Why rents are sticky downward even if there is some slack in the rental market

Angelenos who follow the market in LA were treated to a good story from KPCC this last week:
As DTLA vacancies rise, landlords increase breaks on rent, parking.

Thanks to a wave of market-rate rental construction, supply has outpaced demand downtown since 2014. The vacancy rate now hovers around 12 percent — the highest recorded by real estate research firm CoStar Group since 2000, compared to a citywide vacancy rate of about 4 percent.

Ok, when I say that we should focus on Downtown because redevelopment is easiest there, there is tons of extra capacity, there is a lot of underutilized land from South Park all the way to the second Blue Line, downtown has tons of job access–long before we run into rampaging opposition from single-family homeowners–LA-area YIMBIES give me a stern look, like a preaching rebuking sin, and say “It will take more than downtown to solve our housing crisis!”

That may well be, but DTLA still strikes me as a really good place to keep momentum going. Downtown LA has way, way better transit access to most of the rest of the region’s job centers than anywhere else save for maybe Hollywood. The only subcenter really hard to get to (and that’s only hard if you refuse to get on a bus) is the Westwood/Century city areas. With the Purple Line coming, there will be *great* access to those job centers coming soon. Politically and functionally, I would much, much rather advocate for more units in DTLA than deal with furious, empowered homeowners and (legitimately) terrified renters in other parts of LA, especially as I have no desire to try to defend “meh” projects like The Reef, or to treat that as a real YIMBY contribution the way DTLA actually is.

This article, though, shows one of the issues with believing that filtering happens quickly or excess supply eases the market (it should, it just takes time)–and it makes a pretty bad internal mistake in definitions:

The result has been thousands more luxury apartments than there are renters. Of the 21,000-plus market-rate rentals tallied in a recent report by the Downtown Center Business Improvement District, more than 2,000 are empty under the current vacancy rate.

CoStar senior market analyst Steve Basham said that in the last several years, landlords have been ramping up concessions to lure tenants. Of course, the savings are relative when the average rent for a one-bedroom runs around $2,500. Basham said the high rents are why apartments aren’t filling up faster.

“The stuff that’s being built right now is really targeting the very top of the renter’s pool,” Basham said. “The majority of the renters in L.A. are not going to be able to afford that.”

Now, up at the top of the story, they claimed all this slack occurred because of “market-rate housing construction.”

No. If your units are sitting empty, you aren’t building or offering at market-rates. You are at a price point above market-clearing rates, even in your segment of the market. And while they may be offering breaks on parking and rent, it’s a long ways down from $2500 to “affordability.”

Rents in this case will be sticky downwards for some time. You aren’t supposed to use the word “sticky” in a neoclassical world because as we (supposedly) know, Keynes was wrong about everything and Hayek was (supposedly) right, but I like the term and I think it’s a very good descriptor for why prices don’t adjust quickly, for a variety of reasons.

1. Information problems among both producers and consumers. Industry reports and forecasts like that reported in the story help producers figure out the lay of the land, but it’s really hard to know you’ve hit slack in the market until, collectively, landlords and builders have overbuilt/oversupplied a bit. It’s easy to see an inflection point in optimization graphed out; it’s hard to see it in the real world where you (and everybody else) is optimizing individually and watching everybody else and the market in your peripheral vision. You might think for awhile that you are alone in having some empty units, that you are just being unlucky in attracting people, or that your marketing is just missing the right eyeballs…until it becomes apparent that other people are in the same situation. Minimizing these information problems is a competitive advantage if you can do it.

It also can take renters awhile to get the message that rents in a particular area may be coming to within their range, or that a particular area is really desirable.

2. Gambles against loss-taking. When you pencilled out the project figuring $2500 rents and renters’/homeowners’ associations that could handle that rent and all the trimmings that are required to attract people at that income point, it’s a hard to pill to swallow that you are going to have to come down, and depending on how well-capitalized you are and how you read future markets, you may be willing to sit on some empty units for what you think is going to be “a bit” rather than lock yourself into year-long leases below what you pencilled. Since base rents, like salaries, may determine much about the income stream for the property over time, this gamble is not necessarily irrational.

3. Real potentials for loss-taking if renters are locked in and you have to offload the property. Many of these luxury units are predicated on pretty high maintenance bills for amenities, like swimming pools, that are really, hard to support with people who can’t afford premium rents. Lowering the average income of the residents is a great way to wind up with a bunch of renters that lead to lower levels of maintenance than you need, which can pretty quickly turn your nice, renovated building into a much less shiney version of itself, and by the way, if you want to buy the building, it’s going to come with a bunch of renters you will have to find a way to get rid of, or a bunch of maintainance headaches you will have to resolve with the renters you’ve got. It may be much, much smarter for a developer or owner to keep those units empty and attempt to sell the newly renovated building rather than go lower on their targeted renter profile.

