Development
Old buildings are the key to affordability
All other things being equal, old buildings are usually more affordable than new buildings. Without the latest amenities, old buildings have to charge less in order to attract tenants. A healthy supply of old buildings is therefore crucial to long term neighborhood affordability.
The Cameron, a new apartment building in downtown Silver Spring. Photo from Behringer Harvard Residential, LLC.
Local governments are to be commended for adopting inclusionary regulations that require new projects to contain a certain percentage of affordable housing units, but this process has never been able to provide enough affordable housing supply to meet the demand. The only way to stabilize affordable residential rents in the long term is to increase the supply of old buildings.
Luckily, creating more old buildings is easy. We just have to build a lot of new ones and then let them age. Our problem in the short term is that not enough new buildings were built in walkable areas in recent decades, resulting in a dearth of old buildings today.
A friend's recent housing search offers an interesting example of the phenomenon.
Up until a few months ago my friend lived in a brand new, and quite expensive, building in White Flint. When they announced a rent increase, she decided to look elsewhere. I suggested downtown Silver Spring, thinking that the increased supply of housing units there in recent years would result in lower rents. After doing some research, my friend determined that rents in Silver Spring were comparable to what she was seeing in White Flint.
New buildings, it turns out, are expensive even if there are lots of them. Of course, Silver Spring's desirability in general has also greatly increased recent years, which is why there are so many new buildings there in the first place.
There are more people who are interested in paying to live in Silver Spring than there were a decade ago. While there are now more residential units than before, there is simply far more demand than the new buildings can accommodate to keep rents stable.
Just up the Red Line in Wheaton the situation is a little different. Wheaton is still a few years away from revitalization on the scale of Silver Spring. It is a much less desirable location. Therefore, one would suppose that rents there would be less expensive.
Because Wheaton is a less desirable location, it has fewer new buildings than Silver Spring. But it does have a few. If one compares the rents for a new building in Wheaton to those of a similar new building in Silver Spring, the listed rents are comparably expensive.
Despite the location differences, they are both new buildings. And new buildings have high rents.
Older buildings compete with newer buildings by offering lower rents.
In the specific case of downtown Silver Spring, the older buildings can charge almost as much as the new buildings because the area is so desirable that there is a supply shortage. If there were enough supply to meet the demand, the older buildings would be the first to become more affordable.
Buildings in the same location compete with each other for tenants. New buildings offer amenities, and old buildings offer affordability. Previously new buildings eventually become comparatively old, and therefore eventually have to compete more strongly on price.
The key lesson is that we must produce enough new urban buildings today to meet tomorrow's affordable housing needs. Our current affordability problems are due in no small part to a failure in the late 20th Century to produce enough urban buildings that we would today consider "old". We must not repeat that mistake.
 | Cavan Wilk became interested in the physical layout and economic systems of modern human settlements while working on his Master's in Financial Economics. His writing often focuses on the interactions between a place's form, its economic systems, and the experiences of those who live in them. He lives in downtown Silver Spring.  |
Comments
@ggwash
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Cavan, your friend's search in Silver Spring was unsucesfull not because all the buildings were new, but because of the extrodinarily low apartment vacancy rates of the DC Metro area, currently the lowest in the nation at ~3% when the natl average is 8%
DC has been going through an economic boom since 1999 which has resulted in substantial population and job growth.
Rental rates have nearly nothing to do with "age" of the building. They have everything to do with vacancy. The District is filled with old apartment buildings, all of them charging the same market rates the equivalent new places are.
by freely on Jan 19, 2012 1:04 pm
by selxic on Jan 19, 2012 1:08 pm
by selxic on Jan 19, 2012 1:10 pm
Wouldn't an old car cost less than a new one?
I sorta get the affordability angle but it's loosely supported by are rather nonfacts.
