Introduction
The Rental Crisis in the U.S. is a pressing issue, with high luxury rents and policy challenges hindering affordable housing solutions.
The U.S. is in a rental housing crisis. So we pay $3,060 per month. If I’m really honest, I don’t think it’s a very good value for money. Homebuilders believe the sector is already in a recession, and experts are calling out laws that make building expensive. 40% of the cost of multifamily development is in regulation.
We have to do something about that if we’re going to build more housing. Developers have a really hard job, and they regularly work magic.
In major cities like Washington, DC, developers are working with limited space. Most parts of this country have exclusionary zoning. The only thing you can build there is single-family homes, often on pretty large lots. But in the parts of town where big buildings are allowed, you see a lot of cranes going up.
Those cranes are going to build high-rise luxury apartments. In fact, this year we’re going to see some of the largest number of apartments delivered in the luxury sector in history, literally. Why are there so many new luxury apartments? And what could the government do to get more affordable housing onto the market?
Chapter 1: “Luxury”
When it comes to city real estate, the biggest luxury is location. If you can just walk from your apartment into a metro station and head on about your day, that’s pretty great. Here’s a look inside of one new development in the city.
Right now, we’re in the Ballpark District of Washington, D.C., one of the emerging neighborhoods that is downtown, adjacent. And this neighborhood has gone through a tremendous transformation over the last 20 years.
As part of an overall plan to create an extraordinary place, this building was completed in 2020. And this is the Kelvin Apartments, which is 312 apartments over about 60,000 ft² of retail adjacent to our sister building, which is the Envy Condo, which is 127 condos. This development is currently valued at roughly $230 million.
Transit-oriented development creates the best outcomes overall because of the proximity to jobs and the proximity to educational opportunities, but it is also the most difficult. You’re creating not only deep foundations for underground parking; you are often building over metro lines and transit lines.
You’re also taking care of the neighborhood in terms of its aesthetic. Living in this lifestyle does cost a premium for the renter. Two-bedroom apartments in this building can rent for over $3,000. Single bedrooms can rent for over $2,000.
Perhaps more surprisingly, those prices are technically affordable for 40% of the households in Washington, D.C. And this pattern where the top 40% of earners can afford housing while others struggle to find affordable housing can be found in cities across the US.
So you often see new housing branded as luxury, in part because it’s new. I will say in my personal experience, I’ve seen pretty high-quality, affordable, subsidized housing that could compete with any luxury housing.
I’ve also seen pretty old, tired housing still branded as luxury that, you know, wasn’t the greatest housing out there. It’s definitely not, but maybe a little bit of standards, like a little bit. The building has about 300 units and is worth over $129 million appearance-wise.
And from the outside, this flat looks amazing. It is amazing. And there’s so much light and the location and everything. But then when you actually live here, there’s so many tiny things.
In total, it’s sturdy maintenance requests in a year and five months. So it’s quite a bit. Days before this interview, a malfunctioning dishwasher flooded parts of Carolyn’s apartment building.
Management brought in industrial fans to dry the space. It’s yeah, 75 dB. I measured it, and it’s quite tiring. Like your head becomes like this.
Many other tenants have raised concerns with the build quality in this complex, citing thin walls and repeated issues with water and other infrastructure.
Every homebuilder has a list of complaints.
For every landlord in a multifamily apartment, you can Google and find complaints against literally any landlord out there. But I’ve been to a lot of these communities, and those communities are beautiful, and they have all kinds of amenities like the swimming pool and a gym.
And because these are large-scale communities, that means that the landlord has a large-scale service, usually on site.
Some of what’s happening here is related to changes in the real estate business nationwide.
What we’ve seen in the last 10 to 15 years is that developers used to get capital, develop a property, and maybe sell it as condos or have it as rentals, and they would hold on to the property.
But right now we’re seeing real estate developers with a different model where they’re building a property and then quickly selling it off to a real estate investment trust.
So it sort of builds to sell as opposed to build and hold. When you build a property and then sell it to a real estate investment trust that is controlled by Wall Street, it puts a lot of pressure on the tenants.
Some of the rental crisis that we have in terms of an unaffordable rental market right now is somewhat related to this new model of build to sell and sell to Wall Street. But that’s the high end of the market. When it comes to more affordable housing, the government typically plays a much bigger role.
