A booming economy combined with wage stagnation and wealth inequality has led to an acute housing affordability crisis in and around certain cities around the world. Real wages have simply not kept pace with housing prices or rental costs, causing longer commutes and skyrocketing rates of homelessness. The size of the growing crisis means it is virtually impossible to avoid. Basis Investment Group’s Tanna says of his firm: “Any new deal we are seeing right now from a development perspective in a major market has some affordability component attached to it, often through mandates by the local government.”
Demand is clearly outstripping supply, an imbalance highlighted by Vasquez: “We see a huge affordability crisis in America, which really can only be solved by creating more housing. In the U.S., we’re at approximately a 64% homeownership rate. We can talk about policies, tax credits, opportunity zones, etc., but at the end of the day, more housing needs to be built. We produce pretty much the same level of housing that we did back when the U.S. had about 80 million fewer people.” He further notes that insufficient supply is being exacerbated by the fact that “boomers are retiring ‘in place’ rather than selling their homes and moving into assisted living. They’re also retiring later in their lives than previous generations did.”
There is a silver lining: Real estate investors are keen to fill the void, despite the challenges. Approximately half of all investors in North America and Europe see significant potential in real estate projects that address this particular need (Figure 8). Lubeck says, “Our concern continues to be with being able to make a reasonable profit at every turn of our investment while at the same time delivering affordable and high-quality product to our residents. There’s a lot of new construction in the apartment world, but it’s almost all high end. We really try to focus on serving the midmarket where working-class singles or couples can afford to rent and rent comfortably, while at the same time, delivering a first-class experience and great amenities.”
This is easier said than done. Jackson outlines the obstacles facing developers: “The costs of construction and development are going up. Labor cost is the biggest increase, materials and other expenses are also rising. Investors need to charge higher rents to get returns in that environment, and given wage stagnation among the average worker, they can’t expect those rents. The result is investors end up sinking money into Class A projects like luxury condos because there’s more slack in that demographic’s budget and an investor can charge enough to make their money back.”
“Real wages have simply not kept pace with housing prices or rental costs, causing longer commutes and skyrocketing rates of homelessness.”
Suggested remedies for the affordability crisis run from the mundane to the revolutionary, but every builder knows it is not unusual for costs to creep up when using novel or unproven approaches. Modular construction methods continue to evolve, and Lubeck recalls seeing pitches for projects utilizing shipping containers as the building blocks for affordable housing. He questions the viability of such approaches, however, noting that the costs of transport and refurbishment may ultimately make shipping containers no more cost effective than traditional types of construction. An even more radical approach is 3D printed buildings, which are being ventured as a possible solution in some parts of the world. Testing is still in the early stages.
North American fund managers are more likely than their European and Asian counterparts to expect commutes will get longer, leading them to focus more on residential and commercial projects farther from city cores. According to Vasquez, his company invests “in places near job centers but not too near to be unaffordable. We invest in the suburbs and exurbs. The people living there are working in the hospitals, the schools, the businesses and governments in the surrounding suburbs. The wealth gap and affordability crisis has forced us farther outside central business districts, but not driven us to entirely new markets or geographies.”
The long-term solution, as Jackson points out, “is simply more supply” and avoiding public policies with negative repercussions for developers “like rent caps, which counteract incentives to build, only exacerbating the problem over the long term.” However, this position is not universally held. A vice president at a top 10 sovereign wealth fund told us that while government interventions are generally undesirable, “there needs to be political pressure ultimately to increase the supply of affordable housing, because the incentives that exist in the market are insufficient to stimulate supply at the moment. In the current market, development projects are getting better value by putting a dollar or a pound to work by targeting the upscale market segment, which is willing to pay a premium to live in highly desirable areas. Whether the government comes in with subsidies or legislates mandates for all new developments to have a certain allocation to affordable housing, those are the types of measures that need to happen to address the current shortage ... there needs to be closer cooperation and partnerships between the public and private sector.”
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