Austin Contrarian: Economics

March 27, 2017

Zoning capacity vs housing supply

The key number housing number being bandied about these days is 135,000: this is the ten-year housing unit target recommended by Austin's new strategic housing plan. It includes a mix of market-rate and subsidized housing. Both numbers are unrealistic in my opinion, but that's a topic for another day.

We will hear a lot about this housing target during CodeNEXT. There are already debates about whether that target can be met if 97% of the city remains the same under the new code, as the Mayor has promised.

Before we get too far into this debate, though, it is worth stressing the difference between housing supply and zoning capacity. The housing supply is just the number of housing units that actually will be built. Zoning capacity is just the upper bound on how many housing units can be built. CodeNEXT will (I hope) enlarge our zoning capacity. But expanding our zoning capacity by 135,000 units will not yield 135,000 new units of supply because housing becomes much more expensive to supply as one approaches the zoning capacity. One reason is that it takes ever higher property prices to entice holdout property owners to sell their property for redevelopment -- property owners don't automatically sell their land for redevelopment even when prices justify it. That is the reason there are thousands of single-family homes in central Austin that are not currently being razed for duplexes. A second reason is that the really choice lots tend to get redeveloped first; the more challenging lots go last. The latter are inevitably more expensive to develop.

CodeNEXT is fundamentally about enlarging the city's zoning capacity. Determining how much actual housing the new Code will supply is an intractable calculation because it requires considering all of the soft land use restrictions such as tree preservation and water quality regulations, the willingness of property owners to sell, future construction costs, and a host of other factors. We'll be deluding ourselves if we think we know the answer to that calculation. All we will ever know is the approximate zoning capacity. Whatever that capacity turns out to be, we'll get only a fraction of that --perhaps a small fraction of that -- in new housing on the ground, and the last few units delivered will be very, very expensive.

Los Angeles is a case in point.

Graduate school dissertations don't ordinarily get a lot of publicity. This one did. It is the 2013 Ph.D. dissertation of Greg Morrow, a former UCLA planning student (and current University of Calgary assistant professor.) The title -- "The Homeowner Revolution: Democracy, Land Use and the Los Angeles Slow-Growth Movement, 1965-1992" -- hints at the gist of his thesis.

Morrow's work might have languished in obscurity had USC economist Richard Green not linked to it one day. Since then, Morrow's dissertation got a lot of buzz. This graph, in particular:

Los Angeles has a very high median home price ($616,900 according to Zillow). At least one serious study has identified it as the most unaffordable rental market in the country. This graph suggests the reason: Los Angeles has steadily reduced its zoning capacity even as its population has surged. That's a bad combination.

The "population capacity" Morrow graphs is a "raw" capacity. That is, it is derived from the number of acres in various zoning districts multiplied by the number of allowed units per acre. Morrow did not attempt to adjust the population capacity for the many soft zoning restrictions that Los Angeles has accumulated over the years. That would have been an intractable task.

It is quite possible that L.A.'s current population exceeds its hard zoning capacity. One sign, of course, is the very high home prices and the very high rents. An even stronger sign is that more than 20% of households in LA are "severely overcrowded" under the Census definition(more than 1.5 person per room). In three planning areas, more than 30% of the households are severely overcrowded. I hear Brentwood is nice, though. Back when the City's zoning capacity was four times its population, Los Angeles was an affordable place, even with its nice weather, many manufacturing jobs, and movie stars.

It would be interesting to see a graph like this for Austin -- or for central Austin, since Austin's zoning capacity is constantly increasing through annexation. My guess (and it really is just a guess) is that central Austin's zoning capacity remained more or less level from the 1930s to the 1980s. In the mid-1980s, the city switched from cumulative zoning, which permits apartments on commercial tracts, to noncumulative zoning, which doesn't (except for tracts specifically designated as mixed use). When the city did away with cumulative zoning, it eliminated thousands of commercial tracts as potential multi-family sites. This was likely the largest single down-zoning in the city's history. (If someone knows of a comparable down-zoning, let me know.)

If CodeNEXT is to deliver a zoning capacity that allows the city to grow affordably, we need to focus on the right target, which assuredly is not 135,000 housing units. The correct target is a multiple of 135,000, and our discussions should focus on just how large that multiple ought to be.

