Industry Update

INNOVATE FOR AFFORDABILITY

By Paul Cauduro, AAA Director of Government Relations

NAA research shows that 4.6 million new apartments are needed in America by 2030, in addition to as many as 11.7 million older existing apartments that could require major rehabilitations during the same period. Housing affordability has become the issue of focus that dominates the conversation of local elected officials and community leaders throughout the region and especially in the City of Austin. Housing affordability has been called Austin’s existential threat, and questions about affordability are raised in conjunction with nearly every development proposal or zoning change request. At least every few months the issue is guaranteed to be frontpage news when quarterly real estate data reports are issued affirming the housing shortage and charting the continuous rise in home prices and rental rates. Austin’s housing affordability crisis has even garnered national front-page attention as the subject of a recent cover story for both the New York Times and New York Times Magazine.

The factors that impact the cost of housing are complex and include land availability, income levels, job growth, availability of homes for sale, and even investor interest in the market, as highlighted by New York Times Magazine. So, amid this complexity, what does the rental housing industry itself have to say about housing affordability and, as the key stakeholder in the conversation, what innovative strategies can rental housing operators promote as implementable solutions?

The facts are clear: according to U.S. Census Bureau data, Austin grew faster than any other major U.S. metro every year from 2010 to 2020 and consequently there is a housing shortage. The shortage is being driven by the new arriving Millennials seeking homes in active urban-centers at the same time that the empty-nester Baby Boomer set are deciding to leave the suburbs for a more metropolitan lifestyle. Other drivers include job-seeking immigrant residents who are an increasing proportion of U.S. population

Read about AAA’s current advocacy issues at www.austinaptassoc.com/news/advocacy-in-action growth, and the aforementioned corporate investors seeking both short and long-term real estate gains purchasing homes in core and emerging-core areas.

In October 2021 the region’s Median Home Sales price hit $455,000, up 24% in a year’s time, and supply of sales inventory hovered at only a month. Vibrant economic growth and the lack of purchase options pushed increases in apartment occupancy rates, and more than 21,000 apartments were absorbed in year 2021 when numbers half of that amount is considered robust. These factors asserted pressures on rents, and Austin renters are now paying 25% more on average than a year ago. Austin’s $1,535 median rent is higher than the average rates found in in Houston, San Antonio and Dallas-Fort Worth. Almost 23% of Austin residents are considered housing cost burdened because they must dedicate more than 30% of their income to housing costs (including utilities), and 9% of Austin residents are severely cost burdened since they dedicate more than 50% of their income to housing cost.

Increasing the supply of housing of all types would certainly stop the rapid escalation of prices, but it would be difficult to catch up.” Apartment Association (NAA) research reveals that 4.6 million new apartments are needed in America by 2030, in addition to as many as 11.7 million older existing apartments that could require major rehabilitations during the same period. As for single-family homes, an estimated 65,000 starter homes were completed nationwide in 2020, less than a fifth of the number built annually in the late 1970s and early 1980s. The Bureau of the Census reports that in 1980, 40% of homes constructed were entry-level homes. In 2019, only 7% of homes constructed were entry-level homes.

With steady demand and increasing costs there are some policy levers that government leaders may be tempted to pull, but these actions often disrupt the free enterprise housing market and stymy housing availability at all prices points. However other levers are at their, disposal,

and these levers, when matched with innovative housing policy, can secure private sector support and spur participation.

When seeking fast solutions to a housing affordability crisis years in the making, the near-immediate response is to empower cities with the ability to mandate the construction of affordable housing units as part of the development. Adopted by over 800 localities across the country, inclusionary zoning (also known as inclusionary housing) policies typically fall into two categories: voluntary measures that encourage the development of affordable housing by offering incentives such as increased density for the development, or mandatory programs that stipulate a percentage of units be set aside and fixed below market rents as a condition of approval for new development. In some jurisdictions an agency will be created to help enforce compliance with the program, whereas other local governments lack compliance mechanism to ensure set-aside units are rented to low- and moderate-income individuals and families.

Rental housing providers and apartment industry leaders know that land and construction costs have increased to the point where it is very tough to for market rate housing developments to advance, and mandates for projects to have units set aside at certain price points make it all the more so. The City of Atlanta passed a Mandatory Inclusionary Zoning (MIZ) ordinance, and according to a city progress the report, MIZ has produced a total of 362 affordable units since the program took effect in 2018. This number falls short of projections to create or maintain 20,000 units of affordable housing by 2026.

Mandatory inclusionary zoning distorts the housing market by acting as a deterrent and disincentive to develop rental housing. While the intent is to generate affordable housing, these mandates, which would require approval by the Texas Legislature, increase costs for consumers overall and can spur production elsewhere in the region where the requirement does not apply. Voluntary programs should be paramount because if inclusionary mandates render a project economically infeasible the new housing likely fails to materialize and the city loses out on housing in general along with the affordable units.

Rent regulation policies (also known as rent stabilization, rent freeze or, more commonly, rent control) are another quick-fix response often considered to stem the rise in housing cost These policies are government-enforced price control measures limiting the rents that property owners may charge in market rate rental housing. Rent regulations mandate an artificial cap on rent, or in the case of “Cancel Rent” initiatives, prevent the collection of rents during emergencies like COVID-19, without monetary compensation by the governing jurisdiction.

