Greater Greater Washington

Will "filtering" keep housing affordable?

The rising supply of high-end apartments has slowed the rise in prices (at least outside the hottest areas). Will that make housing more affordable for people who can't afford the fanciest apartments?


Photo by granite-charlotte on Flickr.

Real estate consultant Maeve Gallagher writes in Capital Business that vacancies have risen in the metro area, to 4.4% from 2.2% a year ago, though DC's vacancy rate continues to fall. That means rents in DC are still rising, but have declined in Northern Virginia.

Most people can't afford the highest-end or "Class A" apartments in new apartment buildings, but one theory holds that if we build more Class A housing, other rents will also fall through a process called "filtering."

If the top tier isn't full, rents won't go up there so fast. People who can afford those luxury units will want to buy in a new building, so the owners of an older building will have less incentive to renovate and less market upside from doing that. That will keep lower-tier rents more reasonable, and "filter" down to successively lower-price levels of the housing market.

However, that doesn't happen if the Class B and C apartment building owners instead respond in something of a counter-intuitive yet psychologically sensible way. They could decide to renovate their buildings to Class A, with new granite countertops and other high-end finishes, so they can get Class A rent.

Gallagher writes,

As deliveries of Class A units increase in 2013, pressure on Class B market rents could mount if owners of the higher-end buildings offer concessions to lease their new projects quickly.
In other words, if a new building owner can't get the building leased, they will offer specials like 2 months' free rent. An apartment that's a little cheaper, but not so nice or in a less desirable location, doesn't now seem like a better deal. That could lead the Class B owner to decide now is a good time for a renovation.
Some Class B building owners have responded by refreshing their units. Nearly 32,000 units are under renovation at this writing, at an average renovation budget of $21,000 per unit.
If the market pressure is affecting the owner's bottom line, they might look at the property and think about how they could turn it into more of a money-maker. Even if Class A rents are not extremely strong, they're still considerably better, and there's a good chance they will rise again in the future (and even if they won't, some owners will decide to take the risk).

Gallagher points out that building owners will make more money if they're renovating a building not when higher-tier rents are leveling off, but when they are sky-high, because there's a bigger upside. But not everyone responds that way. I spoke to one developer who said that often as long as a property is bringing in a good return, the owner will just pay it little heed, but then take notice if the margins drop.

Another obstacle to filtering is that demand is rising at all tiers of the housing market. Gallagher says,

Low-wage jobs are expected to grow at a rapid pace, particularly in the retail trade and the construction sectors, increasing demand for Class B apartments. ... In sum, the Class B apartment market in the Washington area faces obstacles in the near-term because of the amount of new supply being added to the Class A market. However, Class B vacancy should remain low, driven by demand from newly created jobs in modest-wage industries.
Few people are building Class B anywhere in the region, least of all in popular areas like DC, Arlington, and downcounty Montgomery. Owners (perhaps rightly) feel they can get top dollar for their properties. Lenders most want to finance luxury projects. And even if the market doesn't quite support Class A in an area now, people may (perhaps rightfully) think they can wait a little while.

Unfortunately, the effect is that almost all of the new supply is in the Class A tier. If we build enough, it might soak up demand for Class A, but as long as more and more people are coming into the market who want Class B, then those units will get more expensive as well.

This isn't an argument not to add more housing. However bad this problem is, it's worse if we aren't adding housing. There's even more profit in renovating a Class B building. The demand at many levels of the housing market will outstrip supply even more than it already does.

It's great we are building housing at a rapid pace. If Gallagher's research is right, we are still not doing enough to ensure that people can find a place to live, near transit if they wish to be, at a price they can afford.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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adding new countertops won't turn a 1970s hirise into the equivalent of a post 2000 building. It will still look unfashionable, usually won't have the same amenities (some can be added, though I think not all) often are energy inefficient, etc.

and of course if rents for class B are kept up by blue collars (thats more likely to be true for the more poorly located class B buildings, I think - the better located ones are already too expensive for that) then it surely wouldnt help to have the folks filtering down from Class A also competing for those units.

by AWalkerInTheCity on May 8, 2013 3:41 pm • linkreport

Not to worry, the new "The Lauren" near the Bethesda Metro is doing its part for Joe Average by promising to provide some highly affordable "Residences from the several millions"
http://www.bethesdanow.com/files/2013/05/014Lauren.jpg

by Chris S. on May 8, 2013 3:45 pm • linkreport

@Chris S.

LOL.

The several millions.

by Nick on May 8, 2013 3:52 pm • linkreport

Am I the only one who thought of "trickle-down economics" when I read this?

by Geoffrey Hatchard on May 8, 2013 3:52 pm • linkreport

Largest employer in the region? Federal government. Median federal salary? $72K (roughly). Show me a federal employee that can afford to live in class B with a family. We need the government to direct property owners to build median income apartments and condos.

by Redline SOS on May 8, 2013 3:55 pm • linkreport

GH - but housing really does filter down (and sometimes up). Filtering was part of urban economics before David Stockman was in diapers.

by AWalkerInTheCity on May 8, 2013 3:58 pm • linkreport

It's not trickle-down. More like supply and demand. The key is that as long as there is too little supply, the landowners will see profit in renovating a Class B building to try to chase the higher rents that are only available because of the constrained supply.

They won't get the same rent in a renovated mid-20th century building as one built after 2000 but they could get closer. The key is that the market distinguishes between Class A, Class B renovated, and Class B regardless of the other factors. The question is by how much.

The more constrained the aggregate regional supply (in this case, the region means near Metro stations inside the beltway, perhaps only in the places that David mentioned in his post), the less the market will distinguish between the different types of buildings. In other words, we need a whole lot more supply to increase the rent differentials between Class A, Class B renovated, and Class B buildings. If supply is constrained, the Class B renovated and Class B buildings have their rents increased simply due to scarcity.

by Cavan on May 8, 2013 4:03 pm • linkreport

Also Class A turns into Class B as it ages, so I think it's reasonable to say that Class A contributes to the overall viability of the housing stock for everyone in the long term. Some Class B is also gutted to make new class A. As long as we aren't losing Class B overall, I think it's a positive development even if I won't live there.

by Alan B. on May 8, 2013 4:03 pm • linkreport

I should add I still think it's incumbent for the government to take steps that prevent owners from raising rents on tenants or redeveloping most of the old housing stock in gentrifying neighborhoods too quickly.

by Alan B. on May 8, 2013 4:10 pm • linkreport

Geoffrey - Trickle-down economics is about giving money to the rich. There is a legitimate comparison with 1950s-style urban renewal, where the government subsidizes downtown housing for the rich, or with government-subsidized Lexus lanes like the ICC and the Beltway express toll lanes.

But the issue of principle here is whether you should allow or forbid private investors to build housing that they sell to the rich.

If you don't build the Lauren in Bethesda, will the people who can afford $3 million apartments be living on the street, or will they occupy housing that someone else would be in otherwise? The question answers itself.

by Ben Ross on May 8, 2013 4:10 pm • linkreport

Before everyone else explains trickle-down economics to me, I get it. I was just pointing out that this title made me think of it. Sheesh.

by Geoffrey Hatchard on May 8, 2013 4:14 pm • linkreport

How about reducing demand on the housing stock by imposing a head-tax on people who aren't federal employees or in service industries?

by Steve S. on May 8, 2013 4:14 pm • linkreport

"Few people are building Class B in popular areas like DC, Arlington, and downcounty Montgomery."

I'm curious, where are developers building low amenity buildings in FFX, upper MoCo, etc? It seems to me like even new buildings in the Huntington metro area, in Dunn Loring, etc, have the usual aspirational amenities.

by AWalkerInTheCity on May 8, 2013 4:20 pm • linkreport

AWITC: That's a mistake. I meant to say "anywhere in the region, least of all..." in those places. Fixed.

by David Alpert on May 8, 2013 4:31 pm • linkreport

Walker, you're correct. New buildings have high rents. The most common way to create Class B buildings is for them to age long enough such that their amenities are superseded by the newer Class A's. New Class B's are rare around these parts.

