Home Contributors McNellis: West Coast Housing Crisis is a High Class Problem

McNellis: West Coast Housing Crisis is a High Class Problem

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Economic Innovation Group, Airbnb, Newgard Development Company, Great Recession, Florida, California, Rust Belt. Southwest

By John McNellis

McNellis
There are problems and then there are high-class problems. Being unemployed is a problem. Getting hit with a huge tax bill is a high-class problem. Not qualifying for food stamps is a problem while discovering your favorite bistro is fully booked is a high-class problem. Being chased by debt collectors is qualitatively different than being hounded by paparazzi. You get the picture.

Perhaps explaining why we hear so much about it, our housing crisis is another high-class problem. There is no housing crisis in the bottom 20 percent of our zip codes. According to the Economic Innovation Group, a business-backed DC think tank, the vacancy rate in distressed America is 14.4 percent, a rate guaranteed to floor rents and prices. The elite zip codes–the top 20 percent–have a vacancy rate a bit under 5 percent and no doubt approaching effective zero in the white-hot coastal zip codes.

And elite neighborhoods have–you guessed it–high class problems. One is Airbnb.

In order to continue its phenomenal growth, Airbnb has been forced to shed its sheep’s clothing and admit its essence. With the recent announcement of a joint venture with Newgard Development Company, a Florida builder, the company has all but proclaimed that it’s nothing more than a hotel operator. A poorly-regulated hotel operator, as much about grandma renting out her sewing room as Uber is about helping drivers earn pocket money. Hand-in-hand with Airbnb, Newgard intends to build a couple thousand apartments where tenants can Air-out their units 180 days a year and split the profits three ways.

This business model–leasing apartments to the gullible at outlandish rents predicated upon the income they can expect from their own overnight rentals–suggests two obvious winners and a host of losers. The losers will run the gamut from the part-time tenants destined to be disappointed with their actual returns to the work-force tenants in need of real housing to society at large as it watches its permanent housing supply dwindle away. Who will build an apartment when the hybrid hotel/apartment gets so much better economic mileage?

Maybe what this should be telling us is that, somewhat akin to the minimum wage, one size doesn’t fit all. Rather than regulating housing in the less fortunate zip codes–11 percent of California’s population lives in a distressed zip code–we should be encouraging job growth there and focusing regulations on where they are truly needed.

Here are a couple suggestions:

First, the lowest hanging fruit of them all: Airbnb and its ilk. Treat these companies for what they are–hotel chains–and ban them outright in residential zones. How hard is that? Besides tin-cup landlords and Airbnb lobbyists, who is going to complain?

Second, our need for affordable housing is so great we should abandon the lovely notion of providing home ownership for the economically challenged and instead focus on rental housing. Here’s what happens in the real world if you require, say, a 100 unit subdivision or condominium project to sell 15 percent of its homes at affordable prices, that is, at about 40-50 percent of the market price. You create 15 lottery winners who will never move–there is always a provision that says the profits go back to the housing authority if the house is sold. And who will likely be unable to afford the necessary upkeep on their homes and the assessments of the home owners’ association (HOA). Thus, about 10 years into the life of a subdivision, the affordable residences begin to call attention to themselves in an unpleasant manner and the HOA gets even more unpleasant in its efforts to collect back assessments.

For each affordable house, a builder could–with the same money–build 2 or more apartments. By way of example, we developed a mixed-use project in Palo Alto that included 37 single family residences. As the city then had a 15 percent low-income requirement, this meant 6 residences had to be affordable. We suggested instead that we build a 14 unit apartment house atop our commercial building. In accepting our proposal, the city received 133 percent more dwelling units in the bargain, dwellings we maintain in first-class condition at our expense.

Also, and this is important, the families who moved into our apartments are not tied forever to the location the way they would be if they were windfall owners. If job opportunities arise out of the area, they can relocate on a dime. You may have seen the articles arising out of the Great Recession that lamented the American worker’s lack of mobility, the fact that his home ownership kept him tethered to the Rust Belt when he should have been following the jobs to the Southwest.

If a city is, however, unwilling to permit rental units in the midst of single-family housing, another approach may be worth considering: Allow the developer to sell all 100 houses in her subdivision at market prices (say, $1 million), charge her the discount on the otherwise 15 affordable units ($500,000) and pay out the resulting sum ($7.5 million) over time to a number of the city’s qualifying low-income residents as direct rent subsidies. You could, for example, subsidize thirty families by $2,000 a month in existing market-rate housing for over 10 years with $7,500,000. This approach avoids the often politically insurmountable issue of building dedicated low-income housing.

If we focus on providing clean, safe and affordable rental housing and not dilute our efforts with a myriad of other social goals–notably, home ownership for all, promoting tech and protecting unions–we can accomplish far more than we’re doing today.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.

Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.

mcnellis-book-coverTo read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.