Posted at 11:03 AM in Austin, CodeNext, Density, Economics, Zoning | Permalink | Comments (6)

March 21, 2014

The Director of Planning weighs in on "micro units"

Back in January, Council passed a resolution directing the Director of Planning to study the barriers to "micro-units" in Austin -- i.e., very small, efficiency apartments -- and to make recommendations for eliminating the barriers. My take was essentially that the City doesn't impose any meaningful size limit per se, but it does discourage small apartments through the Land Development Code's minimum site area requirements, which require a fixed amount of land per efficiency unit, no matter how small the unit.

Greg Guernsey, the Director of Planning, responded to the Council resolution this week. He noted that the zoning regulations do not set an explicit minimumsize. The building code does impose an effective minimum size (approximately 250 square feet), but that minimum is not a real obstacle to the development of micro-units in Austin:

Under the IBC [International Building Code], an efficiency must have 220 square feet of living area, with additional space required for a bathroom, making a feasible minimum space of approximately 250 square feet. For a one bedroom unit, the living area must be 120 square feet, with each additional habitable space at least 70 square feet, and additional space required for a bathroom. A one bedroom also requires approximately 250 square feet of space.

With most micro-units in the 300-350 square foot range, the IBC does not pose any real obstacle to the development of micro-units in Austin. Some municipalities, such as San Jose and Santa Barbara, have adopted local amendments to the IBC that allow the minimum size of an efficiency to be 150 square feet.

I haven't conducted a rigorous survey of recent infill development, but my impression, too, is that the IBC minimum doesn't really matter. If it were a binding constraint, we'd see units being built with around 250 square feet of floor space. But the smallest units I could find in the current wave of development are more than 100 square feet larger than that.

Guernsey instead identified two indirect barriers to micro-units: minimum site area requirements and parking.

Minimum site area requirements: Site area requirements specify the minimum amount of land required per dwelling unit. In Austin’s zoning code, these requirements differ depending on the zoning district. Site area requirements exist for most single-family and multifamily zoning districts, except for MF-6 zoning (highest density multifamily zoning district), DMU (Downtown Mixed Use) zoning, CBD (Central Business District) zoning, or through the utilization of the VMU (Vertical Mixed Use) combining district. Although there is no specified cap in density allowed in any zoning district, the minimum site area requirements effectively do as much. Under Austin’s current code, the smallest site area requirement is 800 square feet, for efficiency units located in MF-5 zoning.

Minimum site area requirements are an obvious culprit. They impose a high fixed cost per unit (the land cost) while simultaneously restricting the quantity of units. This incentivizes the construction of larger units. I pointed out that at least a couple of recent VMU projects on South Lamar (which are not subject to minimum site area requirements) have many more and likely smaller units than they'd have under the minimum site area requirement.

Guernsey also identified minimum parking requirements as a barrier:

Parking requirements: Minimum off-street parking requirements exist for all single-family and multifamily uses, depending on which zoning district they are located in. CBD and DMU districts do not have minimum parking requirements, and in Austin’s central core, the minimum parking requirements can be reduced by 20%, compared to land outside the core. In addition, the VMU combining district allows for a parking reduction compared to what would otherwise be required for that base zoning district to which VMU has been applied. Under today’s code, Austin’s multifamily use requires at least one space per dwelling, unless it meets one of the above conditions for reduced parking. That means that aside from CBD and DMU zoning districts, a multifamily development will have close to one parking spot per dwelling (at the 20% central core reduction) or more. This requirement for parking adds an additional cost per unit, and reduces density by requiring land for parking instead of additional dwelling units.

A parking space requires a minimum of 325 square feet or so (including space required for aisles and entrances), so it functions a lot like a minimum site area requirement. Plus, the fixed cost of building the parking space must be factored into the cost of the dwelling.

Guernsey identified the following ways to remove these constraints:

Minimum site area requirements: These requirements may be adjusted for urban core projects. In order to allow the kind of density typical of micro-unit developments, the site area requirements for multifamily zoning districts could be reduced or removed. As an alternative to adjusting the Code, micro-unit projects could request MF-6 zoning.

Parking requirements: Minimum parking requirements are appropriate for areas of Austin that are not well served by public transit or are lower density. Existing parking reductions and eliminations are a good way to allow the market to determine if parking is really necessary for a given development. To make the development of micro-units more feasible for property not zoned CBD or DMU (which is typically more expensive), parking minimums could be reduced or eliminated. A possible drawback to this, as has been experienced in Portland, is that tenants simply park their cars on adjacent neighborhood streets, much to the consternation of the people who live on those streets. One approach could be to couple any parking reduction with on-site car share (already incentivized in current code) or bike share facilities, or in conjunction with a residential permit parking program for adjacent neighborhoods.

