Housing Markets? Humbug!

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 buildings to affect the housing market, minimum.

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.

As we all navigate our particular situation, we create a lot of noise. If you gather enough data points together, though, you get a picture like this one:
Average Market Rent, Twin Cities

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%.)

chart of mpls vacancy rates

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?

The 2200-2300 block of Colfax currently includes:
  • 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 Colfax now.

What is on the Colfax block now.

What will be added. 2316 & 2320 Colfax S Rendering source Lander Group Urban Development

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.

chart of rental vacancy rates in 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.  

Streets.mn is a non-profit and is volunteer run. We rely on your support to keep the servers running. If you value what you read, please consider becoming a member.

, , , ,

9 Responses to Housing Markets? Humbug!

  1. Wayne March 19, 2015 at 10:53 am #

    I’m curious if there’s a map handy or a description of what parts of town those geographic sectors refer to? They aren’t using a very common naming scheme for Minneapolis, so I have no idea if “North” refers to North Minneapolis or anything north of downtown (like Northeast/Southeast).

    • Wayne March 19, 2015 at 10:54 am #

      And does downtown include near-northeast NIEBNA? Or does it end at the highways and river?

      • Janne Flisrand
        Janne Flisrand March 19, 2015 at 10:59 am #

        Wayne, if you click through to the Minneapolis Trends reports, there’s a map on p42.

        Basically, the dividers are 35W between S/SW, Mississippi between N/E, 394 between SW/N, and the West Bank gets added to East for reasons I can’t explain.

  2. helsinki March 19, 2015 at 12:58 pm #

    I’m a bit confused about the analogy (not because I’m a climate denier!)

    You note how viewing the rents of individual units in isolation fails to paint an accurate portrait of trends in the broader market. This makes intuitive sense. I was lost, however, by the discussion concerning Uptown.

    Sub-markets, like micro-climates, are linked to overall trends but nevertheless function according to a particular logic. So – Paris is significantly warmer than Montreal even though it sits at a more northerly latitude because it is warmed by the Gulf Stream. Similarly, Uptown apartments can command higher rents than apartments in, say, Phillips, because despite their equidistance to downtown, Uptown has more amenities and is seen as a more desirable place to live. By this logic, not only is the 7-county area vacancy rate the wrong metric, but splicing Minneapolis into 5 geographic areas and measuring the vacancy rate of each is also an unhelpful barometer because it compares apples to oranges: expensive neighborhoods are lumped together with inexpensive ones.

    Viewed through this smaller lens, is it really a stretch to say that considerable increases in supply within a neighborhood submarket will have only a marginal impact on price? Obviously the construction of a single building won’t – as you explain with the 2320 Colfax hypothetical. But that claim isn’t really being made. At the same time, a single building might alleviate pre-existing upward price pressures; in other words, rents in surrounding buildings might not increase as quickly or dramatically as they would have done in the absence of the new construction.

    There seems to be a tension between competing claims in this piece. On the one hand, there is a recognition that housing markets are micro and highly location specific. On the other hand, you say that increased rental supply can only affect rents if that supply increase is very large because the rental market must be viewed on a metro-wide scale. Don’t those two points seem a bit contradictory?

    • Janne Flisrand
      Janne Flisrand March 19, 2015 at 2:08 pm #

      helsinki, thanks for this thoughtful comment.

      What I was trying to get at with the analogy is that climate change could cause the upper midwest to be colder on average in the winters, while global temperatures go up. But there are a lot of complexities in the system that make predictions very difficult — ocean current and circulation patterns and transpiration rates over rain forests impact the upper midwest, but we don’t understand them well enough to predict. What we CAN predict is that big enough increases in CO2 (and other greenhouse gasses) will result in a net increase in temperatures across the globe.

      Similarly, there are a lot of intersecting complexities in housing markets that we can’t predict. An increased rental supply in a micro location MIGHT send the neighborhood rents down or, up depending on all the factors I’m ignoring because they’re so complex. The reason I bring in 7-county-metro vacancy rates is that similarly, we CAN predict that big enough increases in housing supply will result in net decreases in rents across the housing market.

      Does that help get past the seemingly contradictory market logic?

      • helsinki March 25, 2015 at 5:21 pm #

        Thank you – yes, it is an apt analogy: both cities and the weather are complex adaptive systems. At the same time, I think it is safe to say that absent increasing demand, an increase in supply will lower the price (i.e., rent). Whether a new building increases demand (by making the neighborhood more desirable) or lowers rent (by increasing supply) – to my mind both outcomes are quite positive, yet you wouldn’t know if from the sturm und drang and general fuss surrounding new developments in traditionally residential neighborhoods of Minneapolis.

  3. R. John Anderson March 19, 2015 at 9:34 pm #

    In addition to understanding where a particular building and it’s particular units fall i their sub-market, there are some larger demographic issues at play. I suspect that over the last 5 years there are more and more one person households as a percentage of residents in your Uptown submarket. When there is a large supply of two bedroom apartments and a low supply of one bedrooms do the one bedrooms maintain lower vacancy rates. I think the prospect of have no roommate is a genuine amenity for a lot of people.

    • Janne Flisrand
      Janne March 20, 2015 at 3:06 pm #

      Yes, that is absolutely true. The post was getting long, and I didn’t think I could do justice to all of the nuances and feedback loops in markets, so I artificially set those sorts of nuances aside to focus on the global picture. Thanks for pointing out some of the details we’ll need to think about when diving in more deeply.

Trackbacks/Pingbacks

  1. Flisrand Consulting » On Rental Housing and Markets - April 6, 2015

    […] where I explain How I Set Apartment Rents. I moved on to a basic housing market explainer in Housing Markets? Humbug! In the third, I walk through an overview of how big the need for affordable housing is, what […]

Note on Comments

streets.mn welcomes opinions from many perspectives. Please refrain from attacking or disparaging others in your comments. streets.mn sees debate as a learning opportunity. Please share your perspective in a respectful manner. View our full comment policy to learn more.

Thanks for commenting on streets.mn!