Chapter 2: Policy
If you look back historically, there’s always some balance of public and private involvement. We run into challenges when whoever’s owning and running the housing either isn’t well capitalized or isn’t properly motivated.
Now the government is using a tax credit to encourage more building. So the low-income housing tax credit is a Treasury program. It is a capital subsidy program.
It helps to provide money to build the building. It does not provide operating assistance. This is a tried-and-true program that has brought private capital into the marketplace to build low- to moderate-income housing.
It is our flagship program right now. Developers have built or preserved more than 3 million affordable homes with this tool. They financed their projects by selling the government-issued credits to investors. The investors provide the financing and, in turn, get a tax break.
More recently, Blackstone has gotten involved in creating a subsidiary called April Housing, which purchased 83,000 units of Lithtech. A bipartisan group of lawmakers has called for an expansion of this program across the country.
Americans are faced with affordable housing. Cost burdens for middle-income families are starting to increase as well. So teachers, firefighters, and others are getting priced out of the market.
Having a program, a credit program that helps build housing for that segment of the population, will not only help them continue to be successful, but it will also take a little bit of pressure off the low-income side of the equation as well.
And others say that despite its success, the program falls short of the country’s needs. The low-income tax credit idea is a good idea, but in the end, it’s the developer, the investors, that benefit from it.
After tax credits, the solution has become more nuanced. Inclusive zoning is becoming more popular around the country. Here’s how it works.
A developer wants to come in and build a 100-unit building. The zoning will only allow for an 80-unit building. The locality would allow for that additional 100-unit building, which obviously makes the deal more profitable.
In exchange for ten of those units or 15 of those units being set aside for low- to moderate-income people, these types of programs are completely local.
They differ fairly significantly across the country. Organizers say these ideas need more work. Most of the inclusionary zoning units are either too small or definitely unaffordable.
The inclusionary zoning doesn’t really include the economic conditions of the people who are threatened with displacement, the design, or the benefit people who have the resources who are in the quote-unquote marketplace to take the money and run when things start falling apart. This wave of publicly subsidized buildings is a new version of an old story.
In New York City, a WPA housing demolition project is underway, which will greatly improve the living conditions of families of moderate means.
You know, if you go back many decades, urban renewal was, you know, kind of translated as it was code for, Hey, let’s knock down places where poor people live and build other things.
And that has a pretty unpleasant history in a lot of ways. We still have, you know, loan programs with the name Urban. You will on them. Now, when we think about it, it is about the preservation of existing affordable housing. In some communities, it means change.
We started our company working in downtown adjacent neighborhoods where there had been disinvestment for decades. And so in Washington, D.C., that was the 14th Street corridor and the 8th Street corridor, both ravaged by the riots in ’68.
Even the nation’s capital was seared. In a place like Shaw Street, you had a lot of affordable housing. A lot of that affordable housing was built right after the unrest in 1968, after Martin Luther King was killed.
Chapter 3: Increasing Supply
In 2022, an apartment building went gangbuster. 40-year high activity. So we still have a residual shortage of housing. So before 5 million, now 4 million in my estimation.
US home builders declared a recession in August of 2022. That could slow down the growth of new supply in cities. While we had steady building opportunities and starts before the pandemic and in part during the pandemic, we had a lot of delays.
That bottleneck has opened up, and we are expecting to see a little bit of a softening in the market here in 2023. But that’s going to correct itself, we think, pretty quickly.
The more supply comes on the market, the less pressure there is on pricing. We do have issues with capital in the sense that there’s an increase in interest rates that has decreased the amount of lending that’s happening.
The Biden-Harris administration released its housing supply action plan in 2022. Their goal is to close the supply shortfall in five years.
But when you get to affordable housing, we need to be providing some additional capital and/or rental assistance to help make that housing affordable to the people who need it most. And that’s where you get more rules, but also real benefit from that public-private partnership for tenants. More assistance can’t come soon enough.
If I could, I would have already left. There is, of course, the economic side of things. There is no magic bullet here. It has taken us decades to get to this point, and it’s going to take us some decades to get out of it.
The trick is, how do you do development that’s inclusive, that’s equitable, that is a luxury, so that developers can make a profit but also fit middle-income and working-class people?