That also implies that the demand for Class A's isn't satisfied yet. However, that assertion could be skewed by the fact that we have such aggregate supply constraints that it makes it so that customers will sign a lease for a Class A when they really want a Class B just so they can conclude the difficult apartment hunt in a tightly constrained supply environment.

by Cavan on May 8, 2013 4:32 pm • linkreport

@Geoffrey Hatchard: I was about to make a comment about trickle down. Your analogy is on point. Thanks for taking the arrows ;-)

by JimT on May 8, 2013 4:42 pm • linkreport

It's obvious but still worth noting that the restrained supply pushes the rents of all classes of housing upward within each category as well. More construction of any class of multifamily residence would be an improvement over the status quo.

by Adam M Taylor on May 8, 2013 4:48 pm • linkreport

That's not happening in Bethesda.

by Capt. Hilts on May 8, 2013 4:52 pm • linkreport

Steve S. - you can't be serious!

"How about reducing demand on the housing stock by imposing a head-tax on people who aren't federal employees or in service industries?
by Steve S."

Federal employees have subsidized transit. They get subsidized discounts on meals in their cafeterias. Washington Sports Club has given them membership discounts and, now, you want a "head tax" on everybody else?????

by Capt. Hilts on May 8, 2013 5:00 pm • linkreport

The issue is also somewhat confused by gentification. Rents in certain areas will rise regardless of housing quality so some of the affordability is really just avoiding existing housing stock being gentrified by building new stock to take up the demand. There is turnover of residents in Petworth and Columbia Heights but I think there would be more if new apartment buildings weren't being built in the area and everyone was competing for the same units. A lot of the older stock appears to still mainly cater to longer time residents.

by Alan B. on May 8, 2013 5:05 pm • linkreport

It works both ways. When a large number of new luxury units come into a small area the rents in existing buildings there rise. Gentrification. People look more to location than amenities.

You'd be surprised how many people will forgo glass showers and granite countertops to save even $500/mo. The difference between class A and B doesn't need to be $1000. Eventually filtering may of course lower all rents in the long term theoretically.

Right now there's an issue of the on-going federal hiring freeze not supplying the new residents that these class A developers counted on. In spite of the sequester private hires haven't hit bottom yet, but federal new-hires are almost non-existent now.

by Tom Coumaris on May 8, 2013 5:06 pm • linkreport

My Class B un-renovated apartment keeps raising rent faster than inflation because we're surrounded by a lot of new Class A units, and they argue the whole are is just nicer and demands more money now. I think the biggest demand in this area is for un-renovated class B apartments, not because people don't want those amenities, but they do want that price. The cost of land and pulling building permits around here forces developers hands in many ways into pricing their units expensively, and they'd often rather sit on them for a few months longer than offer an incentive to move in. Something really needs to pop before I see rent fundamentals working around here. And I don't ever see rents decreasing, maybe just increasing very slowly for a while, letting inflation rise around them.

by Gull on May 8, 2013 5:07 pm • linkreport

If you have a glut of housing, regardless of the class, would not supply and demand take effect, reducing housing costs for all? Shouldn't the District work to reduce some barriers (zoning, taxes, height)that hinder developers from creating as much housing as feasible?

by Randall M. on May 8, 2013 5:26 pm • linkreport

How about reducing demand on the housing stock by imposing a head-tax on people who aren't federal employees or in service industries?

We already have this: it's called the progressive income tax.

:)

by oboe on May 8, 2013 5:33 pm • linkreport

"I should add I still think it's incumbent for the government to take steps that prevent owners from raising rents on tenants or redeveloping most of the old housing stock in gentrifying neighborhoods too quickly."

I suppose you'd be equally ok with the government artificially setting a salary cap for you?

Since that's what you are demanding the government do for landlords and property developers.

Not all landlords are mega-wealthy.

DC has quite a few small landlords, and artificially capping their income is no different from artificially capping the income of a waiter, or accountant.

by Hillman on May 8, 2013 5:34 pm • linkreport

" We need the government to direct property owners to build median income apartments and condos."

How about we expand that logically to demand median income food stuffs, and median income gasoline, and other services all be median income?

Including whatever profession you are in.

Should we demand that you make your services or goods available only at a certain price point?

by Hillman on May 8, 2013 5:36 pm • linkreport

There's already tons of companies falling all over themselves to provide median or low income foods. Developers could learn a thing or two from McDonalds. Build it and the huddled masses will come.

by Chris S. on May 8, 2013 6:07 pm • linkreport

As the owner of a renovated class B unit, I'm not one bit worried. The spread between the rent I charge (profitably, though, as Hillman noted, I'm no millionaire) and what the class A down the street charges is enough to keep me in a tenant. They'd have to offer much more than 2 months free rent to ultimately make it cheaper. And there are plenty of young professionals looking for something affordable who could care less it that doesn't have a pool and fitness center if they can buy a gym membership many times over with what they save in rent...and maybe actually have a little left over to save something for their *own* home some day and have a little fun. When I rented it last year I had *11* applicants to choose from. Even if class A rents stabilize, I'll still have a healthy pool of people to choose from. Bonus, most of them aren't trust-funders, and they're generally pretty responsible people who I know won't carelessly destroy the place.

The average federal income doesn't mean much if your market is younger people.* It took me three years of federal service to even come close to that, and even to this day, I cringe at the rents charged in the class A buildings. If I were still renting, even making about the *household* AMI, I'd be renting a class B and living comfortably, rather than paying through the nose for the new buildings. Pay nearly 30% of my *current* income for a 1-bedroom apartment in a "hot" area? Uh, no. It would be nearly 40% in our slightly-cheaper class A for a GS-9. Plus utilities. There are lots of folks, like me, who look at that number and say "whaaaaa? What are my other options?" Hey...over here...save a few hundred a month by walking 2 more blocks to the Metro and not having a pool! It's working out on both sides swimmingly...I get a small amount of income and they get a safe, comfortable, and AFFORDABLE place to live.

*I don't discriminate. My market is younger people because that's who is interested. I've had a few older people look at it, but they've never applied. It's a small-ish one-bedroom...probably doesn't meet their needs. That's the impression I've gotten. Their general response is "this is nice, but it doesn't fit my lifestyle."

by Ms. D on May 8, 2013 8:19 pm • linkreport

Chris:

Valid point.

But then we aren't forcing McDonalds to make cheap food by government mandate.

They do it as a business decision.

by Hillman on May 8, 2013 9:05 pm • linkreport

The issue isn't that rents will drop in non-A buildings, they just won't rise as much as they would have, had the supply not been increased.

And yes, increases in rent overall give Class B and C building owners the motivation (and access to financing) to upgrade. cf. e.g., UIP. That's their whole business model. Just because the new rents are less than 100% new buildings only makes them cheaper by comparison, the rents are still rising.

What's happening in the market some is that DC is capturing a greater share of the higher end market, when over the last 20 years, it had less of that share, especially in multiunit.

by Richard Layman on May 8, 2013 10:55 pm • linkreport

I often wonder who is buying these multimillion dollar homes/condos in this area, or even the 5-800 thousand dollar residences. As another commenter said, the single largest employer in this area is the federal government, plus the countless other jobs that are "private sector" but only exist because of federal government contracts. I know federal employees make decent money at the GS-12 and above level, but obviously not enough to buy any of those places. I hear contractors do OK as well, but not well enough to buy those places, unless they are high up in the company.

So who does that leave to buy these places? Lawyers that are high up in some of these big law firms?, CEO's at some of these contracting companies?, media types?, Congress? Anybody have any insight on this?

I suppose if I had to, I could pony up to rent in a brand new class A building, but definitely not buy anything. Also, as far as renting is concerned, there is a point I think that is overlooked which I don't really see talked about on here. We have some of the most expensive colleges in the country. It's nothing to some college kid that has rich parents paying the bill to be living in a brand new class A place. And how many thousands of college kids are there like that?

by Nickyp on May 8, 2013 11:03 pm • linkreport

This is the nonsense we are getting from the progressive new urbanist movement. WOW

by W Jordan on May 8, 2013 11:09 pm • linkreport

@Nickyp: lobbyists.

by goldfish on May 8, 2013 11:22 pm • linkreport

Chris, Hillman,

It's more from the bottom up. If food service was regulated in such a way that only rich people could afford to eat out then you'd either see McDonald's never open or they'd be serving wild caught salmon with Kobe beef along with the rest of them.

