Rent prices experienced an unexpected decline in May 2023 after a prolonged period of increase due to the impact of Covid-19, as reported by the June 2023 rent report by Rent.com. However, despite this recent downturn, the U.S. housing market still faces a substantial shortage of 6.5 million homes, as highlighted by CNN. Data from Freddie Mac indicates that the rate of new home construction is insufficient to keep pace with the growing number of households forming.

Given the persistent rise in rents and the acute housing shortfall, one might question why developers are not accelerating housing production. The answer to this question is multifaceted and involves addressing both affordability and development considerations.

Among Americans, 61% express an inability to afford a home, as reported in A Dime Saved. Moreover, one in five individuals believes they may never achieve homeownership. Meanwhile, developers typically embark on housing projects when they perceive clear opportunities. In regions where conditions favor construction and demand for housing is evident, developers are more inclined to initiate and market properties. In essence, increasing the number of homes built could alleviate shortages and potentially drive down rents.

Here are some key insights into why more housing is not being built and strategies to create more accessible housing opportunities for Americans:

 

Land and Development Conditions:

After years of ongoing development, finding suitable land for construction becomes challenging in certain areas. Some municipalities lack sufficient available land for development, while in others, residents may resist new construction, reflecting the “Not in My Backyard” (NIMBY) sentiment. Additionally, some cities impose density limits, such as the floor-area ratio (FAR) cap in New York, which restricts residential building sizes to 12 times the lot size.

Developers typically assess regulatory constraints before proceeding with a project. While zoning regulations serve a purpose in some areas, less restrictive zoning could incentivize new projects. For example, places like Houston, Texas, with fewer height and density restrictions, may attract investors.

Financing Considerations:

Historically, development financing has been considered highly speculative. Amid recent bank failures and heightened pressure on lenders, providing construction loans may entail greater risk. Lenders may prefer financing existing apartment buildings, particularly those generating cash flow.

Moreover, higher interest rates play a role. Developers considering projects such as rental housing construction must calculate the market sale price. With increasing interest and cap rates, alongside investors seeking higher returns, the project’s value diminishes. Until land prices decrease, justifying construction may prove challenging, especially if developers perceive inadequate profit margins.

Tax Incentives:

Developers may hesitate to undertake projects without favorable tax benefits. In New York, for instance, the 421-a tax abatement, which expired in 2022, offered developers a 35-year tax exemption in exchange for providing 25% to 30% of units at affordable rents. After its expiration, developers were less inclined to assume the risk, knowing that completed projects would be fully taxed.

In June 2023, Governor Ron DeSantis signed a senate bill in Florida, allocating $711 million for housing projects and programs. The bill grants multifamily developers and owners property tax exemptions and credits, stimulating construction activity.

Rent Regulations:

States like New York, California, Oregon, and Minnesota impose rent increase limits. Capped rates exert downward pressure on the finished product’s pricing. When developers anticipate difficulty achieving market-rate rent increases, it dampens their enthusiasm for construction.

However, removing rent regulations can level the playing field and reduce rents overall. In Boston, lifting rent control triggered the city’s most significant housing and development boom, resulting in lower housing prices rather than the anticipated rent hikes.

Transit-Oriented Opportunities:

Initiatives such as those by the Regional Plan Association in New York aim to promote new home construction near transit stations, ultimately enhancing affordability and stability. This concept involves repurposing underutilized parking lots for housing development adjacent to major transportation infrastructure.

In areas where alternative transportation modes gain popularity, converting large parking spaces into housing could cater to residents seeking proximity to amenities and public transit. Developers could seize these opportunities to provide healthier, sustainable community options.

 

Undoubtedly, numerous regions face housing crises, such as New York City, where Mayor Eric Adams advocates for 500,000 new units, alongside the Real Estate Board of New York’s call for 530,000 units by 2030.

While demand for affordable housing is evident, there’s also interest in market-rate options. Thus, increasing housing supply across various affordability levels could serve as a viable solution to the housing crisis, potentially leveling the playing field and reducing rents overall.

 

(Source: James Nelson, Forbes)

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About the Author: Kaitie Moore Underwood

Kaitie Moore Underwood
Kaitie Moore Underwood's roots in competitive rodeo in Texas intertwined with her academic pursuits at the University of Houston, where she met her husband, Hank. Their move to the Hill Country in 2021 marked the beginning of both their family and Kaitie's successful career in real estate, assisting 18 families in her first year. With a background in the hospitality industry, recognized for her service excellence by the Starwood Hotel Sales Organization, Kaitie has honed her skills in financial analysis, strategy, and marketing. Now, as a pivotal member of the Blue Collar Commercial Group, she continues her professional ascent, consistently exceeding expectations through her dedication to relationships and solutions.

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