Rents have shot up the most where the supply has increased the most.

This isn't your granddaddy's Econ 101 supply & demand.

by Tom Coumaris on Jul 4, 2012 10:50 am • link • report

@Tom Coumaris: It is simple supply and demand. Supply went up a lot in those neighborhoods, but demand went up by even more. If you want to get sophisticated about it, you can point out that demand went up partly because supply went up (having more young professionals living in that area makes it a more desirable place for young professionals to live). But the basic supply and demand analysis still works.

by Rob on Jul 4, 2012 11:02 am • link • report

@tom

yes it is. first you need to distinguish a shift in the supply curve from the change in quantity supplied. A change in quantity supplied can take place with NO shift in the supply curve, due to a shift in the demand curve. Or the demand curve can shift MORE than the supply curve and dominate. Either is compatible with the quantity supplied increasing at the same time price is increasing. So what we see in NoMa and Riverfront is completely compatible with basic microecon.

In housing there are externalities where more high quality housing makes an area more desirable. Thats not econ 101, but would be discussed in urban econ. That may be the case here, though that would contradict the claims that high rises have mostly negative externalities.

by AWalkerInTheCity on Jul 4, 2012 11:04 am • link • report

@Tom Induced demand.

Though I do think that there are many areas in the District that could be more dense, I don't buy the whole "we need to get rid of the Height Act so that the District remains affordable". If tall buildings kept prices low, I'd move to Manhattan.

by Amber on Jul 4, 2012 11:08 am • link • report

NYC had tall buildings AND was affordable a couple of decades ago. Demand however has continued to increase.

Chicago seems to be a better example of tall buildings and relatively low rents.

by AWalkerInTheCity on Jul 4, 2012 11:34 am • link • report

OK, so GSI sucks as a contractor. Still, what's with the Franklin Square fixation? Even without the daily parade of yummy food trucks, there are innumerable food options of every conceivable style and ethnicity (Soho Gourmet, Five Guys, Port of Piraeus, Lighter, Cafe Phillips, Cosi, etc. ad nauseam) close by in every direction.

If the Downtown BID is really pressing for this, I think the Downtown BID has FUBARed priorities.

by 20002ist on Jul 4, 2012 11:38 am • link • report

The Salon article is just silly. Indy has been trying to "rebrand" itself as something other than a big nothing with a famous car race for years without much success. They went heavily into promoting athletics for a while--getting major league teams, sponsoring the Pan American games, but that seems to have fizzled. They opened a new convention center in the late 90s that attracted some big meetings initially but hasn't brought them back. The idea that it has good schools is equally funny--it was a major victim of white flight from the schools in the 80s and the rich suburbanites I taught at IU were negatively conspicuous compared with the kids from the Chicago and Cincy areas.

As for Chicago, it's gone from being a nonentity associated with gangsters and corruption to being seen as "cool" over the past 25 years. Not a bad evolution.

The article makes mention of Atlanta in passing. Atlanta is a good example that after years of hype is finally being recognized as the oversold brand it's always been.

by Rich on Jul 4, 2012 11:43 am • link • report

The cost of buildings is important and communities all over the world have realized this a long time ago. A builder has a certain cost+profit they need to obtain for the cost of the building they put up. While a complete collapse leading to bankruptcy may lead to permanently lower rents, more often a temporary over-supply in a neighborhood just leads to a temporary lowering.

In my neighborhood there are many small apartment owners like myself who traditionally rent for $2 sq. ft. Now 1100 new units are going in at $4. I'm raising my rents to $3 and others are doing the same. If there is a temporary glut in the expensively-built units they may drop to $3.5 for a while. But they can't go much under that for long without going bankrupt.

In urban areas throughout Europe and much of the US the standard high-density/low cost flat concept is 4-6 story buildings of frame construction with no underground structure. This model is also the most environmently-friendly to the immediate area.

At least in my neighborhood, choosing the 7 story concrete building with 2 stories underground that takes 2 years to build, over the 6 story frame model with no underground that takes 6 months has been a disaster for renters.

by Tom Coumaris on Jul 4, 2012 11:49 am • link • report

@Tom Coumaris: Okay, so you're saying that due to increased demand, prices have risen. And that increases in supply also lead to reductions in price, though not as much, since demand has risen a lot more.

So you're saying it's consistent with basic economic analysis, but counter-intuitive on its face?

by Gray on Jul 4, 2012 12:09 pm • link • report

Gray- No, I'm saying that simple supply/demand is a false religion and that's why Econ goes past 101.

Cost matters too. There are plenty of instances where an owner is more than happy with rents that are much more than that owner's cost and rents stay somewhat stable. But when you inject numerous new units in proximity that, by necessity, have much higher rents, owners aren't deaf mute and blind. Rents in the entire neighborhood rise much more than they would have.

by Tom Coumaris on Jul 4, 2012 12:43 pm • link • report

"There are plenty of instances where an owner is more than happy with rents that are much more than that owner's cost and rents stay somewhat stable. But when you inject numerous new units in proximity that, by necessity, have much higher rents, owners aren't deaf mute and blind. Rents in the entire neighborhood rise much more than they would have."

Yes econ goes past 101. however it does not throw out basic concepts, but explains things using more complex analysis. You seem to be saying that existing owners, possibly due to lack of information, "suboptimize" - charge less than the market will bear. And so when new buildings are built and DO charge what the market will bear, the old landlords raise rents. Of course in that case there will have been, in the before case, a shortage of units and competition for units not based on price, but on wait lists, etc. I think its much more likely that what you are seeing is that demand is increasing, and that at the same time landlords are increasing and builders are coming in. The timing of the rent increases may lag, but I do not think that new buildings cause higher rents INDEPENDENT of demand. I think you are mistaken in saying rents are higher by necessity - they are only higher if someone is willing to pay them.

as for your belief that 6 story construction leads to lower rents independent of demand, I think there are many examples to show thats false. Look at parts of Brooklyn like south williamsburg, where 6 stories is the maximum height, and rents have skyrocketed. Because of demand.

by AWalkerInTheCity on Jul 4, 2012 1:05 pm • link • report

@Tom Coumaris: But as I wrote above, the behavior you describe is completely consistent with standard economic theory. An increase in supply does not necessarily reduce price, for example when demand also increases significantly. The elasticity of demand also matters. As certain neighborhoods are seen as unique and therefore less easily substituted with housing from other neighborhoods, this makes potential renters less price-sensitive, and prices will tend to rise.

Cost enters into basic economics, but not in the way that you seem to think it does. It basically comes down to this: you raise rents because you can. Which is to say, the market will bear it. The market will bear it not because builders have constructed new units with expensive materials, but because renters are willing to pay the higher rent. It's possible that they're willing to pay this because the new units have raised the general look or feel of the neighborhood, but that isn't directly related to the cost of the new construction, as you propose.

by Gray on Jul 4, 2012 1:10 pm • link • report

higher cost per unit at higher levels of output is precisely why supply curves take their Econ 101 shapes. This is really impossible to explain efficiently without a chalkboard/white board to show the curves. I suggest we move on. I am quite sure the phenomenon Tom claims has nothing to do with whats going on in riverfront (where there are no small landlords suboptimizing their rents) nor does he present a cogent case that Riverfront would now have lower rents had heights been limited to 6 stories.

by AWalkerInTheCity on Jul 4, 2012 1:30 pm • link • report