In DC it's not as if we have an ocean or mountain range to physically limit where we can build.

by drumz on May 8, 2013 11:27 pm • linkreport

Also this isn't New Urbanism. New Urbanism is a specific design philosophy. This is about the constraints we have in the market and what the effects are.

by drumz on May 8, 2013 11:29 pm • linkreport

If this were true, then Manhattan would be becoming affordable. It isn't. The inference about Virginia has no numbers or trend line attached. A small change could easily be statistical noise in a larger trend.

Rents and property values reflect a variety of forces. New buildings may be more or less comparable to what they "replace, but often aren't. Location isn't elastic, esp. if the general location of workplaces doesn't change much. Amenities such as retail, restaurants and services, if anything have become more broadly available. This drives up prices locally--over time it might reduce them as more places have them, except that hasn't happened. Markets are distorted--that's probably more of a constant than the assumptions that should make them function in the way that self-styled "followers of markets" think they do.

by Rich on May 9, 2013 12:05 am • linkreport

@Rich,
Manhattan is not becoming affordable because demand still outstrips supply. As Manhattan continues to increase its pedestrian friendly amenities (turning streets into plazas and introducing bikeshare), we will see demand continue to rise faster than supply of housing.

As DA was implying, once the demand of Class A housing maxes out, older buildings will have to begin lowering their rent to capture the Class B demand. No building owner will keep the building artificially expensive if no one wants to rent there.

If a neighborhood is theoretically built out at Class A levels (I cannot think of a neighborhood where this has happened in DC), class B housing will remain on the periphery. All the more reason to increase public transportation and amenities in the class B neighborhood! DC still has decades of growth.

by cmc on May 9, 2013 12:55 am • linkreport

I think the problem here is you've got two seperate concepts -- filtering and supply/demand.

Both are real phenenma, but have limited practical value in terms of housing affordability.

In DC, we've got a full on apartment craze. Plenty of new, class A luxury units coming online. Not a drop in vacancy rates and/or rental rates.

And again in DC, "filtering" doesn't really work well because of gentrification (as a bad areas gets better landlords jack up the rent), stickiness (landlards hate cutting rent) and upgrades.

And the current trend of defining affordablity as 30% of regional AGI is pretty dumb.

by charlie on May 9, 2013 8:19 am • linkreport

Another factor in this is that there are a number of people who (in theory) could afford these Class A luxury apartments, but choose to rent less expensive units. I count myself in this group - I don't see much point in spending an extra $300-400/mo just to have granite countertops or access to a rooftop deck or party room. I know many of my neighbors feel the same way. I'm no economist, but this can't be good for people who really can only afford Class B or C apartments.

Also, it will be interesting to see what happens if/when the housing market shifts back to condo projects. I expect many of these luxury apartment buildings will be converted to condos, as many of them were originally envisioned as condo projects anyway.

by Rebecca on May 9, 2013 8:27 am • linkreport


The problem/challenge is public policy in DC has been to overly subsidize with public resources the creation of class A units. Subsidizing them with dollars meant to stabilize the market for low, moderate and middle income families. DC was waved out of HUD income guideline which allowed this to happen. Via pay-to-play corruption allied with new urbanist thinking, investors via refinancing schemes make money not building buildings but financial transactions subsidized by the government.

New urbanist movement in many ways has allowed itself to become a front for wall street and housing injustices. inverse-robinhood.

The structural costs to build a typical new urbanist building is about the same as a typical class B. In fact its generally cheaper to build a loft style unit. Marketing to the new urbanist just allows developers to build smaller units and larger buildings. Upscale ghetto units with fancy amenities.

by W Jordan on May 9, 2013 8:47 am • linkreport

@Rebecca
I'm no economist, but this can't be good for people who really can only afford Class B or C apartments.

In theory I suppose it would be better if you "maxed out" what you could afford, but economics doesn't care because it doesn't consider you part of the demand for class A apartments.

by MLD on May 9, 2013 8:56 am • linkreport

"Also, it will be interesting to see what happens if/when the housing market shifts back to condo projects. I expect many of these luxury apartment buildings will be converted to condos, as many of them were originally envisioned as condo projects anyway."

Grayson flats in Arlington was converted. there is a new building on 14th with some sky high rents that will probably be moved over (studios for 2500?)

@ MLD; correct, but was long as we think class b means poor people, you're in that mode of thinking.

(and we're leaving out three huge categories here -- private CL rentals, group houses, and the house that grandma owns but 5 of you live in)

As I said, "filtering" is a good way to look and measure the amoung of residental investment coming in but not a good way to help with pricing.

by charlie on May 9, 2013 9:10 am • linkreport

Someone once commented on here that driving a car in the city is a luxury. Well, if only Class A units are built near Metro stations, doesn't riding Metro also become a luxury? That doesn't seem very progressive.

by Chris S. on May 9, 2013 9:14 am • linkreport

Chris S., riding Metro already is a luxury. That's why you see a different demographic riding the WMATA bus system. Without free transfer or a flat fee, our transit system reinforces the economic segregation of our area.

by Capt. Hilts on May 9, 2013 9:17 am • linkreport

@nickyp - I know federal employees make decent money at the GS-12 and above level, but obviously not enough to buy any of those places.

They probably can't buy $500-800k homes the first year they get to GS-12, sure, but after a few years, or if it's a two-income family, or if they've had some cash in the market the past 4 years? Sure. It might chew up most of their savings, but it's certainly possible. GS-12 step 1 for this area is $75k. The million-plus homes, yeah, they're probably being bought more frequently by lawyers, lobbyists, managers at consulting and accounting firms, etc. And, of course, older people with more experience and more savings.

by worthing on May 9, 2013 9:24 am • linkreport

1. Housing is very much driven by supply and demand, but its different because housing units are very durable, and so the supply to the market at any given time is based on investments at earlier times. Thats what filtering is ultimately all about. There is some assumption here that renovation can easily equilibrate between class A and class B units - thats true only to a limited degree in going from class B to class A - some older units are obsolescent, even with any economically feasible renov. And in the other direction, it takes time for a new unit to become "old"
2.Its also complicated because a unit isnt just sq ft with amenities - its a location in a neighborhood, which has charecteristics other than distance from the CBD. In DC, that means that (AFAICT) class B units in established nabes (West of RCP, Dupont, AdMo) are just as expensive as new units in the "hot" areas. And many of the hot areas have zero, or close to zero, in the way of older units in elevator buildings, as there wasnt anything like that built in those areas pre-2000.
3. To all you happy owners of little units
We don't particularly want to deal with a private landlord anymore. Too many bad experiences - someone who suddenly decided to sell to an owner occupant, someone who took 10 phone calls to get a repair done, etc. And a fitness center in the building is a way to meet folks in your community that a seperate gym isnt - plus its a place to go to get away from your spouse, regardless of how you are dressed, or what the weather is. Ditto for all those business centers, lounges, etc. Theres a significant value to an indoor accessible "third space". There are certainly young folk who don't need that big a discount to forego class A spaces - indeed, from what I can tell, there are some who don't need that big a discount to live in a basement. But ultimately the market with those tastes is not infinite.

by EmptyNester on May 9, 2013 9:29 am • linkreport

"And again in DC, "filtering" doesn't really work well because of gentrification (as a bad areas gets better landlords jack up the rent), "

But someone looking at a 30 year old unit in upper NW can also look at new unit east of RCP. So why doesn't the new supply of gentrified nabes pull people out of the old established neighborhoods, and lower prices there?

The reason isnt because the established neighborhoods are getting better.

The reason is because demand is growing.

by EmptyNester on May 9, 2013 9:40 am • linkreport

Charlie,

And again in DC, "filtering" doesn't really work well because of gentrification (as a bad areas gets better landlords jack up the rent), stickiness (landlards hate cutting rent) and upgrades.