Maybe I'm confused..which isn't uncommon
by HogWash on Jan 19, 2012 1:12 pm
old buildings do not cause low rents. Rather the opposite.
by CJ on Jan 19, 2012 1:25 pm
by BeyondDC on Jan 19, 2012 1:34 pm
No, they are not charging the same rates. They might be charging higher rates than they were before due to low vacancy rates, but a building with more amenities and a better location will command higher rents.
I've linked to it before, but I think this post from Austin Contrarian gets at the core issue Cavan is touching on, perhaps in more accessible language:
http://www.austincontrarian.com/austincontrarian/2008/06/filtering.html
by Alex B. on Jan 19, 2012 1:35 pm
It's about supply and demand. Increase the supply, given consistent demand, and you theoretically see lower prices. However, some observers noticed that you don't see lower prices in the newest buildings. They then use that as an argument against infill development. I wrote this piece to illustrate the details about how increasing supply leads to lower prices. You see it in the older buildings once you reach a critical mass.
by Cavan on Jan 19, 2012 1:47 pm
The difference in rental rates between silver spring and Wheaton is not dependent on the age of the respective buildings. The age of the buildings is a symptom of the difference in rental rates.
by CJ on Jan 19, 2012 1:51 pm
by Crickey7 on Jan 19, 2012 1:55 pm
by CJ on Jan 19, 2012 1:55 pm
It's an oldish complex a few blocks from the Metro, and has some of the lowest rents in the DC Metro area.
The place is also very poorly maintained, which could have something to do with it too.
In DC proper, there are very few old buildings, and the ones that are here are expensive. Part of this has to do with the fact that most of them are in neighborhoods that have been "prestigious" for quite some time. Another part has to do with the fact that we didn't build apartment buildings for many years; we built detached homes and auto-centric tower blocks in the suburbs instead. Coupled with this trend was DC's vast long-term housing surplus, the damage done by the 1968 riots, the fact that most old buildings were so badly neglected that they had to be completely gutted, and the fact that many of the city's low-density neighborhoods were not allowed to gradually densify, which is a trend that continues today.
This is particularly frustrating in my neighborhood (Near Northeast), which has its share of good single-family homes that should be preserved, vacant lots, and properties that could go away without anybody shedding a tear. Because we swung from no development for many many years to the current frantic construction boom, the 'new' and 'old' parts of the neighborhood feel awkward and disjointed. The Loree Grand is an ENORMOUS 10-story building surrounded by empty lots and 2-story houses, and located on a street that isn't even a major corridor. Had DC grown gradually, this awkward situation wouldn't have happened.
There are oddball affordable old buildings scattered here and there, which help support the article's point. Lanier Heights surprisingly enough has a few.
by andrew on Jan 19, 2012 1:59 pm
Read what I wrote carefully. "The District is filled with old apartment buildings, all of them charging the same market rates the EQUIVALENT new places are"
Hence, the new building with the pool is charging the same rates +/-~5% as the old building across the street with the pool.
Columbia Heights a great example. Old buildings and new side by side charging the same rates within a few percent).
It is DC's economy that is driving vacancy which in turn is driving rental rates, just like it is DC's economy that no longer allows me to buy nice 3 story federal row homes on cap hill, 4 blocks from the dome for 250K like they were in 1997.
I don't know anything about "Austin TX" other than what I just googled and thats the Apartment vacancy rate of 7%, more than twice what the DC vacancy rate is but I really worry about the supposed urbanists who get such a fundamental causation relationship between rental prices and vacancy so completely wrong.
Want a great example of where your "new buildings are expensive, even when there are lots of them"?. I suggest a trip to Miami. The recession hit it hard, forcing 22,000 condo units spread over hundreds of buildings already being built to be converted to apartments, floating the apartment vacancy rate to nearly 13% (more than 4 times DC's rate) and the rental prices to bottom out. All these 22,000 units were in brand spanking new buildings with rec centers etc.
Rental rates are driven by vacancy, not age.
by freely on Jan 19, 2012 2:03 pm
Read the link I provided. I'm not sure exactly what strawman you're tilting against here.
