This is part 2 of a series on the interaction between the rental housing market and rents. Read part 1, “How I Set Apartment Rents.”
We’d need a few hundred of these to affect the housing market, minimum.
Housing markets are complex, and here I attempt to explain how there can be a broad market trend and submarkets bucking that trend. I’m also going to imagine what might happen on a single block or if there were big neighborhood changes.
An Analogy
Bear with my analogy.
Climate is to the Housing Market
as
Weather in a Given Location is to Rent on a Given Apartment
An extremely cold or snowy winter in one place for one year doesn’t say anything about climate change. In the same way, whether my rents go up or down doesn’t say anything about the overall housing market. A collection of weather data from the whole planet over multiple years DOES say something about climate. And, rents across the whole city or region over multiple quarters DOES say something about the housing market.
As a landlord, I’m balancing multiple interests (my ability to get renters with my level of investment of time and money) for my particular units. As prospective tenants, people are also balancing multiple interests (location, cost, unit quality [management, maintenance, beauty, size, amenities]) in the world of available units. A given apartment’s rent is limited by the fact that people won’t pay a higher price for an apartment that provides what they want if they can find another equally desirable one for less.
Credit: Minnesota Housing Partnership
Across the whole market, there are broad trends. Things went up until 2008, then they dipped and stayed flat until 2010, and then they started rising again. Within those trends, rent on some apartments went down in 2009, but that wasn’t true for all apartments. (Mine didn’t).
The Market is BIG
The housing market is really BIG! According to the US Census, there were 178,287 housing units in Minneapolis in 2010, and of those ~90,570 were rental units. According to the Met Council, In the 7-county metro for the same period there were 1,186,786 units total, and of those, 335,274 were rented.
What’s the point of looking at the 7-county numbers when I’m just writing about Uptown? People looking for housing are balancing many factors, including location. If someone wants to live in Uptown, but also wants a stylish 2br/2ba apartment and can’t afford the $2100/month rent in those new Greenway buildings, that person may go to St. Louis Park, instead. (That is how I ended up renting a house by the Crystal airport when I first landed in the Twin Cities — Crystal was next door to Golden Valley, where the house-hunter had a job, and the house-hunter couldn’t find a suitable place in GV.)
Any discussion that suggests increasing supply affects rents — even just slowing rent growth to the pace of inflation — requires a BIG increase in supply. And the borders of sub-markets are porous, especially because of our auto-centric culture and regional road system. One more neighborhood or suburb just doesn’t feel like a big deal, to most people.
But for a moment, let’s pretend those borders are not porous. With those ~90,000 rental units in Minneapolis, if you want to increase the vacancy rate and hypothetically get landlords competing for tenants (and lowering rents again), you’d need to get the vacancy rate up from 4.7% (Minneapolis Trends, 4th Quarter 2014*) to over 5%, probably at least to 7%. (The last time rents went down across the market was when it was at 7%.) That means about 2,210 additional units in Minneapolis. Depending on your perspective, that might be considered a drastic oversupply of units.
That assumes no population growth, and no pent up demand from people in their parents’ basements who have gotten jobs since the economy improved. It assumes there’s no one moving to the city from the suburbs, no demographic shifts or baby boomers downsizing, and no change in the percentage of households who prefer to rent rather than own. And the number at the base of that math is old – it ignores the construction that’s happened in the last five years. (It’s worth noting there’s lots of wiggling going on, probably due to these factors. The 3rd Quarter report listed the vacancy rate as 2.1%.)
Rental Vacancy Rates
Source: Minneapolis Trends; 4th Quarter 2014
Shifting the rental housing market in the Twin Cities, or even just in Minneapolis, is going to require many strategies. Some are very micro (see Accessible Dwelling Units), some are small (see infill), some are sizable (see the Greenway housing boom), and some are subsidized.
A Very Particular Hypothetical
I want to explore how a particular project might affect a micro-market – say, one block. I bike and walk the block hosting the famed 2320 Colfax project. What will that mean for rents on that block? To repeat, no single building is going to affect the housing market as a whole. Only many, many new buildings can do that. However, could one building on one block affect nearby rents?
- 5 old, single family homes (not part of the rental market)
- 3 old, triplexes/subdivided homes
- 2 old, homes that have been subdivided into rooming houses
- 3 low-slung, 70s-era walk-up apartments
The new building will be walk-out townhomes below apartments, and the only building constructed in the last 30 years.
What is on the Colfax block now.
What will be added. 2316 & 2320 Colfax S Rendering Image credit Lander Group Urban Development
That means there will be five different housing sub-markets on a single block. They all exist within the larger Uptown, Minneapolis and 7-county Metro markets. The coming project may signal a more desirable neighborhood, or it may simply reflect what everyone already knew: it’s a desirable neighborhood. So what happens to the neighbors?
Worst-case scenario, it prompts neighboring owners to increase their rents. Of course, none of them can charge rents matching the new building! And, unless they are already charging below-market rents, they can’t raise rents above the similar buildings on nearby Bryant, Aldrich, or further south in the Wedge — residents will just move. If they are charging below market rents, it matters why. Is it because they rent to friends, want to avoid turnover, have good hearts, or are not paying attention to the market? Unless it’s because they are not paying attention, they are likely to stick with the current plan.
An Expanded Hypothetical
Now, if enough new apartments get built, and there are suddenly thousands more new $1000/month 1br apartments in the Wedge, that will affect the neighborhood market. And here’s where it gets really messy. I can imagine several outcomes:
- Maybe some Flux or Elan residents decide they’d rather skip the sauna, billiards and shuffle board to save $500-$1000/month as what they really want are in-unit laundry and location. Will Flux and Elan have to lower rents to hit their occupancy targets?
- Maybe the new $1000 units have to drop their prices to $925 because there are too many 1br units in the Wedge.
- Maybe some residents from the Victorians and 70s walk-ups are game to spend a bit more to move to the new buildings, or to trade in the second bedroom for a new apartment with super-low utility costs. Will those owners will have to lower their rents or increase amenities to appeal to folks from Whittier or East Isles or Northeast?
- Maybe the construction isn’t enough to meet demand, and simply makes the neighborhood more and more desirable, pulling people from surrounding areas and other parts of the Twin Cities (see argument 4). If (and only if) there are enough new units, those other communities will have to find other ways to fill their units, lowering rents or increasing amenities.
None of those things happens, though, if you have just one building. That only happens if you have enough new construction to affect the entire housing sub-market of the Wedge, and all of Uptown and Southwest Minneapolis.
Vacancy Rates by Minneapolis Geographic Sector
Turns out ALL the vacancies are in Downtown, they generally declined elsewhere.
Source: Minneapolis Trends, 4rd Qtr 2014
But the Market Won’t Help REALLY Poor People
No matter what, the market, even if it’s got a lot more vacancy than it does today, won’t meet the housing needs of very low-income people. I won’t pretend it can. It can’t.
*Check out pages 25-30 for a great summary of trends in rental vacancies and rents in Minneapolis. It includes data broken down by five geographic areas of the city, and also by unit size.