What you are describing is indeed filtering! It is just filtering up, not filtering down.

Filtering is not some policy that works well or not; it is a description of how the market prices react across different submarkets.

Filtering happens in both directions.

Imgaine a city with an increase in demand, but no new supply. Class B landlords think they can get class A rents, so they renovate and 'filter up' into that submarket.

Now, imagine a city where a bunch of new supply is added. Some brand new class-A buildings go up, and an older class-A building can't keep up with the latest amenities and sees its vacancy rate rise, so it filters down to the class B submarket.

by Alex B. on May 9, 2013 9:50 am • linkreport

Man, I'd love to live in one of those new buildings near a Metro station, with a gym and a lobby, etc.

However, they all cost well over 1.5 times what my apartment in a renovated rowhouse costs. It's not that I'm a happy owner of a little unit. It's that my income literally won't support something larger or newer.

I'm a fan of smart growth, but I'm recently finding it difficult to shake the feeling that we're doing it wrong. Instead of expanding transit-accessible neighborhoods, we're pricing everybody out of them.

In the past year alone, the direction of the housing market has been especially troubling. Most vacancies I've seen are in new Class A buildings, and it appears as though those rents will begin to rise sharply once the owners have leased out the entire building. Vacancies in sub-class-A spaces are few, far between, and still incredibly expensive.

I too want to know who the hell can afford these places.

by andrew on May 9, 2013 9:51 am • linkreport

That said, one nice side effect of "filtering up" is that there are very few disgustingly terrible rental units in the DC market.

At the very least, the market conditions in DC don't seem to be encouraging slumlords to rent out shitholes for exorbitant prices (which has almost become NYC's defining characteristic).

Compared to other expensive real estate markets around the country, we at least do seem to get our money's worth when it comes to the quality of interior spaces.

by andrew on May 9, 2013 9:55 am • linkreport

"Man, I'd love to live in one of those new buildings near a Metro station, with a gym and a lobby, etc.
However, they all cost well over 1.5 times what my apartment in a renovated rowhouse costs. It's not that I'm a happy owner of a little unit. It's that my income literally won't support something larger or newer."

I wasn't suggesting everyone should or could live in a new class A unit. I was question how good a substitute a unit like your own is - which impacts who big the price differential needs to be to maintain equilibrium. The debate, raised by DA's column, is whether the compression of class B and class A rents is caused by constrained supply all around, or if (as some seem to claim) its because class B really is a close substitute for Class A. That really does depend on how many people of the different sets of tastes make up the demand - I dont know, but I am skeptical of how close a substitute these units are.

"I'm a fan of smart growth, but I'm recently finding it difficult to shake the feeling that we're doing it wrong. Instead of expanding transit-accessible neighborhoods, we're pricing everybody out of them."

Im not sure what you mean. To expand transit accessible nabes, you need to either build more transit (Silver line opens this year - the more H street trolley, with more debatable RE impact opens soon too - and the purple line is in the pipeline now) or expand the commute range around transit (the expansion of biking is a good way to do that). But for existing transit, within a given range, increased demand will increase prices - it would be worse if we did not increase supply.

"In the past year alone, the direction of the housing market has been especially troubling. Most vacancies I've seen are in new Class A buildings, and it appears as though those rents will begin to rise sharply once the owners have leased out the entire building. Vacancies in sub-class-A spaces are few, far between, and still incredibly expensive"

And the impact of class A building on class B is what we are discussing. You can't build new old buildings, and while you can build new low amenity buildings, the economics for that appears to be weak. Thats why filtering - of Class B tenants into Class A units, and, ultimately of class A units down as they age - is important.

by EmptyNester on May 9, 2013 10:01 am • linkreport

Why can't you build new buildings with limited amenities? People watching their budgets don't need super-fancy kitchens and pools. And there are a lot of people watching their budgets in the DC area today. Seems like there's a market there.

by Chris S. on May 9, 2013 10:07 am • linkreport

Seems like there's a market there.

There is a market but the market is so constrained (land is scarce and even then you face all sorts of regulatory hurdles and neighbor opposition) that its marginally more profitable to do the pool and granite countertops than to build plainly.

by drumz on May 9, 2013 10:14 am • linkreport

chris s

physically, of course you can. That developers don't, suggests to me it doesnt make economic sense to them - probably because the cost of building class A rather than Class B is relatively small, and the differential in rent relatively large. That would make sense if the simple cost of building new period is high (aggravated by the constraints on building new buildings).

by EmptyNester on May 9, 2013 10:16 am • linkreport

Why can't you build new buildings with limited amenities?

You can, conceptually. There's definitely a market for those kinds of apartments - the question is if our regulatory and financial framework allows developers to meet that market.

The problem is that our zoning regulations drive the cost of construction up so that developers are far more likely to target the highest prices they can.

Parking requirements add tremendously to the cost of construction. Other approvals processes add time (and therefore money) to the projects as well. There are lots of other factors, but those are two big ones. If you lower the cost of construction, that allows developers to still make their margin while marketing those units to a lower-priced and lower-amenity submarket.

by Alex B. on May 9, 2013 10:22 am • linkreport

"The problem is that our zoning regulations drive the cost of construction up so that developers are far more likely to target the highest prices they can."

I'm delighted to report that apartments in R-B and Tysons will be so much cheaper...

by charlie on May 9, 2013 10:27 am • linkreport

in fact there are a range of limitations on construction in those places as well. Arlington has had its fair share of zoning wars. And Tysons is clearly a place where the supply of WUP units has been far below the potential demand.

In both of course you've got the additional demand factor of better schools and public safety.

Again though, Im not sure how one would expect one jurisdiciton to have significantaly lower rents/prices for similar units than another. People are mobile among the jurisdictions, which tends to link the submarkets.

by EmptyNester on May 9, 2013 10:34 am • linkreport

Median federal salary? $72K (roughly). Show me a federal employee that can afford to live in class B with a family. We need the government to direct property owners to build median income apartments and condos.

In this region the median federal salary is higher than $72k mostly do the cost of living adjustment. In Washington DC the median federal salary is $101K, and I would guess that many families headed by a federal worker are two-income households.

by Scoot on May 9, 2013 10:58 am • linkreport

I can't really think of any American city where neighborhoods with lots of amenities close to transit are affordable for everyone, other than Chicago - and even then, there is a price floor on housing value. And I am really an expert on all the factors driving Chicago's relatively inexpensive real estate but I am guessing it's a combination of weather, geography, and the fact that it has remained a stable, affordable place to live for a very long time.

And I really doubt that it is ever possible to build enough to supply to soak up demand for Class A housing. Building more of it just induces demand for people to live in those areas as more amenities and transit connections are created to serve those people.

by Scoot on May 9, 2013 11:12 am • linkreport

I'm not sure this filtering effect will show up much in the urban core (and the close-in suburbs) as what you're really buying is proximity. This is especially true as population growth is likely to keep up with any increase in housing stock. The only historical push-back on this has been crime. It's the presence of crime that has kept down prices, not out-of-date kitchen counters, etc... Look at ares like Hill East, where the last 10 years has seen neglected row houses come on the market. But rather than providing affordable housing, they've been gut-rehabbed and sold at a premium.

(You've seen a filtering process in the suburbs, as kids raised in places like Aspen Hill and Wheaton grew up and moved to Gaithersburg, then their kids grew up and moved into the city or gentrified the extremely close-in areas like Hyattsville, etc...)

by oboe on May 9, 2013 11:20 am • linkreport

"it's a combination of weather, geography, and the fact that it has remained a stable, affordable place to live for a very long time."

Im not sure how weather would impact, other than its impact on the total pop and job market. Which are strong in Chicago.

As for stable, I think thats a good part of the point - Chicago has had time for supply to keep with demand (and to some extent benefits from earlier periods of peak demand followed by decline before the recent revivial)

And to some degree this is circular, depending on your def of amenities. When rents come down, a lot of the folks who move in won't be inclined to buy expensive cocktails or small plate dinners. The problem in DC, is that even if don't need those particular kinds of amenities, but do want convenience AND safety, the pickings are limited.

by EmptyNester on May 9, 2013 11:26 am • linkreport

"This is especially true as population growth is likely to keep up with any increase in housing stock."