Telling people to ask for MF-6 zoning doesn't seem to me to be a practical solution, if the goal is to encourage (or at least not discourage) micro-units. That ask requires a full-fledged zoning case, which is time-consuming, expensive and uncertain. That's a compelling strategy if you want to raise the average fixed cost of your units, not lower it. Developers, when they do ask for and receive MF-6 zoning, inevitably agree to all sorts of restrictions to limit the height and bulk of the development. That's fine, but it would make more sense to use the height and FAR limits already in place -- and there are different limits for each flavor of MF zoning -- rather than require a bunch of ad hoc negotiation.

Reducing parking could also help. As I've pointed out before, the existing parking minimums might not matter for the developers of the large VMU projects. (I must caveat this, again, by acknowledging that I haven't done a systematic survey.) But there are many smaller sites on our core transit corridors which might be developable only with reduced parking. I suspect we'll find out as developers work their way through the choicer sites.

Posted at 04:52 PM in Affordable housing, Austin, Austin development, Density, Economics, Zoning | Permalink | Comments (1) | TrackBack (0)

January 26, 2014

Austin's shadow tax on small apartments

Councilmember Spelman is trying to determine whether we can do something about affordability with micro units:

Thanks to Austin City Council Member Bill Spelman, who’s concerned about spiraling local housing costs, the city will look into a possible way to help more folks get a little place of their own.

The operative word here is little, and Spelman, who doesn’t shy from big ideas (he also thinks we might need a local subway system), is serious about this small idea. It’s called “micro-housing.”

“This is an affordable housing issue,” he told me. “What we’ve found in other urban markets is that, as construction prices get close to $300 per square foot, young folks are willing to consider living in much smaller than traditional apartments.” (See, it’s not just us less-young folks who daydream about downsizing.)

Affordable housing math is simple: Costs can be reduced by cutting per-square-foot prices or by buying or renting fewer square feet. Focused on the latter, Spelman won the council’s OK on Thursday to direct the city staff to research “recommendations for making micro-unit development legal and viable in Austin, including any necessary code amendments.”

Spelman is thinking pretty small, as in apartments of 300 to 500 square feet. The idea is one of several now pending at City Hall to deal with the problem, caused by our coolness, of high housing costs.

I am not aware of any explicit minimum size for apartments in the Land Development Code. The building code imposes some kind of de facto minimum size but, whatever it is, it is really small. It certainly allows units of 400 ft² or so. (Foundation Communities' downtown Capital Studios will consist of efficiencies averaging 415 ft². The MLK at Rio Grande Apartments will have a few 382 ft² efficiencies.)

But there are ways to discourage small apartments without an outright prohibition. One strategy is to impose high fixed costs on rental units. High fixed costs make very small units unbearably expensive on a per-square-foot basis, thereby encouraging larger units.

Requiring a minimum amount of land per dwelling unit does just that. Austin's multi-family regulations include a "minimum site area requirement" in all multi-family districts other than the nearly mythical MF-6 district. These regulations require a certain amount of site area for each dwelling unit: one amount for efficiency apartments, slightly more for one-bedroom apartments, and more for two-bedroom (and larger) apartments. The minimum site area requirement does not vary by unit size, however. This means that if you're building a one-bedroom apartment, you'll use up the same allotment of site area whether you make the one-bedroom large or small. Small apartments conseqently have a much higher per-square-foot land cost than large apartments.

An example: Austin's MF-3 zoning district purports to be our "medium density" district. It requires a minimum of 1,200 ft² of site area for each efficiency unit, 1,500 ft² for each one-bedroom, and 1,800 ft² for each two-bedroom.

Suppose the raw land cost in a particular MF-3 district is $40/ft²(e.g., $400,000 for a 10,000 ft²lot). Let's work out the impact of the minimum site area requirements on the cost per square foot.

A 400 ft² efficiency requires an allotment of 1,200 ft² of site area, which works out to $48,000 worth of land. That's $120 per square foot. Just in land cost. Foundation, floor, kitchen and roof are extra. A 1,000 ft² two-bedroom apartment requires 1,800 ft² of site area, or $72,000 worth of land. That's just $72 per square foot. Thanks to the minimum site area requirement -- which, again, applies per unit rather than per developed square foot -- the land cost for the moderately-sized two-bedroom apartment is 40% less per square foot than the land cost for the small efficiency.

