From the Desk of the COO
As the saying goes, the only thing that is constant is change. It’s what moves us forward for better or worse and what ultimately dictates the foundation from which we conduct our affairs, both personally and professionally. However, by definition, change is the instrument that makes the form, nature, or content of something altogether different from what it is or what it would be if left alone, so as we work to advance our personal and professional agendas, we are inherently imparting change. As such, we are continually operating from a foundation that is not fixed and that is evolving with each new action we impress upon it.
So, when someone asks me to assess the real estate market, it’s kind of like asking someone about the weather. I can tell you with certainty what is currently going on outside, and to a certain degree, in the near term. But anything beyond that is really just a forecast. There are many forces at work that can and will alter the current landscape and inextricably alter any future prognostications. The only question is how long will it be before these changes take place? A day, a month, a year, a decade?
With that said, the current real estate market conditions are already impacting many development projects nationwide, which could very well carry over into the long term. Primarily, we’re seeing a surge of millennials and fresh college graduates who are intent on escaping their suburban upbringing to live in a more convenient and convivial urban environment. The influx of young city dwellers has resulted in a housing deficit across many metropolitan areas that is affecting this budding workforce, many of whom do not plan on buying homes in the near future and are thus turning to renting as their primary source of housing.
While this does present development opportunities, high demand for high quality housing begets high rents. With scores of young professionals and recent grads who are saddled with student loan debt entering the market, a (not so) perfect storm is brewing for real estate developers. Namely, a growing population of renters who are highly sensitive to changes that could have an adverse effect on monthly rates, as opposed to homeowners who are more sensitive to developments that could have an adverse effect on home value. The result is a serious concern amongst this new generation regarding how affordable it is to live not just in urban areas, but urban areas with gainful employment. Presumably, this will eventually trickle into the political arena and have real effects on public policy regarding development and land usage.
In fact, some city and state level governments are already in the process of bringing rent control legislation to the forefront, which has wide-reaching ramifications for real estate developers. This has created a nationwide divide amongst states and municipalities regarding land use policies intended to address rising housing prices. Oregon, for example, has recently enacted a statewide rent control policy. Massachusetts (Chapter 40B) and New Jersey (Mount Laurel Doctrine), among others, have utilized inclusionary zoning – which requires 8-10% of residential floor area be set aside for affordable rental – as their primary policy mechanism, while cities such as Houston, TX have resorted to a drastic decrease in zoning laws altogether as a way to increase the availability and affordability of units on the market.
All of these differing policies underscore a widespread and profound disagreement amongst legislators across the country who are attempting to mitigate these shifts in the real estate market. The sheer level of political discourse surrounding these issues in the housing market is a strong indicator of changes to come. As developers, it’s imperative that we effectively coordinate with city, county, and state level governments regarding new construction, and ensure our relationships with both policy makers and the public are well maintained. Increasing the strength of public-private partnerships will be key in navigating markets that are becoming increasingly influenced by policy. Not only will this help us keep attuned to the happenings on both sides of the coin, it will give us a solid vantage point from which to observe market conditions, anticipate fluctuations, and cultivate solid development strategies in the face of constant change.
Ezra Stark, Chief Operating Officer