The US population is growing about 1% a year. In recent years Metro DC has grown faster - some pessimists say it will shrink - a reasonable scenario is that it will grow at the same pace.

In recent years theres been a sharp rise in demand for transit served "urbanism" as we recover from postwar imbalance - but at some point that has to reach equilibrium too.

Im not sure, aside from constraints on average FAR across the core, why supply could not catch up to demand and at least bring the cost of new housing down close to the cost of production.

I would also suggest there is a discount for older units quite apart from location and safety. You need to look at a place that has BOTH older units and new ones to see that - I would suggest looking at, say, Col Pike in south arlington, or at DTSS to see the premium for new.

by EmptyNester on May 9, 2013 11:30 am • linkreport

"Building more of it just induces demand for people to live in those areas as more amenities and transit connections are created to serve those people."

where do these people come from? Are they spontaneously generated? If they come from anywhere in the region, they have to be weakening SOME submarket. Do more such areas actually draw people from outside the region who wouldnt otherwise have come? And create the jobs to employ them? Thats like Richard Florida on steroids, and I do not find it credible.

by EmptyNester on May 9, 2013 11:33 am • linkreport

It seems that these class A buildings are designed with the concept of the renter to be able to cut outside costs i.e. gym membership, trips to the grocery store, access to metro which means no car, gas and insurance; and instead use that money towards living expenses. For example, if you spend 50% of your monthly income on the things mentioned above, but now rent a class a unit and say that is 40-45% of your monthly income...in theory you are saving money

by Sam on May 9, 2013 11:35 am • linkreport

@AlexB, I'm not sure if the concept of "filtering" is really a contra-flow. As oboe says, as a suburban concept it works brilliantly. Layman had a cartoon on that -- the secret plan for blacks and cities by Tom Toles.

Another push back is the very naive assumption that market "works" or achieves equilibrium. As we are seeing in DC the outside demand is what is driving the RE rental market.

I'm sure the "once class A' building that I used to live in that was built in 1983 rented for far less, even adjusting for inflation, than a class B rental today.

The wish of "more apartments mean more cheap rentals" is happening right now in DC. 25K units coming in. Far more than the 1000 people a month moving into DC. (Not sure if that in true in 2013) Throw in the nearby suburbs and it far more. Yet we're not seeing a move to affordability.

by charlie on May 9, 2013 12:06 pm • linkreport

"Another push back is the very naive assumption that market "works" or achieves equilibrium. "

markets dont move to a single static equilibrium - demand and supply curves shift, as tastes change, pops grown, tech evolves, etc - and there is lag.

as for the number of units in 2013 and the growth in pop, thats probably why there are indications of rent growth slowing, or in some submarkets, reversing. But its overcoming several years when the demand grew faster than supply, so there is a lot of unfulfilled demand backlog out there.

by EmptyNester on May 9, 2013 12:16 pm • linkreport

@AlexB, I'm not sure if the concept of "filtering" is really a contra-flow. As oboe says, as a suburban concept it works brilliantly.

The concept definitely works both ways. Oboe didn't argue otherwise. I would agree with Oboe that in DC's current context (the key context being increased demand for urban living) you won't likely see prices decline with filtering - but you would see increased development and more people able to take advantage of quality urban locations.

Even just getting class B rents to stabilize would be a big plus for the city and affordability. And, given the demand, if that is to happen, the mechanism through which it will happen is filtering.

Of course, housing units can always filter down by reducing demand - and oboe hinted at that, too - crime and bad schools depress demand.

Another push back is the very naive assumption that market "works" or achieves equilibrium. As we are seeing in DC the outside demand is what is driving the RE rental market.

You naively assume my statement was a naive assumption!

I'm not advocating filtering as a way to make the market 'work' (if you define working as achieving a desirable outcome), I'm talking about filtering as how the market 'works' (defining work as the mechanism through which prices change). Big difference.

And of course there are outside factors as well. I said so in my very first comment!

The wish of "more apartments mean more cheap rentals" is happening right now in DC. 25K units coming in. Far more than the 1000 people a month moving into DC. (Not sure if that in true in 2013) Throw in the nearby suburbs and it far more. Yet we're not seeing a move to affordability.

Come on, we're talking about much longer time scales here than one quarter or even one year.

If your house is too hot and you turn on the AC, you don't automatically assume the AC is broken when the overall temperature hasn't changed 2 minutes later...

by Alex B. on May 9, 2013 12:23 pm • linkreport

@ EmptyNester; true enougn, and in any sort of discussion like this you've got this thing long term vs short term.

That all being said, looking at CL, I'm seeming some of the crappy old buildings on Mass AVE upper NW, in a very non-transit area, renting from around 1900 for a 1BR.

Not cheap.

I know when I first moved here, you could rent one in that area for around 900 a month.

by charlie on May 9, 2013 12:26 pm • linkreport

The US population is growing about 1% a year. In recent years Metro DC has grown faster - some pessimists say it will shrink - a reasonable scenario is that it will grow at the same pace.

http://www.mwcog.org/news/press/detail.asp?NEWS_ID=617
http://www.census.gov/prod/2/pop/p25/p25-1131.pdf

It's likely either the pessimists will be correct (which likely hinges on some sort of fiscal doomsday scenario), or the mainstream of population forecasters will be correct. Not sure if you can just split the difference there and say, "Some say it'll shrink, others say it'll grow by 5+% or more, so it'll probably stay the same."

In recent years there's been a sharp rise in demand for transit served "urbanism" as we recover from postwar imbalance - but at some point that has to reach equilibrium too.

Not if population growth continues at even a moderate pace. Say such demand stops rising and stays flat at n% of total population of the DC metro area.

Heck, we've seen a positive feedback loop as far as desirability of TOD areas as they become denser and more wealthy, where crime falls and services (e.g. schools) improve leading to increased demand.

At some point in the not-to-distant future, we could see a situation where people who wouldn't choose to live in a TOD environment do so "for the kids" just as some used to swallow their preferences and move to a cul-de-sac somewhere.

by oboe on May 9, 2013 12:27 pm • linkreport

If this were true, then Manhattan would be becoming affordable. It isn't.

When 'filtering' fails:

http://theworstroom.tumblr.com/

by oboe on May 9, 2013 12:31 pm • linkreport

oboe - MWCOG - 43% in 27 years. somewhat higher than 1% a year, but not close to 5%. the census figures are by state so cant be used to judge the growth in the metro area,

"Not if population growth continues at even a moderate pace. Say such demand stops rising and stays flat at n% of total population of the DC metro area."

equilibrium, not as a steady state. One where demand and supply are in dynamic balance, and the price is equivalent to the full (return on capital included) cost of production. No more Ricardian rent. Quite consistent with growth.

"Heck, we've seen a positive feedback loop as far as desirability of TOD areas as they become denser and more wealthy, where crime falls and services (e.g. schools) improve leading to increased demand."

There are TOD areas in the region that are not high crime and have good schools. There are even some in DC. Im not arguing that specific transitioning nabes wont get more expensive, but that the regional market for 'good' TOD will only cease to be so overpriced (vs the cost to produce) when more is produced.

"At some point in the not-to-distant future, we could see a situation where people who wouldn't choose to live in a TOD environment do so "for the kids" just as some used to swallow their preferences and move to a cul-de-sac somewhere."

Nah. for one most suburbs wont decline like PG. For reasons to do with larger dynamics, plus most suburbs are able to get TOD.

by EmptyNester on May 9, 2013 12:49 pm • linkreport

@charlie, I guess I need to get into the lobbying industry.

by Nickyp on May 9, 2013 12:57 pm • linkreport

where do these people come from? Are they spontaneously generated? If they come from anywhere in the region, they have to be weakening SOME submarket. Do more such areas actually draw people from outside the region who wouldnt otherwise have come? And create the jobs to employ them? Thats like Richard Florida on steroids, and I do not find it credible.

Sure, some are spontaneously generated -- e.g. new graduates, new families; others come from the immediate region, i.e., from the suburb to suburb, city to suburb or suburb to city; and still others come from other regions.