Rarely do economists from across the political spectrum agree on public policy; however, rent control is one of the few subjects that finds wide agreement. Economists ranging from Milton Friedman to Paul Krugman are opposed to the regulation of rents. Like zoning mandates, rent control policies also distort the housing market by deterring or discouraging the development of rental housing and investment in maintenance and rehabilitation. With profit capped, rental housing providers shift their investments to other non-rent regulated jurisdictions.

In practice, rent control policies have the effect of increasing the cost of all housing by forcing a growing community to compete for fewer housing units, and reducing the quality of rental housing. State legislators understand that rent control is counterproductive to achieving affordable housing, which is why 37 states prohibit municipalities from enacting rent controls.

“As cities and states look for solutions, we encourage policymakers to engage all stakeholders, including property owners, to create workable solutions that best serve their community,” says NAA’s Executive Vice President Bob Pinnegar, and he’s right. Workable solutions created in partnership with rental housing providers can be implemented without market disruption, and the implementation of innovative housing policies custom-crafted for unique market conditions can attract private sector support and participation.

One workable solution is to lower the regulatory cost of housing in Austin. The costs associated with platting and permitting fees combined with building permits and inspection fees are staggering. In 2017, a local developer identified the regulatory cost associates with building a four-story, 243,000-square-foot, 322-unit apartment project in the city of Austin versus building the same project in the city of Dallas. Nearly $1 million in fees and permitting costs were identified for the Austin project, and after being scrutinized by the media and a fact-checking news outlet his findings that Austin’s regulatory fees are eight times more than Dallas were

Voluntary programs should be paramount because if inclusionary mandates render a project economically infeasible the new housing likely fails to materialize and the city loses out on housing in general along with the affordable units.

The time is now to explore innovative solutions and implement them to help improve housing affordability and lower the number of residents experiencing house cost burdens. proven correct.

Another workable solution are tax abatements. Property taxes are typically the largest annual expense for multifamily properties. The tax bill is a burden that impacts the viability of the property and make it difficult to maintain rents at affordable levels. Because of the annual appraisal process, extensive property renovations increase taxes owed as a result of the improvements

Tax abatement and tax exemption programs for new multifamily properties, or to existing properties that wish to maintain a percentage of units as affordable, allow owners to repair and renovate their properties without raising rents and helps preserve their properties. The cities of Portland and Chicago have interesting tax abatement programs that merit consideration. In 2019 the City of Austin discussed their own program, and the concept proved very promising.

The draft Austin program would have given 100% abatement of city taxes in exchange for 10% of the total units having rents at or below those that can be afforded by a family earning 80% of the area’s median family income. The AAA wanted the concept to be formally presented to city council, but in the end city staff determined that it would be very difficult to create the abatements given the state and local taxing frameworks and that monitoring the abatements would be a burden. AAA still supports having broad stakeholder discussion on this proposal.

Innovations in land-use policy could help relieve some housing shortage pressures. The City of Minneapolis made news in recent years when they passed zoning reforms which allows for duplexes and triplexes on lots previously zoned exclusively for detached single-family housing. The aim is to increase the number of units built in every part of the city. This same goal applies when giving density bonuses in exchange for affordable units which allow developers to build more units than would otherwise be allowed by the zoning.

The City of Austin is discussing the innovative strategy of allowing residential units in current commercially zoned property. This would allow housing development on overlooked retail centers and long-gone used car lots without the expense of a formal zone change request and the Not-In-My-Back-Yard (NIMBY) activism it brings using well-worn complaints that housing developments cause traffic jams and increase crime.

Other innovative strategies include using tax credit financing tools, creation of local and state housing trusts, shared equity programs and using vacant properties or publicly owned land for a portion of new affordable housing units.

The time is now to fully explore innovative solutions and implement them in conjunction with non-disruptive strategies to help improve housing affordability and lower the number of residents experiencing house cost burdens.

Round Rock Issues Waste Hauling Franchise

The Round Rock City Council has selected Central Texas Refuse (CTR) as the City’s sole commercial refuse hauler. The council action ended the ability for multifamily properties to selected a waste hauler of their own. Any existing contracts with waste haulers end after April 30, 2022.

City officials explained that an “open waste hauling market” with multiple vendors in the city providing waste hauling services results in wear and tear on streets as well as inefficient collection because of vendors driving duplicate routes.

CTR has held the sole contract for single-family residential refuse collection in Round Rock for more than 30 years. Because this long-term relationship with CTR the City Council directed staff to negotiate with CTR to see if it could reach an agreement on a combined residential and commercial contract. While there was not a bidding process for the service change, the hauling rates negotiated with CTR go into effect in May 2022 and will stay in effect until September 2023 or until CTR requests approval for rate increases.

Awarding exclusive rights to one waste hauler strips multifamily properties the ability to negotiate with private waste haulers on price and terms of service. The AAA desires a “multifamily rate” to be included in any city franchise agreement because the commercial rates set by the municipality and paid by multifamily properties ultimately result in higher costs for renters.

For more information call Michael Thane, Round Rock Director of Utilities and Environmental Services at 512-218-5555 or contact AAA staff at paul@austinaptassoc.com