Stershic said.

With the opening of the hotel, the Sands now has about 1,800 full-time employees, said Mayor John Callahan. The city is conservatively estimating that there will be an additional $6.7 million spent by visitors as a result of the new hotel opening, he said.

I don’t know enough about the hotel market to comment on the numbers, but it’s worth emphasizing that the theory of change here tracks what I’ve been saying about the benefits of greater density in the core cities.

Overnight trips boost spending because overnight guests are more likely than daytrippers to go out for dinner, get some drinks at a nearby bar, and patronize other local businesses during their downtime. But the main mechanism at work here is that you’re putting 2-300 more people on Southside Bethlehem. It doesn’t especially matter whether they’re guests or permanent residents. The more people you can fit on Southside, the bigger the market for service sector business opportunities.

The Future is Job Density

Christopher Leinberger says firms are moving out of suburban office parks back into walkable urban cores to attract Millenials:

In spite of the U.S. Census data for the past decade showing continued job de-centralization, there is now much anecdotal evidence for the just the opposite…

The reason in nearly every case? The millennial generation is demanding it. Highly-educated young workers, the life’s blood of many industries, have been flocking to center cities in recent years. Trying to recruit this talent to Stamford, Conn., or Hoffman Estates, Ill. is exceedingly difficult. They are voting with their feet for a hip, high-density walkable lifestyle and a reverse commute to the ‘burbs is not in the cards for most of them.

The companies moved out to the suburbs to attract their baby boomer parents, raising their kids in suburban isolation. The millenials are doing what many generations have done in the past; they have rejected how they were raised. This once again shows that building a high quality residential base will lead to the attraction of jobs…only this time it is back to the future.

I think this needs to be read in the context of mounting evidence that rents will continue rising, increasing demand for multifamily housing construction in the second half of the year. The correct policy response from the core cities is to get ahead of these trends by relaxing anti-density zoning regulations in the core business districts.

Our Urban Future, Cont’d

Spencer Soper:

Another factor that is increasingly influencing the housing market is the high cost of gasoline, according to a recent national survey conducted by Coldwell Banker.

Of nearly 1,200 real estate agents surveyed nationally, 75 percent said the recent spike in gasoline prices has influenced where their clients chose to live.

Additionally, 93 percent said if gas prices keep going up, more homebuyers will look for houses close to their jobs. Of those surveyed, 45 percent said buyers want homes closer to shops and services, which could be a boost to urban living.

The survey also indicated homebuyers are increasingly interested in homes with offices so they can skip the commute entirely.

“Today, rising fuel costs and a person’s decision to commute or perhaps work remotely are additional factors of the decision home buyers must consider,” Jim Gillespie, CEO of Coldwell Banker Real Estate, said in a news release about the survey.

Building new low-density suburban developments and remote office parks continues to look like an increasingly stupid idea.

81% of LV Residents Concerned About Loss of Open Space

I made a few Excel charts from the results of the Muhlenberg/Morning Call’s Annual Quality of Life survey that I’ll be posting over the next few days.

Here’s the open space question. A political gold mine awaits anyone who wants to run against sprawl in the municipal elections :

A combined 81% are either concerned (44%) or somewhat concerned (37%) with the loss of open space.

To fix the problem, voters need to be looking for two things: in the borough and township elections, the ideal candidate is someone who wants to vote against building anything in areas that aren’t already developed. This person wants everything that is now farmland or forest to stay that way.

In the cities, the ideal candidate is someone who wants to increase density in and around the central business district.

If you’re going to stop development of the “open space” areas, that amounts to a significant downzoning. That makes the already-developed land more expensive, so you have to balance the “zoning budget” by upzoning elsewhere – ideally in the core cities.

Surprise! Higher Gas Prices = Less Driving

Reuters:

U.S. highway travel declined 1.4 percent in March from a year ago as gasoline prices rose, marking the first year-on-year decline in the number of miles driven in 13 months, the U.S. Transportation Department said on Friday.

The report provided some of the first government evidence that soaring prices at the pump have discouraged driving. The national gasoline price rose 21 cents a gallon during March and climbed until it reached nearly $4 this month.

This is such a banal point, and yet somehow it’s being completely missed by the people who think we should just keep building new sprawling low-density development forever as if gas prices are going to be cheap forever. They’re not, so things are going to have to get denser.

Quibbling With Alan Jennings on Affordable Housing

A few comments on this Spencer Soper interview with Alan Jennings. First, here’s Alan:

Q: How has the Great Recession changed demand for affordable housing?

A: Families still need housing. However, those who have lost their homes to foreclosure have not only depressed home sales and, therefore, prices; they will also drive up rents by being added to the rental market. In a “normal” recession, pressure on rentals subsides at least a little. Not this one.

And:

Q: What can be done to address the supply/demand imbalance for affordable housing? Do any of those options have any traction given the efforts to curb government spending?

A: The mortgage interest deduction can be a good stimulant but it goes too far: Houses are too big, big lawns cause sprawl, super-rich people are getting subsidies they don’t need and we even subsidize their vacation homes. The only housing subsidy that is an entitlement is this deduction. Poor people, on the other hand, wait in line for years, entitled to nothing. I’m not optimistic that this Congress is going to fix this.

On the first topic, I’ll note that Alan is endorsing the point I’ve been making that the fundamentals are putting upward pressure on rents.

On the second point, Spencer is asking the right question, but I don’t think Alan is giving the best answer (even though he’s 100% correct on the mortgage interest deduction).

Spencer’s assumption is correct that relative affordability depends on supply and demand. Cities only have a few effective options for making housing affordable:

1) Make the city a terrible place to live so that residents leave
2) Build more housing
3) Give people cash money to bridge the difference between market prices and what they can afford to pay

I don’t think any city officials are going to be game for the first option, so we’re left with the second two.

Alan suggests a demand side fix, changing how the subsidies are distributed, but I think it’s more important, especially over the long term, to attack the problem from the supply side. If rents start increasing in the city cores, you can push them down by building more housing. If you uncap building height and let developers build taller residential buildings, you increase the supply of rentals and the price drops. What matters most is the constraints on building more housing, which are coming from local government.

By all means, convert the mortgage interest deduction to a progressive cash transfer, but you can make a lot more progress on affordable housing and jobs for low-skill, low-income individuals if you can roll back local restrictions on density. No need to get progressive transfers through a Republican House – just logroll the city zoning boards.