Curious, do you find induced demand for automobile traffic to be credible? Because it's really the same principle. This blog talks a lot about ways to improve quality of life in particular neighborhoods (for example the post about building rooftop bars in parking garages in Montgomery Co) but does not seem to realize that demand for good quality of life is very high, and building more housing to create better quality of life will ultimately fuel higher demand for those areas where quality of life is highest.

Want a quick way to reduce demand for housing in a particular region? Reduce the quality of life so that people won't want to live there.

by Scoot on May 9, 2013 1:06 pm • linkreport

"Curious, do you find induced demand for automobile traffic to be credible? Because it's really the same principle."

induced demand wrt to auto traffic is about the same number living in the region, but people switching to auto mode, or taking more or longer trips.

Im not sure what the alt mode is for housing - people moving from the exurbs as the price of close in TOD declines? That would mean a submarket would be having lower prices (but Im less optimistic than Oboe that TOD will be that popular). The equivalent of longer trips would be living living in larger units - more singles living in 1BR instead of efficiencies, more young couples living in 2BR or 2BR with den, instead of 1BR. I would consider that a healthy thing. The equivalent of more trips? Folks keeping more than one unit? I doubt we will see prices decline enough to make a summer home in DC or Arlington viable.

"Sure, some are spontaneously generated -- e.g. new graduates,"

More new grads than there would be? Again, youre suggesting that for a given amount of jobs, the cost of housing determines migrations of young grads? I dont believe that.

"new families;"

IE, former singles. Who used to live somewhere.

"others come from the immediate region, i.e., from the suburb to suburb, city to suburb or suburb to city;"

and again, that means the increase in supply is pulling residents from SOME submarket in the region. Thats my point.

" and still others come from other regions."

More than would come otherwise?

by EmptyNester on May 9, 2013 1:15 pm • linkreport

"Want a quick way to reduce demand for housing in a particular region? Reduce the quality of life so that people won't want to live there."

What I said = Richard Florida on steroids. Less TOD housing leading ultimately to less employment. Given the many factors impacting firm location, I dont think that dynamic works very efficiently, if at all.

by EmptyNester on May 9, 2013 1:17 pm • linkreport

induced demand wrt to auto traffic is about the same number living in the region, but people switching to auto mode, or taking more or longer trips.

That's not entirely true, it is also about *new* people coming to the region who will choose car trips over other modes. The population of the region as a whole is growing.

The equivalent of longer trips would be living living in larger units - more singles living in 1BR instead of efficiencies, more young couples living in 2BR or 2BR with den, instead of 1BR. I would consider that a healthy thing.

It is a healthy thing, but new development in this city is not going in that direction. A lot of the new development is studio and 1br units promoted for singles, particularly the class A housing. Developers do not really want to build a bunch of low-margin 3 bedroom units. And the office of planning is on a very pro-developer kick at the moment.

"new families;" IE, former singles. Who used to live somewhere. and again, that means the increase in supply is pulling residents from SOME submarket in the region. Thats my point.

Yeah, somewhere like in their parents' house, or in a college dorm, or in a cheap college apartment that will eventually be filled by another college student. Sure, there are people coming from other submarkets in the region. And then there are people coming from other regions altogether. I moved to central DC from Atlanta. I did not move into a suburb of DC and then into central DC. I was an example of someone who was induced to live here by the high quality lifestyle. If you built more housing in my neighborhood, it would only make the quality of life higher, inducing even further demand.

by Scoot on May 9, 2013 1:33 pm • linkreport

"That's not entirely true, it is also about *new* people coming to the region who will choose car trips over other modes. The population of the region as a whole is growing."

But the question of induced demand is, is it more BECAUSE of the changes made. Do more people move to the region BECAUSE of a new highway? I dont think thats what the induced demand argument WRT highways is about.

"It is a healthy thing, but new development in this city is not going in that direction. A lot of the new development is studio and 1br units promoted for singles, particularly the class A housing. Developers do not really want to build a bunch of low-margin 3 bedroom units."

That would suggest we are not having induced demand wrt housing at this point. A change in apt size mix wouldnt help - developers ARE building 2BR units, but they are marketed towards roommate pairs. BECAUSE rents are so high, BECAUSE supply is too low.

" And the office of planning is on a very pro-developer kick at the moment."

I do not agree.

"Yeah, somewhere like in their parents' house,"

If lowering rents means fewer need to live with their parents, I think thats good.

" or in a college dorm, or in a cheap college apartment that will eventually be filled by another college student. "

Again, I dont think you are understanding induced demand. It means MORE growth than would have happened otherwise. The number who graduate from college is the same whether we build more units here or not. So it sounds like you are saying if we build more, more new grads will come here instead of say, Charlotte. Again, I do not believe that effect will be substantial.

"And then there are people coming from other regions altogether. I moved to central DC from Atlanta. I did not move into a suburb of DC and then into central DC. I was an example of someone who was induced to live here by the high quality lifestyle."

would you have moved here whether there was a job or not?

" If you built more housing in my neighborhood, it would only make the quality of life higher, inducing even further demand."

again, the dynamic for an individual neighborhood is different from the entire metro area.

by EmptyNester on May 9, 2013 1:43 pm • linkreport

Very valuable point about the type of jobs being created that must match to the housing market. A race to the top could lower high end rents and raise low end - perverse but could happen in DC area...

by Developer on May 9, 2013 2:00 pm • linkreport

charlie,

Actually we are seeing rents move in response to building apartments. See:

http://www.bloomberg.com/news/2013-04-23/washington-faces-apartment-glut-after-boom-real-estate.html

http://www.philly.com/philly/blogs/inq-phillydeals/Why-are-rents-falling-in-DC-but-rising-in-Philly-.html

And I don't know where you got your figures from but from what I could find we are building ~10,000 units per year not 25,000.

I don't know why people seem to think housing is immune to supply and demand but as these articles show if you build more units than the growth in demand, prices will drop. DC is particularly troubled by high prices because of the height limit. If all those new buildings going up were twice as high and could have twice as many units then the developer could spread out their fixed costs over a larger number of units and thus afford constructing Class B buildings with fewer amenities that could rent for less.

As others have pointed out the number of people that want or can afford Class A buildings is not infinite. If you meet that demand then you'll see developers moving to capture the demand for lower amenity buildings. As long as we restrict development to the point where that demand can't be met then we won't see developers trying to sell to Class B and C tenants. Its pretty simple.

by meegles on May 9, 2013 2:15 pm • linkreport

" and still others come from other regions."

More than would come otherwise?

If one could rent a 2 br / 2 ba apartment in Manhattan, would more people come to NYC than otherwise? That seems likely.

by oboe on May 9, 2013 2:25 pm • linkreport

Oboe

I dont know. NYC has a culture of people coming cause its NYC, like certain west coast cities do. DC doesnt. And the high rents and poor QOL related to that in NYC doesnt seem to have prevented people from moving there. As far as I can tell, most of the migration to and from NYC is pretty adequately explained by the employment market.

by EmptyNester on May 9, 2013 2:45 pm • linkreport

"If one could rent a 2 br / 2 ba apartment in Manhattan, would more people come to NYC than otherwise? That seems likely."

I lived in NYC in the 1970s when a middle class couple COULD afford a 2BR apt in Manhattan.

NYC was losing population then.

by EmptyNester on May 9, 2013 2:48 pm • linkreport

I lived in NYC in the 1970s when a middle class couple COULD afford a 2BR apt in Manhattan.

NYC was losing population then.

I wonder if something else could've been at play there. Hmmm...

by oboe on May 9, 2013 3:04 pm • linkreport

er yeah, there was.

if you think it was the financial crisis, that too was secondary.

The garment industry, and most other manufacturing in NYC was heading to the south. Its one blue collar NYC mostly died. That had knock on effects on white collar, NYC of course. Wall Street etc wasnt big enough or growing fast enough to offset that.

Thats my point - its employment growth, impacted moderately if at all by cost of housing, that drives most migration.