Of course, this all is predicated on demand. Who has said otherwise? The larger point is that older buildings have costs that newer buildings do not. Even if the rent is the same, the return to the landlord might not be.
I think part of Cavan's confusion here is in conflating age with quality. They often correlate, but older apartments can (and often are) renovated. The old buildings that are charging the same rents in Columbia Heights aren't exactly that 'old' in the quality sense, since those buildings have seen large renovations and massive investments.
Nobody's gotten the supply-demand relationship wrong here, you just seem to want to grind an axe for some reason.
by Alex B. on Jan 19, 2012 2:10 pm
Cavan said all things being equal old buildings are cheaper than new, in dc there is far greater demand which makes things unequal. Without that caveat you would see how the statement doesn't quite fly in dc
by Canaan on Jan 19, 2012 2:11 pm
Personally, I hate the new buildings. We should only build old ones. ;)
by Falls Church on Jan 19, 2012 2:13 pm
One other big element playing into why old buildings tend to be cheaper is that they've long-since paid off their construction costs.
by Bossi on Jan 19, 2012 2:13 pm
by skeptical on Jan 19, 2012 2:17 pm
I disagree entirely with Freely. In a market with low vacancy, of course rates in general are going to be higher. But older (or otherwise less desirable) buildings will always be cheaper than newer/nicer buildings.
Office buildings go the same way. They almost always open as Class A. After 20 years with no major renovation, they become Class B. After 50 years with no major renovation, they become Class C.
Likewise, all the relatively affordable housing in Arlington (that wasn't produced through some government inducement) is in older apartment buildings.
This is sort of the root of the problem, and why I think government "affordable housing" programs are and will always be weak: they're mere window dressing. To get really large quantities of affordable units, buildings just have to age and be available.
by Joey on Jan 19, 2012 2:34 pm
Part of the problem is that we're not building affordable new housing. Another part of the problem is that we can't.
If I'm not mistaken, many of the designated "affordable" units in new DC buildings are built at a loss to the developer (rather than simply less profit). Last I checked, these units weren't even terribly cheap, and were often built with rock-bottom-quality materials.
This is a huge problem.
The building methods employed to construct affordable multi-unit buildings today tend to make for somewhat undesirable dwellings that won't survive long enough to ever become an old building. There are some obvious and considerable safety implications of wood-framed apartments, while steel and concrete construction is too expensive, especially when DC's height restrictions are taken into account.
Maybe we need to begin thinking about new building technologies and construction methods, given that current costs are out of control, and aren't even producing a quality product.
With a few exceptions, most of the "luxury" buildings in DC that I've seen are fairly unremarkable. Divided across the total number of units, the fancy lobby and gym really don't cost that much. We're paying exorbitant prices for fairly ordinary housing.
Seemingly, the best way to generate affordable housing is to build a nice new building, and allow it to slowly age. If you built it well, it will age nicely, depreciating slightly as it grows dated, but also maintaining most of its integrity and livability.
I guess the best solution is to keep building more faux-luxury apartments, and wait 50 years.
by andrew on Jan 19, 2012 2:41 pm
Jane Jacobs wrote extensively about this. It's pretty well accepted in the planning world.
Well thank goodness all of our omniscient urban planners agree.
by long-time reader on Jan 19, 2012 2:48 pm
I agree with you in principle, but these programs help make sure that new multi-unit buildings get built, and provide a stop-gap measure to help the working classes find housing today. I don't love that it's the way that we need to do business, but given our current realities, it's not a bad compromise.
