This is not a new problem, the Federal government has had programs subsidizing the construction of rental housing via HUD financing and block grants of Low Income Housing Tax Credits to the states for more than 20 years.
The current scarcity of affordable rental housing -- and when we talk about a shortage of any kind of real-estate, we're always qualified by 'affordable' -- is greater because of two trends.
The first was Hope 6 from the 1990's in which large public housing projects were torn down and replaced with much smaller and prettier public housing projects and by which the stock of public housing in the US was greatly reduced. Displaced tenants were expected to find housing in the private market using various vouchers, such as Section 8. This increased demand raised rents and removed surplus from the affordable housing market.
The second trend however, effected the rental housing market more broadly. In the housing boom of the early 2000's, a large percentage of the existing rental housing units in the US were converted to condominium ownership and the units were taken out of the primary rental market. Because of the way condominium insurance is written, many condominium deeds restrict rentals of units in order effort to limit association fees. This makes it less likely for former rental units to return to secondary rental markets after a property has gone condominium.
The issue is quite simply that rents don't cover development costs in much of the US for large demographic segments of the population. In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
One last piece of rental housing development is also worth bearing in mind, the upfront costs tend to be higher and the payback longer than with owner occupied housing development. There's no deposits or presales to fund partial development or create an initial income stream. There's no revenue until the rent checks arrive so projects get built in a single phase. That means a bigger loan and an emphasis on faster construction times versus a slower more variable pace tailored to sales velocity.
Addendum: Another factor which may be coming into play is that rental housing has traditionally attracted institutional investors. To the degree that startups offer an attractive alternative the pool of potential investors for rental housing development might be reduced.
In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
Interesting comment overall, but this does not appear to be true: see The Rent is Too Damn High (http://www.amazon.com/dp/B0078XGJXO/) and The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health...) for more detail on how height limits and parking minimums in particular prevent the housing market from functioning, especially in desirable urban areas with many jobs.
All real estate is local, so there are places where rental housing availability is dominated by height restrictions. But most places. land costs and fire codes make building more than four stories economically infeasible, there are simply better returns to be had.
Parking drives projects upscale because it forms a lower bound and the costs are better amortized with higher priced units. Then again, we don't regulate automobile ownership in ways that prevent offloading private use onto public parking infrastructure. It's not as if people can be prohibited from owning cars based on where they live.
The dominance of parking is worse in the suburban environment where multiple spaces exists for every car.
> It's not as if people can be prohibited from owning cars based on where they live.
In Japan to buy and register a car, you have to submit proof that you have access to a parking space for it, some cities have rules such as the parking space needs to be within, say, 3 km of your home.
In the USA many people grumble if the city wants you to pay only a couple dollars a month in return for the privilege of being allowed to park along the side of the public streets, on top of a patch of asphalt that probably costs the city many times as much to maintain.
I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
> In the USA many people grumble if the city wants you to pay only a couple dollars a month in return for the privilege of being allowed to park along the side of the public streets, on top of a patch of asphalt that probably costs the city many times as much to maintain.
Most municipal parking permits I have seen are more on the order of a couple of dollars a day for weekdays. That provides far more revenue than the cost of maintaining just the parking spaces themselves. In fact, parking enforcement is often the greatest expense in maintaining paid municipal parking, and I know a few cities in South Florida that ditched paid street parking because they noticed that nearly all the revenue was effectively going towards collecting the revenue.
> I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
To me, paying for government services al la carte is a very libertarian arrangement. I don't know anyone who would call it "communism", but I have certainly encountered hypocrites who decry freebies for others while also decrying lack of freebies for themselves.
Where does the gasoline tax then go to? Are we just so numb to government pork that any new tax burden is immediately accepted as long as it 'sounds right'?
The gasoline tax goes to maintaining the roads that are owned by the entity that levies the gasoline tax. In many areas that's just the state and federal governments, and not one red cent of it will go to pay for the street you live on.
Municipalities frequently use property taxes to cover roads, but that's potentially a poor way to pay for the extra infrastructure costs associated with curbside parking. In major cities it would be downright regressive, since a lot of less-wealthy people don't own cars. It also fails to account for the fact that in denser areas there simply isn't room for everyone to own a car - and in such a situation it's not necessarily so great (and certainly more authoritarian) to expect everyone to pay for parking regardless of whether they'll be using it. And it fails to account for the fact that many people own cars, but acquire the location they use to store their car when they're not using it on the private market (perhaps by building a garage on their property, perhaps by renting a space in someone else's lot or garage).
It's unfortunate that Americans' way of thinking about taxes has become so distorted that they'll knee-jerk dismiss a tax they're not familiar with using weasel words like "pork", even when that tax is actually more equitable and economically efficient.
In the US, property taxes are probably more relevant, unless the road is a major one maintained by the state.
But the same principle applies, these street parking spaces are in front of residential property that's paying into the city's coffers, which the residents pay, directly if owners, through their rent if renters.