And the math means that the land cost per square foot always goes down as the size of the apartment goes up. The land cost per square foot for a 1,200 ft²two-bedroom is $60/ft², compared to $72/ft²for a 1,000 ft² apartment. The LDC effectively imposes a $12/ft² shadow tax on going from 1,200 ft²to 1,000 ft²when raw land is worht $40/ft². That's a hefty penalty on going smaller. If you're going to pay $72,000 in land costs for that two bedroom apartment regardless of its actual size, you might as well make it bigger: the marginal building cost to make the rooms slightly bigger is not all that high.

While our Land Devel0pment Code imposes lots of unnecessary housing costs, the minimum site area requirement is particularly pernicious because it creates shortages in MF-zoned land. If the Code requires everyone to use a lot more framing lumber than they need, that runs up the cost of building apartments. But it does not run up the price of framing lumber because Austin's demand for framing lumber is too small to affect the national market for framing lumber. But when Austin requires apartments to use more land than necessary, that not only runs up the cost of those apartments, it runs up the cost of all apartments in town, because it reduces the effective supply of land that can be developed with apartments. Our shortage of a developable land for multi-family housing in this city is purely a consequence of regulation, not geography.

But do the minimum site area requirements really matter? Do they cause developers to build fewer (or larger units) than they otherwise would?

This is an empirical question. Theoretically, the minimum site area requirements might be set below the market demand for density, in which case they wouldn't matter. This may very well be the case in Austin's suburban markets. It's hard to tell.

But there is a quick and dirty test to check whether minimum site area requirements matter in the urban core. Some places in the urban core aren't subject to minimum site area requirements. Downtown, obviously, although downtown is perhaps a special case because of the atypically high construction costs. But minimum site area requirements don't apply in Vertical Mixed Use districts, either, as long as the developer restricts 10% of the units in the VMU building to affordable housing. The building must fit within the allowed setbacks and height limit (and provide the required amount of parking), but the developer can divide the building into as many units as it wants to.

A spot check of two of the large VMU projects on South Lamar currently under development shows that, yes, they have more units -- many more units -- than they could have in an MF-5 district (which is the "high density" multi-family district.)

The vertical mixed use development flanking the Broken Spoke has two residential phases. The smaller one, just north of the Broken Spoke, would require about 15% more site area for its 103 apartments if it were developed under MF-5 regulations. The larger one to the south of the Broken Spoke would require about 60% more land for its 275 apartments. (I'm having to make assumptions about which units would be classified as efficiencies and which one-bedrooms, but my assumptions are conservative.)

Likewise, the Hanover South Lamar, which has a mix of VMU and that very rare MF-6 zoning (MF-6, like VMU, does not have minimum site area requirements), is much denser than anything that could be built under MF-5. It will have 340 units on a 157,472 ft² site. Again, making reasonable assumptions about which units would be classified as efficiencies rather than one-bedrooms, Hanover would need a site roughly twice as large to hold the same mix of units in an MF-5 district.

Comparing VMU to multi-family is hardly apples to apples, of course. Vertical mixed use developments must allocate the first-floor space to non-residential uses. In other words, they have to sacrifice 20% or more of their buildable space to provide the commercial and retail space. This implies that VMU developers would provide even more residential units per acre if they could.

It is almost certainly the case that minimum site area requirements are binding in the high-cost urban core.

It's also notable that both developments will provide small units (although perhaps not as small as Spelman has in mind). A little less than 10% of Hanover's units will have 491 ft², while roughly 30% of the Broken Spoke units will have an average of 495 ft². If the developers had had to comply with minimum site area requirements, it's hard to believe that they would have provided so many small units. Indeed, the average size of all the units in these developments is almost certainly smaller due to the elimination of the shadow tax on going smaller.

Why not follow the VMU model for all multi-family housing? Get rid of minimum site area requirements. Specify a building envelope (which can of course vary by district), prescribe a few, reasonable design regulations, and let the developer decide how many units to fit within the envelope. We'll get more units, smaller units, and cheaper units. That's the goal, right?

And if you say that's the goal but can't help flinching at the prospect of all that density, don't worry -- there'll still be minimum parking requirements.

Posted at 10:15 PM in Affordable housing, Austin, Austin development, CodeNext, Density, Economics, Zoning | Permalink | Comments (7) | TrackBack (0)

December 17, 2013

Comparing rents

Like Brian Kelsey, I'm organizing my thoughts for tomorrow's Leadership Austin panel discussion. One of the things that needs to be emphasized in any discussion of affordability is that other large Texas cities have managed to keep themselves much more affordable than Austin despite rapid growth (if not rapid growth in the city proper, at least in the metropolitan area). In 2012, according to the 2008-2012 American Community Survey, the median rent for Austin (city only) was $950, compared to $822 for Dallas, $837 for Houston and $798 for San Antonio. The 2012 one-year estimates show an even bigger gap between Austin and the other three.