Similarly, these programs actually seem to be working and achieving their goals without any major negative social consequences, and might even lead to improved social mobility. Given the exceptionally poor track record of government-subsidized housing, this isn't exactly something to sneeze at.
by andrew on Jan 19, 2012 2:48 pm
by selxic on Jan 19, 2012 2:48 pm
From every indication, the industry is taking that bet big time right now.
by Will on Jan 19, 2012 2:51 pm
The NPV of a building is going to be the rents minus operating costs over the life of the building (abstracting from renovation options) suitably discounted. Those rents will decrease, because consumers utility curves value newnewss and because newer buildings, even if they dont have more amenities, will have the ones currently in demand. (folks gungho on older buildings are confusing ones old enough to have become historical and/or majorly renovated with recent older buildings - here in DC think of buildings from 1950 to 1980, not gems from the 1920s) IN a "steady state" metro you will have a balanced supply of newer and older buildings, and older buildings will be cheaper AND will make up enough of the supply to create affordable units. In a stagnating metro (think NYC during its golden age of affordability) there will be lots of apt buildings around with rents, even allowing for their place on the age curve, that wouldnt justify new building (that MAY be where we are with certain exurban houses, now). In an overheated area, we see that some of the demand for new gets displaced to old, raising rents in the old AND the old makes up a smaller proportion of the housing stock.
by AWalkerInTheCity on Jan 19, 2012 3:39 pm
Also, old is relative---is c. 1950 yellow brick building on Conn Ave "old"; what about a c. 1970 building at Van Ness. In the 'burbs, either would be old, but in DC, not so much.
As for desirability, despite its retail revival, SS is about as appealing as Rosslyn to a lot of people. It's certainly less lively or upscale than Bethesda. Despite being further out, Wheaton has great ethnic restaurants which might be more attractive than the chain stuff in SS. It also has a mall.
by Rich on Jan 19, 2012 3:48 pm
by Rebecca on Jan 19, 2012 3:55 pm
by grumpy on Jan 19, 2012 5:20 pm
It's near two metro stations, one of which is also the best transit hub in the city.
It's near all the downtownish development in Noma.
It's near a major corridor, H Street NE.
by H Street Landlord on Jan 19, 2012 9:48 pm
by Andrew on Jan 19, 2012 10:35 pm
"Luxury" residential is usually a term of art for realtors that describes apartments with a doorman and an elevator. That's all it is in NYC; I don't know what variations it takes on in DC.
by Neil Flanagan on Jan 20, 2012 12:20 am
Older units are cheaper, he would say, only when cities have continued to build newer buildings that soak up the demand for high-end residential.
Yes, this is the 'filtering' process described in the Austin Contrarian link. If there is demand for luxury housing that doesn't currently exist, you can either add more luxury capacity, or older units will be renovated and 'filter up' to that price range.
And yes, all things aren't usually equal. We don't build 'em like we used to.
The adage that we need old buildings isn't wrong, but it's incomplete - and it somewhat mistakes the symptom for the cause.
by Alex B. on Jan 20, 2012 8:41 am
its a symptom and a cause - its a symptom of the housing market at time t-1, and a cause of the housing market at time t.
Obviously we can't go back in time and change the conditions at t-1 (whether those conditions are purely market driven or impacted by yesterdays policies). What we can do is answer those who ask why the building of new units has not created affordable units, and who infer from their failure thus far to do so, that creation of new units has nothing to do with provision of affordable of units.
by AWalkerInTheCity on Jan 20, 2012 9:15 am
I thought about this problem and this piece is a sort of rebuttal to the argument that building new housing increases prices. It doesn't by itself. We're in a specific situation right now and I was trying to work out why we see what we see and get a broader view of how supply decreases prices.
by Cavan on Jan 20, 2012 10:31 am
The major drawbacks I experienced living in an older building:
1) Horrible plumbing issues--mostly cause they use older copper pipes versus the newer wider PVC piping used in newer buildings. Expect periodically clogged plumbing in your toilet and sinks and back-ups that can flood your entire unit when you are not home.
2) Electricity/power problems with old wiring.
3) Plaster walls versus dry wall. Some people prefer the plaster but if you have a crack or need repair, it's a lot harder to fix and never looks quite the same, even after you paint over.
4)While some older building have gone through remodeling, many still have old windows and bad HVAC issues as well. Check that out before you rent.
Here are the plusses though:
1) Thicker walls--less noise from neighbors!