3 or 4 stories is fine. Lots of the old parts of towns here in Italy are that high, and it's a nice compromise, because you can pack more people in, but buildings like that don't jut out from their surroundings when they're all about that high.
I think this is a great point. In Oakland, places that could use six stories for a project to pencil out are hampered by 35-foot height restrictions. Reading zoning code is so depressing because it has not changed much (despite updates) in 100 years. It's amazing how fast web technology moves to accommodate the browser's API: our neighborhood API needs hacking.
There's no deposits or presales to fund partial development or create an initial income stream
I don't know how widespread the practice is, but in the mid 2000's I went to a seminar that was exactly this. Pre-sales of condominium units in rental seniors-only housing.
The premise was that you could purchase (at a substantial discount) the condos before they were built, knowing the expected minimum rental income based on the surrounding neighborhood. It was likely that the tenants would stay there for the rest of their lives.
I decided not to invest, but I talked to some people who had done it before and, well, it was a goldmine!
Some people made real money on the boom. But by the time your barber is talking about flipping, dead money is coming to the table. The bubble burst in October 2005, that's when sales in Florida started flagging. Easter Sunday of 2006, the front page of the Atlanta Journal Constitution had a story about problems with the condo market along the redneck riviera. That's more than a year before anyone had heard of sub-prime.
The people I know who made money on the rising tide of condo prices made it by building the things because they saw their pro forma get better and better during entitlement and construction. Then, for the most part, they lost every bit of it and more on the follow on projects they started in 2005 through 2007 because those came online during the down cycle but had costs and returns premised on the upcycle. They ran out of money and faced the same sort of dilution a startup would.
many condominium deeds restrict rentals of units in order effort to limit association fees
Many condominium bylaws restrict the number of units that can be rented (somewhere between 30% - 50% rentals) mostly due to conventional/FHA loan requirements. This is applicable when a unit owner decides to sell their unit and the purchaser cannot get a nice low-cost loan. The unit owner would have to reduce the list price in order to compensate, thereby reducing the market value of other units in the building.
Other than this market value issue, a higher percentage of rentals does not cost an association more.
>In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
This sounds like a distortion caused by extreme inequality and high levels of poverty, then.
It's caused by the high cost of construction. $30,000,000 gets you a few hundred mid-market three story walkup wood framed apartments with surface parking and some modest resident amenities.
From which, if all goes well, investors will see moderate rates of return after four or five years. On the positive side, it's all mailbox checks. On the downside, nobody will become a billionaire on the deal. So it's all risk minimization and most possible deals simply are not viable.
Tangential but important for long-term invesment: What do you (or some other experts) think the impact of self-driving car would be on different types of real estate markets in the next decade or so?
You seem to be an expert in real estate and I believe your opinions would be useful to many people deciding to make the largest investment of their life. (A snippet of your background is interesting too)
Never did I think I'd see an LIHTC discussion on HN (or anywhere technical I frequent), I've worked on and written some compliance software for them. I was surprised at the scale and implementation of them.
It's a pretty specialized business. I only know about it because I know a couple of developers who built a successful track record in the business. Right before I met them, they split the business, one staying mostly focused in LIHTC and the other branching off into more speculative work.
The one who kept at LIHTC did better when things fell off the cliff, in part because LIHTC funding was boosted to fund 'shovel ready projects'.
Out of curiosity, did you write software for a developer or for a funder like Enterprise?
The current scarcity of affordable rental housing -- and when we talk about a shortage of any kind of real-estate, we're always qualified by 'affordable' -- is greater because of two trends.
The first was Hope 6 from the 1990's in which large public housing projects were torn down and replaced with much smaller and prettier public housing projects and by which the stock of public housing in the US was greatly reduced. Displaced tenants were expected to find housing in the private market using various vouchers, such as Section 8. This increased demand raised rents and removed surplus from the affordable housing market.
The second trend however, effected the rental housing market more broadly. In the housing boom of the early 2000's, a large percentage of the existing rental housing units in the US were converted to condominium ownership and the units were taken out of the primary rental market. Because of the way condominium insurance is written, many condominium deeds restrict rentals of units in order effort to limit association fees. This makes it less likely for former rental units to return to secondary rental markets after a property has gone condominium.
The issue is quite simply that rents don't cover development costs in much of the US for large demographic segments of the population. In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
One last piece of rental housing development is also worth bearing in mind, the upfront costs tend to be higher and the payback longer than with owner occupied housing development. There's no deposits or presales to fund partial development or create an initial income stream. There's no revenue until the rent checks arrive so projects get built in a single phase. That means a bigger loan and an emphasis on faster construction times versus a slower more variable pace tailored to sales velocity.
Addendum: Another factor which may be coming into play is that rental housing has traditionally attracted institutional investors. To the degree that startups offer an attractive alternative the pool of potential investors for rental housing development might be reduced.