There are probably lots of ways to slice this issue, but one useful cut is to look at the age of the housing stock. I've gone on ad nauseum on this blog about units "filtering down" to cheaper markets as they age, and you really do see that in the data when you break out the median rents by age of the structure.

All cities (except, for some reason, the most recent construction in Houston) see rents steadily drop as units age, until 1950 or so. My guess is that the rise in rents in 1950 is in part due to survivor bias (the crappy stuff built in the 1950s was torn down, leaving higher quality units) and the fact that older stuff is located in central neighborhoods experiencing a surge in demand.

San Antonio median rents are far below Austin median rents for each period. But Austin rents for relatively recent construction -- stuff built in the 90s or 2000s -- aren't that much higher than Houston or Dallas rents. (The median rent for Houston's 90's-era construction is within $5 of Austin's median rent).

It's in the older complexes that a significant gap emerges. It's remarkable to me that the 1970's and 1980's apartments in Houston, Dallas and San Antonio all have approximately the same median rent. It's equally remarkable that the Austin median for these periods is so much higher. The gap in rents for 1940's-era construction is even larger, but it's a small share of the housing stock and probably not consequential. But there's lots of housing remaining from the 1970's and 1980's. The reason Austin is so much more expensive than Houston and Dallas is because our 1970's and 1980's housing is so much more expensive than theirs.

Posted at 05:02 PM in Affordable housing, Austin, Economics, Stats | Permalink | Comments (5) | TrackBack (0)

The Price You Pay: Austin's Affordability X-Factor

Leadership Austin has organized a breakfast panel discussion for tomorrow morning at the Long Center entitled, "The Price You Pay: Austin's Affordability X-Factor." Francie Ferguson, Brian Kelsey and I will be on the panel, moderated by KXAN's Robert Hadlock.

Brian (who has his own firm, Civic Analytics) has posted a blog entry organizing his thoughts for the panel tomorrow. It's chock full of interesting statistics. I don't want to steal his thunder, but I can't help passing this one along:

In 2000, 14% of households in Austin (city) had incomes of at least $100,000. In 2012, it was up to 24%. In 2000, households with incomes of less than $15,000 outnumbered households with incomes of $100,000 or more. In 2012, $100,000+ households outnumbered < $15,000 households by almost two to one. This is a remarkable shift in the city’s demographics in a very short amount of time and can go a long way toward explaining why housing is so expensive, especially in centrally located neighborhoods.

I don't think I'm mischaracterizing him when I say that Brian believes that affordability is mainly an economic development problem (with "economic development" meant in its broadest sense). Brian mainly advocates policies that increase human capital (let's give our young people better schools/education) and income (let's draw better paying jobs). Or put more simply (perhaps too simply), he thinks the affordability problem is mainly about making people wealthier. He's "skeptical that we can 'build our way' to greater affordability in Austin, especially without an equally ambitious strategy for human capital development–i.e. investing in people so they can afford to live and raise families here."

There's actually a bit of daylight between our views on this, of course. My own view is that unless you allow housing supply to respond elastically to demand, higher wages will be offset (more or less) by higher housing costs. Freezing the housing supply while raising wages will attract higher-skilled workers and push out lower-skilled workers, turning the city's real estate market into a giant sorting machine. See, e.g., San Jose. You'll get a housing market that is increasingly occupied by households making over $100,000 and devoid of households making less than $15,000.

Honestly, there's almost no limit to how expensive you can make a really nice city with really wealthy people if you put your mind to it. We complain about high housing costs, but they're nothing like San Jose's.

If you want rising wages to be broadly shared by the people who already live here, you need to make sure the gains aren't eaten up by rising housing prices. The only way to do that, for the vast majority of people who will never get a subsidized housing unit, is to allow housing supply to respond elastically to rising demand.

Posted at 03:36 PM in Austin, Blogs, Cities, Economics | Permalink | Comments (1) | TrackBack (0)

December 02, 2013

Filtering up in Zilker

Here is yet another example of an apartment building in Austin "filtering up." This one is a 12-plex on Garner Avenue in the Zilker neighborhood.