2) More square footage--most older units, especially 1 bedrooms--seem to be around 750-800 sq ft, versus the newer building that try to get away with 500-650 sq ft 1 bedrooms. Size is often an issue.
I guess it's a toss up, really.
by LuvDusty on Jan 20, 2012 1:23 pm
wrt Andrew's point about Near Northeast, there the issue really is the failure to build a variety of housing types over time. E.g., north of H Street and south of Florida Avenue, of about 1700 buildings, there are a handful of 4-6 unit buildings (one building got a third floor addition), one 18 unit building (at 7th and K), and a set of apartments built to look like regular rowhouses, dating from the late 1800s early 1900s at the nw corner of 6th and L Streets NE. Instead most all of the housing in the neighborhood is single family rowhouses. (But I agree with H St. Landlord that the Loree Grand building is well positioned wrt transit. In fact, the inclusion of the NY Ave. metro as an infill station revalued lots of property for more intensive uses on the east side of the station, between 2nd and 4th Streets, in a manner that will have significant positive value for the city and H Street.)
Note that this failure to have a variety of housing types within neighborhoods, especially some multiunit buildings of various sizes, is a longstanding problem across many neighborhoods in the city, irrespective of Connecticut, Massachusetts, and Wisconsin Avenues and streets like 16th and Porter.
wrt Neal Flanagan's mentioning of Ed G., that is the issue, that if there is a large stock of old buildings, but constructed well, and there is a small stock of new buildings, also built well, the old buildings won't be priced significantly less than units in new construction, because the fact that they are "better" trumps the fact that they are "old" and "new" construction, built less well is not valued as highly.
I don't know if Ed G. discussed rent control. A lot of people feel that rent control is a technique to screw landlords, but I would argue that part of the justification is that because zoning restricts supply, the units that are available get greater than normal rents (a premium) and therefore price restrictions are in part a way to address the pricing imbalance created by the supply problem.
by Richard Layman on Jan 20, 2012 1:59 pm
I'm not sure if this could work in DC. My impression is that "luxury" buildings get built because the land is so expensive that this is the only way to make a profit. But if it could work, it'd be a lovely solution. I'd rent one in an instant.
by dan reed! on Jan 20, 2012 4:19 pm
Part of the reason that C zoned land is expensive is you can build housing there, whereas most of the places where you could build housing are already developed. (with some big exceptions, e.g., the proposals for Walter Reed redevelopment call for the construction of almost 2000 units, most in multifamily buildings).
The process you describe is similar for SFH too. It's why developers mostly build big single family houses, not a bunch of small units that are more affordable.
by Richard Layman on Jan 20, 2012 4:31 pm
* suburban or exurban locations
* high crime rates
* high vacancy rates
Clearly, we need to work hard to increase the prevalence of all of these factors so that we can have affordable housing. My first proposal is to require that landlords evict 20% of their tenants on June 1. Vacancy rates will shoot up, and prices will decrease significantly!
We can work on encouraging much more multifamily housing in crappy locations and raising the crime rate in more accessible locations next, but this is an important first step in the meantime.
by Gray on Jan 20, 2012 7:46 pm
by Dino on Jan 20, 2012 9:45 pm
A lot of people read this and assumed the author was making the point that older buildings cause lower rents. But (I guess) he wasn't because he then said:
It's about supply and demand. Increase the supply, given consistent demand, and you theoretically see lower prices. However, some observers noticed that you don't see lower prices in the newest buildings. They then use that as an argument against infill development. I wrote this piece to illustrate the details about how increasing supply leads to lower prices. You see it in the older buildings once you reach a critical mass.
This helped a little, as the author is arguing that new construction does not increase housing prices. Well...duh.
I guess I'm confused as to what the policy prescription is supposed to be.
by WRD on Jan 21, 2012 7:09 pm
by WRD on Jan 21, 2012 7:10 pm
This only happens after a enough new housing is built to meet existing demand. Otherwise, the old buildings don't have to compete very much since there's too little supply for demand.
by Cavan on Jan 22, 2012 3:32 pm
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