Im not saying that if you care about economic development, you shouldnt care about housing. Clearly thats one factor in employer location decisions. But its not so strong that "induced demand" nullifies supply and demand - for the most part metro area housing markets ARE independent of each other.

by EmptyNester on May 9, 2013 3:13 pm • linkreport


But the question of induced demand is, is it more BECAUSE of the changes made. Do more people move to the region BECAUSE of a new highway? I dont think thats what the induced demand argument WRT highways is about.

I think we both get the concept of induced demand and are just discussing different facets of it, possibly talking past each other. Like you said, the glut of new housing from the construction boom is influenced by so many factors - the job market, the desirability of the housing itself, where it is located, etc etc, that unless you were looking to confirm an existing bias you could not really assume that the oversupply was itself responsible for lowering values. I mean clearly values are just as high if not higher in high demand neighborhoods of the city, even neighborhoods like U st and Logan Circle where lots of housing is being built. Induced demand from a bunch of new amenities and transit connections being built there is definitely driving up prices.

But you are fine to disagree. No problem there, have a great day!

by Scoot on May 9, 2013 3:16 pm • linkreport

" Like you said, the glut of new housing from the construction boom is influenced by so many factors"

There is no glut. Prices are still high, compared to the past, compared to other metro areas, and compared to the cost to build.

" - the job market, the desirability of the housing itself, where it is located, etc etc, that unless you were looking to confirm an existing bias you could not really assume that the oversupply was itself responsible for lowering values."

There is no oversupply. what an odd thing to say. The modest decline in rents we are seeing is probably related to both a tapering in demand due to the sequester, and to the supply finally catching up. Its hard to say how much of each. But there is nothing indicating that increasing supply does not tend to lower rents, ceteris paribus.

" I mean clearly values are just as high if not higher in high demand neighborhoods of the city, even neighborhoods like U st and Logan Circle where lots of housing is being built. Induced demand from a bunch of new amenities and transit connections being built there is definitely driving up prices."

One more time - the issue of relative rents in different neighborhoods, as gentrification occurs, is NOT what DAs post is about. Its also not "induced demand" That would mean building more transit leads to more transit riders, or building more housing leads to people consuming more housing. really, induced demand has a specific meaning - it sounds like you dont like the implications for roads some people draw from that - but you are not using the term precisely.

by EmptyNester on May 9, 2013 3:22 pm • linkreport

it sounds like you dont like the implications for roads some people draw from that - but you are not using the term precisely.

What implications? I don't drive, why should I care what the implications are?

Induced demand is a pretty simple concept. Once supply increases, more of that good is consumed. That's pretty much it. That can apply to transportation, housing, even hamburgers. Gentrification is a classic example of induced demand.

I don't think that DC has reached that tipping point yet where supply has caught up to latent (i.e. induced) demand for housing. We are still in a period where developers are inducing demand for housing by building more housing - in some areas certainly more than others (without a doubt there are some areas where developers are building housing where people just don't want to live). So long as gentrification occurs, the tenet that you can increase affordability by increasing housing stock will not hold.

Re Class A housing: I think that even if you built out all the Class A units that the city can handle (given available land area, zoning constraints, height limits, etc), this would still not meet the demand for them, both from the people who live here and the people who migrate here. So in that respect I think you can say, practically speaking, that there is an "infinite" demand for Class A units because we will never be able to build out all the Class A units that we hope to build unless there is some big development change, e.g. raising the height limit or changing the zoning ordinances.

Of course that's just my opinion. I don't underestimate the number of wealthy folks who live here or want to move here. But like you said a lot of it will probably depend on employment prospects.

by Scoot on May 9, 2013 4:27 pm • linkreport

@andrew: Instead of expanding transit-accessible neighborhoods, we're pricing everybody out of them.

This, this, a thousand times this. The lack of transit vision in this city is absolutely depressing. More Circulator routes and streetcars are just a panacea when what's needed is at least three additional heavy rail lines to open up vastly underserved areas of the city.

Housing demand in DC is almost entirely about transit access. Does it have a Metro stop? Is it relatively safe? Are there some things to do in the immediate area? BOOM. Major influx.

I'm not saying every Metro station has spurred TOD (e.g., Deanwood), but the development you do see has really exclusively taken place in areas with a direct Metro connection. Plus H Street, but notice the lack of density in comparison with say, the 14th Street corridor and its generic, boring Class A luxury buildings with ground floor small plates restaurants.

If we truly want to create the necessary space and conditions for additional Class B units, we need to open up far more of the city to Metro. That's what drives development around here, and will continue to do so for our generation.

by MetroDerp on May 9, 2013 5:04 pm • linkreport

"Induced demand is a pretty simple concept. Once supply increases, more of that good is consumed. That's pretty much it. That can apply to transportation, housing, even hamburgers. Gentrification is a classic example of induced demand."

building more housing, causing more housing to be consumed, is induced demand. Building more transit, and that causing more housing to be consumed is not. Building more amenities and that causing more housing to be consumed is not. Personally I am very skeptical that building dense multifamily housing is a major driver of gentrification - in most dc nabes, and in most urban nabes, gentrication happens via renovation of the existing housing stock typically row houses - and new housing comes later.

"So long as gentrification occurs, the tenet that you can increase affordability by increasing housing stock will not hold."

again, that is incorrect. By gentrifying a neighborhood, you are adding competition to already gentrified neighborhoods. Building a new midrise on H Street MAY make h street more desirable (thats debatable) but it certainly does not make Conn Avenue more desirable.

"Re Class A housing: I think that even if you built out all the Class A units that the city can handle "

Class A units are being built not only in DC, but in close in suburbs as well.

by EmptyNester on May 9, 2013 5:07 pm • linkreport

MWCOG estimates about 40% growth in the metro area by 2040. I think thats optimistic, but lets go with that. That means the metro area grows from 5.7 million by another 2.3 million or so. to about 8 million. Assume say, 25% want walkable urbanism. That may be high - the pew study said about 1/3 will trade space for convenience, but a lot of those folks wont trade much space for convenience, and will never end up in a WUP of any kind. But lets go with it. So we get 2 million. Can we accommodate all 2 million in WUPs? Fairfax envisions 100k in tyson. FFX has other potential WUP areas - merrifield, rte 1, etc. MoCo is looking for similar. Some folks who have a taste for WUPS work way out in Loudoun, and will have to make do with faux urbanism like One Loudoun,or move to Herndon, Reston Town Center, etc.

I think the metro area can certainly accommodate 2 million in WUPs, esp given that many of those folks dont work in DC.
By no means will all live in DC. But DC will still be a very important part of providing the housing.

by EmptyNester on May 9, 2013 5:16 pm • linkreport

http://trends.truliablog.com/2013/05/american-homes-by-decades/

"But in a few markets, old homes cost more than new construction. Homes currently on the market in Houston from the 1920s have a median asking price of $317,900 – more than Houston homes from any other decade. Washington D.C. homes built in the 1900s and earlier are listed for more than homes built in any other decade. In New York, San Francisco, Seattle, and Austin, too, the decade with the most expensive listings is long in the past.

Where is buying a piece of local history most expensive, relative to buying a recently built home? Charleston, SC: the median asking price for pre-1900 homes is $805,000 – more than twice the median price of listings from any other decade. Furthermore, the median asking price for 19th (and earlier) century Charleston homes is the highest among all metros for homes from that era. We bet they’re not calling them “used homes” in Charleston."

by charlie on May 10, 2013 6:13 am • linkreport

By gentrifying a neighborhood, you are adding competition to already gentrified neighborhoods. Building a new midrise on H Street MAY make h street more desirable (thats debatable) but it certainly does not make Conn Avenue more desirable.

I don't really see it that way. If there is some sort of transit connection to H Street from Conn Ave, then development on H Street is just another amenity to residents on Conn Ave, which could (and does) make Conn Ave a more valuable for people already demanding to live there.

I live in a long-gentrified neighborhood off Conn Ave and demand for living here will always significantly outstrip supply. There are a ton of great neighborhoods in this city and yet condos in my neighborhood usually go under contract in less than a week. People here place value on certain things that H Street never could or would offer, and vice versa.

by Scoot on May 10, 2013 10:13 am • linkreport

Washington D.C. homes built in the 1900s and earlier are listed for more than homes built in any other decade.