Before (courtesy Google maps):

And after:

The renovation is so well done that I actually (if just momentarily) thought this might be new construction. But it is not -- the building was built in 1959. The owner was there supervising the renovation when I went by a couple weeks ago. He was nice enough to show me around. As you might guess, each unit is now tricked out with hardwood floors, granite countertops, undermounted sinks, designer fixtures, and the other accoutrements expected by moderately affluent, single professionals over age 30. Here's the Craigslist ad; asking rent is $1,275 per month (all of the units are one-bedrooms).

These "before" and "after" shots vividly illustrate, I think, the difference between "filtering up" and a general rise in rents. As I've explained before:

People understand that a tight housing market leads landlords to raise rents. What they often don't seem to understand is that a tight housing market also causes some landlords to invest more money in their properties in order move them into a more expensive submarket. That's how a shortage of units in the $1,200/month submarket (for example) can hurt someone shopping in the $800/month submarket.

This is why it's a mistake to dismiss the beneficial effect of new, higher-end housing, as so many people in Austin tend to do. The people in the market for high-end housing are ultimately going to get it, one way or the other: if it's not provided through new construction, it will be provided by the owners of existing down-market units, who will upgrade their cheaper units with new floors and fixtures and mark up the rent.

As an aside, some might be tempted to call this "gentrification" but I'll stick with "filtering up." "Filtering up" (at least as I use it) has a very specific meaning: the process by which a particular building shifts to a more expensive housing submarket as a result of the owner's capital investment. "Gentrification," to the extent the word retains any usefulness at all, denotes a neighborhood's general shift from poorer to richer residents. (I know this because that acclaimed expert on the dynamics of urban housing markets -- the Centers for Disease Control and Prevention -- says so.) What's more, gentrification isn't necessarily triggered by new capital investment. Often, it's simply triggered by a shortage of housing somewhere else; the sudden inflow of new capital -- evidence of gentrification, perhaps -- comes later.

Posted at 02:42 PM in Austin, Austin development, Economics | Permalink | Comments (13) | TrackBack (0)

August 27, 2013

Context matters

The Daily Texan ran a piece a couple of weeks ago on the high cost of housing in West Campus which really illustrates the importance of putting neighborhood-level housing data in context of the larger metro market:

Characterized by its proximity to the UT campus and many conveniences, West Campus is one of the most popular — and expensive — living areas for UT students. According to Multiple Listing Service, a professional rent listing used by West Campus realtors, rent in the area has increased by about 15 percent since 2008.

At least three new apartment complexes will have their grand opening this year, including 2400 Nueces, Callaway House and 21 Pearl. West Campus has also caught the eye of some out-of-state and international investors, which increases the value of land.

The popularity of West Campus is driving up prices at older apartment complexes in the area, leading some UT students to share rooms or leave the neighborhood entirely. Apartments are also being leased quicker, forcing current and prospective students to make a housing decision or lose a space.

Rent for recently built apartments in West Campus averages $1,250 a month for one-bedroom apartments and $850 per bedroom a month for two bedroom apartments, according to the listing service.

Stories like this always generate a bunch of hand-wringing and some of it's justified -- West Campus, after all, is very expensive.

But though the rents in West Campus are high, the 15% increase in rent since 2008 is not. Or, rather, it's not when compared to the rest of the Austin metropolitan market. Rents throughout Austin have risen since 2008. A bunch. West Campus, being a part of Austin and therefore linked to housing market in other neighborhoods, is experiencing the same pressure from rising demand.

In fact, here's some evidence that West Campus has fared better than the city as a whole. Below is a chart prepared by Charles Heimsath's Capitol Market Research depicting average rents and occupancy rates in the Austin market since 2007. Between the second quarter of 2008 and the the second quarter of 2013, average rents per square foot rose from $0.96 to $1.17, an increase of nearly 22%.

Note that $0.96 (according to this chart) was the pre-recession peak; the increase over the trough was even higher.

When put in context of this larger market trend, a 15% increase in rents in West Campus is notable for being below average. It's all the more notable given that a large percentage of the housing in West Campus is new, and, as everyone knows, the new stuff is super-duper expensive. This means that any sort of average rent in West Campus that includes all the housing stock is skewed by the new stuff. By contrast, in the Austin metropolitan market as a whole, the expensive, new development makes up too small a percentage to have much effect on average rents.

I'll caveat this by noting that it's dangerous to compare averages that were calculated with different methodologies using (possibly) different data sets. Perhaps the West Campus average quoted in the story was based on median rents, or average rents per bed, or some other metric, and the per-square-foot average has seen an increase similar to that of the Austin market as a whole. Dunno.

