Luxury Apartment Overbuilding May Help Tenants Save for Down Payment

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Blah-blah-bland architecture and luxe prices.

Reasonably-priced new construction is fast becoming one of those stories parents tell wide-eyed offspring about the good old days. We all know that new apartment construction within a reasonable commute to a job center has been almost all-luxury. In fact, since construction restarted post-Recession, RealPage estimates that 75 to 80 percent of all apartment construction has been luxury. Adding to the problem, existing apartment buildings have been snapped up, resuscitated, and flipped to higher-rent brackets.

It’s often simple to blame greedy developers because … well … duh … but that’s as simplistic as it is simple. What isn’t simplistic is the effect this lack of market-rate affordable housing has on home buying.

Harvard’s Joint Center for Housing Studies reported in late 2017 that 47 percent of all renter households (21 million) spend more than 30 percent of their income for housing.  And 52 percent, or 11 million of those households spend over half their income on housing.  Generally, 30 percent is considered a healthy ratio of income to housing costs.

Looked at another way, 47 percent of Americans work jobs that do not pay enough to afford an OK life.  And since the economy is largely viewed to be at or near full-employment, jobs are relatively easy to find. But jobs that pay enough are elusive to nearly half the households in the country.

When people exceed 30 percent in housing costs, slang calls that “house poor” and it means other expenditures, especially saving, suffers. “Savings” is a catch-all for retirement, rainy day funds, and yes, down payments. Being house poor, especially in an apartment, is a cycle that diminishes current and future options.

While the costs of my first dumpy home were crippling (Silicon Valley, renovation … ‘nuf said), I have never been apartment poor. If I had to be poor (e.g. Silicon Valley), I chose to be poor with equity.  I hated that house and location. I couldn’t wait to leave. But it taught me a lot about getting in over my head.

Renting cheap offers a better level of financial freedom. Those options are disappearing.  Don’t think for a moment that tiny houses, the gig economy, and increasing percentages of renters are cool trends.  They’re the outward symptoms of people whose jobs don’t pay enough. The trend of overextending on outward trappings is the result of social media’s two-sided coin of exhibitionism/voyeurism.

Rolled together, a healthy number of people pay too much for housing. But that ship is running out of steam.  Nationally, many believe we’re on the edge of a luxury apartment glut.  This is great news for renters who may soon be less house poor as building owners become more desperate for tenants.

In November, I wrote in D’s Frontburner about how tony Uptown apartments were coughing up big discounts – anywhere from one to three months representing 8 to 25 percent in free rent – just to get butts in beds.

As more and more buildings come online and seek to dredge the same pool of renters, rents are going to take a hit.  This will mostly take the form of free months as landlords are loath to decrease rents for fear or starting precedent with tenants.  They also bank on tenants staying after the first lease is up and the discounts evaporate. But depending on how far Dallas overbuilds in the luxury segment, discounts may lead to lower actual rents.

I know I’ve typed “luxury” a lot in the past few paragraphs, but if luxury declines, it will have a knock-on effect on the rest of the rental market.  Tenants on the cusp of a better apartment will move up, freeing more affordable units for others. Win-win for tenants.

Mansion or hovel, a 2×4 costs the same

Sunk Costs Drive Price

So why aren’t builders building more reasonably-priced apartments?  The quick answer, they say, is that the costs to construct a new apartment are so high, rents have to be equally high to pay for it. But there are multiple components that comprise “costs.”

Construction material costs are the same whether the end product is a dive or a palace. Wood is wood and drywall is drywall. This administration’s tut-tutting with Canada over lumber hasn’t helped.  But concrete and steel have also increased in price as a global building boom has taken shape post-Recession.  Not much can be done here.

The Zoning Lottery

Land costs are another piece of the puzzle.  White return-flight back to cities has led to finite land costing more.  Land costs are driven by three things; zoning, demand and lot size. Essentially what can be built and who would want it. A 10-by-10-foot parcel, in the hottest area in town that’s zoned for a high-rise isn’t going to be worth much.

What also drives a level of unaffordability via cost is when the city tinkers with zoning.  In Uptown, Oak Lawn, and Knox, the battle between MF-2 (36 feet tall) and MF-3 (unlimited height) rages with MF-2 owners wanting to cash in on MF-3 prices. When the city converts one parcel, it drives up the land value of neighboring parcels assuming the same deal.  The result being formerly stable neighborhoods convert to streets of high-density bedroom communities.

(Side note: I just returned from Chicago and the worst place to be walking is a street lined with imposing new apartment buildings with their block-after-block of privacy walls and fences. No one ventures out of these Bark Park outfitted fortresses.)

Source: Immigration and Customs Enforcement (ICE) website

ICE, ICE Baby

The more insidious problem is immigration or ICE.  For every Hawaiian coffee farmer or Kansas science teacher we read about, there are untold numbers of immigrants being quietly deported as they hop into their truck headed to a construction site. I’m not going to jump into the political fray on immigration (takes too long) except to say that the Workers Defense Project pegs Dallas’ immigrant construction workers at close to 63 percent.

In a booming construction cycle, skilled labor losses continue to have disastrous effects on end pricing. Couple the actual or threat of deportation with a big drop in younger construction workers, and you begin to get the gist.  How big of a drop? Harvard estimates that in recent years construction workers “under age 35 dropped by 34 percent and the number aged 35–44 shrank by 21 percent.” This is to say that construction labor is not refilling its ranks as Boomers retire.

We have a situation whereby those willing to do the work are being driven out or underground at the same time new entrants to the field are declining and older workers are retiring.  Calling this a perfect storm of construction labor dynamics is trite, but accurate.

House poor apartment tenants got that way, in part, because underlying costs have been driven up. Raw material costs, land scarcity (and greed) in hot locations, and the persecution of a large number of construction workers have all played a part.  Of course a need of many to lead a selfie life has voluntarily added to their house poverty.

Regardless of the reasons, when you pay more than 30 percent of your salary towards housing costs, you are limiting your future.  Seize the approaching opportunity to reduce your housing costs as the overbuilt luxury market softens.  In other words, stop making lemonade from lemons, save up for an orange instead.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement.  If you’re interested in hosting a Candysdirt.com Staff Meeting event, I’m your guy. In 2016 and 2017, the National Association of Real Estate Editors has recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email [email protected].

Jon Anderson is CandysDirt.com's condo/HOA and developer columnist, but also covers second home trends on SecondShelters.com. An award-winning columnist, Jon has earned silver and bronze awards for his columns from the National Association of Real Estate Editors in both 2016, 2017 and 2018. When he isn't in Hawaii, Jon enjoys life in the sky in Dallas.

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