There would seem to be some pretty damn obvious confounding variables there, no?

Old homes are also far more likely to be located in dense, close-in walkable urban neighborhoods, are they not? How do those newer units in those places compare to the comps in that 'hood that are older?

You're not going to find a lot of Victorian rowhouses in Van Ness or Dunn Loring or East Falls Church, but you will in Dupont.

by Alex B. on May 10, 2013 10:26 am • linkreport

So many great comments in this thread. It's a pleasure to read.

2. wrt the classic concept of filtration, like neighborhood development and outmigration, as it was defined originally, it was a one way phenomenon.

"Conventional housing theory holds that housing ages and filters downward in quality, while people filter upward." p. 42 _Building Neighborhood Confidence_ 1976. But as Goetze pointed out, the way the theory works and reality were very different, it wasn't lock step.

"Clearly housing age or condition per se do not determine the future dynamics of neighborhoods: there are more subtle forces determining who are the replacement buyers and the new residents, and shaping of their housing demand on the maintenance of the stock."

3. Scoot's comments about latent demand being so high for living in DC (because of metro access etc.)--once municipal service quality started improving and crime dropped (as charlie would normally point out) and with a plan (even if I disagree with it) for improving schooling--I tend to agree with, and because this is so high comparatively speaking, the filtration argument isn't all that relevant, especially because most neighborhoods have been dominated by single family housing, with the exception of the apartment buildings (or co-ops/condos) along 16th, Connecticut, Wisconsin, and Massachusetts Avenues.

4. WRT MetroDerp's excellent comments about the need to expand heavy rail (I'm down with at least two expansions--sep. blue/Silver line, sep. Yellow Line; don't know what the third one s/he has in mind), I have been thinking about writing another H Street entry, post-streetcar.

One of the things that differentiates H Street from some other corridors is that some of the blocks have big enough parcels to build a lot of housing on, 200-400+ units per block, depending on the 200 block (both sides), 300 block (both sides) 600 block--a double block (both sides), 800/900 block (south side), 1200 block (south side) + areas west around Hechinger Mall (Atlas Flats, Hechinger Mall, RFK parking lots, Pentacle).

All of the @#$%^&*( whining about streetcars will be put to rest once the streetcar starts running on H Street, and it will be a better ride than the bus (of course, there won't be enough streetcars to have enough service, that's another issue). It will be visible.

It will also drive the development of new, quality retail all along the corridor. Add new housing + interesting retail + the nightlife + the streetcar and I think it will become one of the more interesting and successful neighborhoods in DC, especially as the Amtrak Master Plan and Burnham Place developments come to fruition over the next 20-30 years.

5. wrt the composition of housing units in new multiunit buildings, yes, they are working on making them smaller. Yes, developers build for the most profitable market.

It's arguable that in the DC regional market, higher income people want to live with families in multiunit buildings the way they will in NYC.

That might be ok though. Traditionally, we have under-provided supply for housing for singles and childless couples, and have over provided SFH housing (attached or detached). By adding these kinds of units the ability to serve a greater variety of household types/segments occurs. This should make neighborhoods more resilient and successful over time, and allow for flows between different types of housing as household characteristics change for individual households. We'll see.

by Richard Layman on May 10, 2013 1:31 pm • linkreport

Just to make it clear, "filtering" is nothing new. It has been documented for at least a century, when it was a pillar of how Chicago School sociologists understood urban neighborhood change. In their world, cities grew centrifugally, with each wealthier generation moving further from the core and abandoning their old houses to newer, poorer arrivals.

Speaking of Chicago, though, one key to its relatively lower housing prices (relative to the amenity value of said housing) is that relatively lax land use regulations mean that housing construction can easily respond to demand. Metro-wide, households grew by only 5.6% from 2000-2010, but housing units increased by 9%; within the city, households dropped by 1.5% but housing units increased by 4% -- including 40,000 units downtown.

When a neighborhood gains more amenities like shops, services, and safety, those increase the "amenity value" of the apartments within. That's how Class B apartment rents continue increasing in gentrifying neighborhoods, even as the apartments themselves don't get any nicer. Similarly, transit accessibility is about metropolitan access: as access to the city gets more valuable (particularly for its jobs, but also its other amenities), access to the city becomes more valuable, and hence higher values.

Induced demand for walkable urban places is, in fact, having an effect on the market for exurban sprawl. That's a good thing, from an environmental point of view!

by Payton on May 10, 2013 6:24 pm • linkreport

Ultimately, NOT building more units of any class will make housing prices go up for everyone -- those who want Class A bid up the prices of the Class B, B-preferring residents to C, etc. That's San Francisco, Los Angeles, Brooklyn, etc. in a nutshell.

But the subtle point regarding classes of complexes does matter -- if EVERY new property is class A, your market gets out of whack where there's insufficient demand for class A but insufficient supply for class B. My guess is that you'd get an intermediate tier of apartment that new class B renters would be forced into, which is class A-priced apartments that are the least desirable of the bunch. Their prices might be a little lower than the other Class A's, but they will be the only ones available.

The REAL issue is how to circumvent the profit-maximizing behavior of developers and get them to build an appropriate amount of class B and C apartments for those segments of the population, even though their potential margins will be lower.

by Vinnie on May 13, 2013 1:15 pm • linkreport

Also a related question: how do we convert Class C stock into Class B? The real driver of that is demand and incentive, and key to increasing those is by adding Metro connectivity with new lines like, yesterday.

by MetroDerp on May 13, 2013 5:12 pm • linkreport

"If there is some sort of transit connection to H Street from Conn Ave, then development on H Street is just another amenity to residents on Conn Ave, which could (and does) make Conn Ave a more valuable for people already demanding to live there."

I doubt that. People buy/rent mostly based on convenience to work, and on amenities in their neighborhood. I doubt amenities in a different neighborhood add much - certainly not enough to offset the supply effect.

"There are a ton of great neighborhoods in this city and yet condos in my neighborhood usually go under contract in less than a week."

As we have discussed repeatedly, there is not enough housing in the WUPs in DC and adjoining jurisdictions to meet the demand for housing in WUPs, which has increased even faster than the metro area population. We can debate the reasons for that - simple lag, legal restrictions, or institutional limits on the ability of developers to create new supply - but ultimately nothing that is for sale is immune to being overpriced as supply catches up to demand. Certainly not housing.

by EmptyNester on May 13, 2013 5:49 pm • linkreport

"Scoot's comments about latent demand being so high for living in DC (because of metro access etc.)--once municipal service quality started improving and crime dropped (as charlie would normally point out) and with a plan (even if I disagree with it) for improving schooling--I tend to agree with, and because this is so high comparatively speaking, the filtration argument isn't all that relevant, especially because most neighborhoods have been dominated by single family housing, with the exception of the apartment buildings (or co-ops/condos) along 16th, Connecticut, Wisconsin, and Massachusetts Avenues."

first, those buildings exist and are important

Second, there are also older buildings in places like Silver Spring, on Columbia Pike in Arlington, etc. Im not sure why it makes sense to limit the market to DC. The market for transit served WUPs is wider than that.

by EmptyNester on May 13, 2013 5:57 pm • linkreport

A slight oversupply of Class A is actually happening right now in a subsection of the downtown office market (smaller tenants, edge locations). What results is known among brokers as "flight to quality": tenants that usually would go to Class B instead get incentives to move into Class A buildings.

by Payton on May 13, 2013 6:07 pm • linkreport

When I think of filtering I think of the usual concept of new fancier houses being built (usually further out) and the houses left behind (usually in old ring suburbs) becoming more affordable for lower incomes ("used" housing).

In DC this would mean new fancier "class A's" luring tenants from older "class A's", making them in effect Class B.

However, this doesn't work if the rents for the new Class A's are significantly higher than the rent for the older Class A's making the rents for the old Class A's stay the same.

This is what I see mostly.

by Tom Coumaris on May 15, 2013 11:13 am • linkreport

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