The point, though, is that you can't meainingfully evaluate trends like "rents rose X% in this particular neighborhood over the last five years" without understanding what's happening in the larger market. That worrisome trend might turn out to be the wrong trend to worry about.

Posted at 01:09 PM in Austin, Austin development, Economics | Permalink | Comments (5) | TrackBack (0)

July 29, 2013

West Campus development can't be too bad for students if it attracts students

My latest writing about filtering was prompted by a piece last week by KXAN on the new, up-scale West Campus housing coming on line. Robert Maxwell briefly interviewed me. The gist of my remarks was, "Build moar housing!"

Every time I say something like this, particularly about West Campus, I draw objections that all the new housing in West Campus is actually making things worse for students. Or, if not worse for all students, then at least more expensive. Soon, I'm told, students won't even be able to afford to live over there.

I bet West Campus is substantially more affordable than it would have been without all the new, high-priced housing. Unfortunately, the only metric that's ever reported is average rent, which is an awful statistic for neighborhoods experiencing a large amount of new development. The average is skewed by the high-priced new stuff. What we really need is a metric showing us the average year-over-year change in the rents for the existing stock of housing, a Case-Shiller index for rental housing.

We don't have such a metric (that I know of), so we're forced to rely on other measures.

Perhaps the best is simply to look at where college students (or at least college-age students) choose to live. If new development is pricing students out, then the student population should be dropping. But it's not. Students have flooded into West Campus since UNO, as I discussed a couple of years ago:

The initial Census figures confirmed, not surprisingly, that the area added a lot of people and not just a lot of apartments. And although I've heard some complain that the new developments in West Campus are too expensive for students, the Census demographic data confirm that, indeed, these new apartments are being occupied by college kids, or at least college-age kids. Census tract 6.03 (West Campus between MLK and 24th Street) saw its population of 18-24 year olds rise from 4,367 in 2000 to 7,065 in 2010. Census tract 6.04 (West Campus north of 24th Street) saw its population of 18-24 year olds rise from 4,272 to 5,816. Combined, these two tracts housed more than 4,200 more 18-24 year olds in 2010 than 2000, an increase of around 50%.

Interestingly, both tracts actually added more 18-24 year olds than they added in total. As a result, this age group comprises an even larger share of the population today than in 2000: in 2010, 18-24 year olds made up 90.6% of the population of Tract 6.03, up from from 82.8% in 2000. The increase was almost identical for Tract 6.04, an increase from 82.1% to 89,5%. The most reasonable interpretation is that, given a free(r) hand, developers tore down older housing stock that appealed to non-students and replaced it with housing stock that appealed to students.

Where would these students have lived? I've long suspected that the new housing was drawing students who otherwise would have lived in the giant apartment complexes in the East Riverside-Montopolis area of 78741. I speculated that the surge of Hispanics and children into 78741 was mirrored by an exodus of students. The recently-released demographic data, again, confirm this. The Census tracts that roughly comprise the area bordered by Parker Lane, East Riverside, Oltorf and Montopolis (23.13, 23.14, 23.15 and 23.16) all saw a sharp drop in college-age residents.

That drop, by the way, can not be explained by the demolition of apartment complexes on the east side. Three of those four Census tracts saw a healthy increase in overall population. The college-age population declined both as a percentage of the total and in absolute terms.

The latest West Campus developments will surely continue this trend. 2400 Nueces was developed by a college-housing specialist, is marketed specifically to college students, and is, according to the developer, 99% leased. Callaway House, if anything, is even more narrowly focused on college students, because it even offers a choice of meal plans. Perhaps 21 Pearl is mainly drawing non-students, but it, too, markets itself as a student community.

If you want to claim that, despite this actual historical, factual record, the new development will eventually run college students out of West Campus, you need some sort of theory. You need a theory that can explain how the first 20 (or however many) new developments have drawn students in but it will be the 21st that starts pushing them out. I wait with bated breath.

None of this is to belittle claims that West Campus is extremely expensive or that the high cost of housing is a real hardship for UT students. It's true. I totally get that. But that's a problem with Austin's rental market overall. Everything within a few miles of UT is expensive. Austin sucks for all renters right now, not just UT students.

In fact, if you are a renter in Austin right now, you should be thankful for all that West Campus development even if you are not a student. Imagine what rents would be outside West Campus if there were an additional 4,000 students competing for the limited supply of apartments in the central core.

Posted at 11:47 AM in Austin, Austin development, Economics, Zoning | Permalink | Comments (7) | TrackBack (0)

July 25, 2013

Filtering is a real thing, part 29

From the same KUT report on Austin's record rents:

But developers are responding to higher rents in Central Texas. Davis says 17,000 new apartment units are under construction in the Austin-area, and another 10,500 are expected to be built. She says that could help slow the rise in rents.

"There's certainly a possibility of that as people start competing for market share," she said. But at the same time, lower-grade properties are racing for a piece of the higher-end market by installing faux wood floors, granite countertops.

"Those rents are increasing as well with these upgrades," she says.

From the standpoint of a renter in the market for a $750 per month apartment, two bad things can happen when the rental market is tight. One of those bad things -- the one everyone seems to get -- is that rents can rise across the board. "All the apartments I'm looking at rented for $750 last year but rent for $800 this year."

The other bad thing, though, is less well understood. When there is a shortage of housing at the higher end of the market, there is not only an incentive to build new, high-end units, but also to upgrade existing, lower-end units. Upgrading existing units can almost always be done more cheaply and more quickly than starting from scratch.

The newly upgraded units don't rent for a little more than they used to; they rent for a lot more. The renter, in fact, won't even complain about the rents at the upgraded apartments because she won't bother looking at them -- they've effectively been moved from one rental submarket to another. The renter then has a smaller pool of apartments to choose from, and naturally pays higher rents for what she can find in her price range.

So: (1) a shortage of units leads to higher rents across-the-board; and (2) a shortage of units causes landlords to upgrade low-end units to high-end units. "Filtering up" refers to (2) but not (1).

As the KUT report again illustrates, filtering is a real thing.

What we'd prefer to see is housign filter down. Almost all decently priced, unsubsidized rental housing is old or aging housing. New apartments naturally deteriorate with age. It becomes increasingly expensive to keep them in tip-top shape. Rents naturally decline with the condition, and as the affluent chase the latest new thing.

"Naturally" is the key word here. When there is a shortage of pricey apartments, landlords have an incentive to make the extra investment to keep their aging units in shape to fetch the highest rents. Units that should have filtered down don't. Or, worse, units actually filter up.

This is why allowing the construction of a lot of expensive rental housing is a sound strategy for preserving moderately-priced rental housing.

Posted at 01:25 PM in Austin, Austin development, Economics | Permalink | Comments (31) | TrackBack (0)

This is what rents in a static housing market look like

KUT's Nathan Bernier reports:

Apartment prices are at a record high in the Austin-area, averaging $1.15 per square foot, according to a report by Austin Investor Interests.

More people are moving to Austin and there hasn’t been a lot of new apartments constructed, although that is changing. But many of the new apartments being constructed are centrally located and aren't cheap.

There are construction cranes all over downtown, West Campus and South Lamar. But the new construction has lagged demand. The Great Recession wrecked the financial markets, and construction lending recovered after demand recovered. And there is always a natural lag for residential construction, particularaly for infill apartment construction, which takes a long time to complete. So while there is a lot of stuff in the pipeline, very little has been delivered recently.

That residential supply in the pipeline has zero impact on current rents. None. Zilch. No one will charge a tenant less rent today to compete with apartments that will not come on line for a year or more.

The point is this: today's rental market is indistinguishable from a market in which nothing is being built. If you want to know what a low-housing supply strategy looks like, you're looking at it. Record high rents. Constant complaints about the lack of affordable housing. Renters being pushed out to the suburbs or forced to double up.

This is ridiculously obvious (I think). But people still get confused. They see all the construction cranes, they see the high rents, and they infer causation. There is causation, but it's the rents causing the construction cranes, not vice versa. No one can propose a credible mechanism by which the mere act of commencing construction on an apartment building will raise rents in the area.

And this is worth bookmarking because people will really get confused once the new housing hits the market. The way the market dynamic works is, unless Austin's economy collapses, rents will continue to rise until enough new housing supply comes online to moderate them. This, in turn, means that the rent peak will coincide with a massive influx of shiny, new, expensive apartments. People who wouldn't blame today's high rents on the new supply (because there is very little) won't hestitate to blame the high rents on new supply then. They will have conveniently forgotten that rents were rising long before the new supply hit the market.

Posted at 12:46 PM in Austin, Austin development, Economics | Permalink | Comments (2) | TrackBack (0)

Austin Contrarian

Chris Bradford on Austin, economics and other stuff