4. Meanwhile, the land underneath the buildings is still appreciating a lovely rate due to urban productivity spillovers. And while that’s not as nice as having both speculative gains and streams of rental income, it does provide an asset cushion for you to hold out longer against lowering your rents. The same land speculation gains that we’re always yelling at homeowners occurs for everybody, not just single-family homeowners, and there are plenty of well-capitalized landowners who can just sit on relatively empty buildings (just like those dudes hanging onto parking lots) and still not lose the shirt entirely.

@alon_levy ‘s cost-per -vehicle-mile and cost-per-(vehicle?)-hour (or hour-hour) cost questions in UrbanLA and (relatively) small denominator problems

Alon Levy has a nice, question-posing article up at Urbanize.LA where he discusses the operating costs reported by major rail operators across the US and the EU. He has a legitimate question: why are operating costs in LA so high? We can partially attribute the higher costs to unionized labor, which shows up generally in cost-per-hour figures (See BART). Levy reports that the per-mile or per-kilometer figures, but it’s not clear exactly what the “per-hour” numbers are: I’m guessing this is vehicle-hours because that’s a good way to measure for cost allocation how much it costs to put service on the road.

This super-duper for me because we just went over cost allocation in my transit class, and I can show them this article to prove they are learning the cutting-edge, y’all!

The cost-per-vehicle-mile, for me, is most relevant internally to the agency itself as a managerial metric. You want to see where your money is going in terms of running your fleet. For buses, a manager might ask if we are spending a lot on tires per kilometer? If you are, you might be operating on crap roads (a big problem for LA Metro) or you might want to examine your supplier there, or maybe there needs to be a change in the maintenance practices or scheduling. Of course the public might want to scrutinize these figures, but it’s not really an answer to value-for-money questions that the public usually has. The NTD reports them because agencies look at how their peers are doing and ask questions from there.

I think a better measure for audiences external to the agencies is cost per passenger mile. The costs per vehicle mile you incur, in general, because you are operating vehicles across a distance, and you have to pay your operators, maintenance, etc regardless of whether you have any butts in seats or not. It’s a measure of cost-effectiveness; cost per passenger mile is a measure of system work or productivity. One of my big concerns for LA Metro is that the last time I ran estimates, they were having to spend more for each additional passenger-mile they were attracting (I will do that again and post some numbers here) and that’s not good. It may be attributable to their large capital improvements program, but bad capital investments can just put agencies on the hook for operating unproductive lines and large amounts of debt service. Any and all new rail supply is not always good news. (But it can be really hard to know in advance what is a good investment: nobody seemed all that excited about the Expo Line in the beginning of the planning stages, and now it’s everybody’s darling. As it should be. I love you, little train that takes me to work!)

Back to Alon’s numbers. This is a pretty difficult exercise that he’s undertaken here, simply because I don’t think you can really trust that the numbers have been reported to the sources in a consistent way. Budget documents vary quite a bit in how they are presented, and cost allocation practices internally vary as well with agency context.

I am suspicious of the European numbers because they are so much lower and relatively uniform. It may be a denominator question; perhaps they really are offering way more miles of service than US agencies are, but I don’t think so. I think it may have to do with how internal accounting practices allocate administrative costs in budgets and whether European agencies only report costs that vary by hour or whether they allocate out salaried employees. If they do not put salaried employees into the figure, that’s a pretty big difference because US agencies often do so. Accounting, even though accountants are as fiercely scientifical as economists, can be pretty subjective. Think about it this way: where do you allocate the costs for your route planning staff? Do you leave them out because they don’t actually wear and tear with vehicle service, but you do need them to provide service? Where should we charge Phil Washington’s salary? Where do charge the service contract out to the LA Sheriff’s office for security?

The cost allocation model I present to my students follows from Eric Bruun:

Your Short Title Overleaf

Your Short Title Overleaf

This is a pretty simple cost allocation model, but it does the job. The point is that there are things that vary with distance, things that vary with hours, things that vary with both, and things that vary because you have to acquire and keep rolling stock (and a whole bunch of things, like landscaping and yard maintenance, security, etc etc). And your asset commitment.

You could, by way of policy, assign percentages of Phil Washington’s salary across all these categories because he’s responsible for the whole ship, but does that tell us about whether we are spending more on landscaping than we want?

By way of my guess, I think the commenters who have attributed LA’s larger numbers to frequencies are probably right. The lower service frequency, the smaller the denominator in calculating the unit coefficient, the bigger that coefficient will be. But I would need to grub around more with the data to be sure.

Some of the young women in my classes have so little confidence in their abilities that it breaks my heart

I am a tough teacher; I don’t mean to be, but I tend to throw the class into various, open-ended activities and let people explore. This is really shocking, I think, to students who have come up in the American educational system in K-12, where testing is so common, and where educational programs stress working to specific expectations. The only expectation I really have is that you explore, and usually in exploration, concepts become mastered along the way. I am a chaos muppet, and I think life, and that includes life in a classroom, should be full of adventure, laughing, experiments, gambles, and surprises. With those come failures and setbacks.

This means that order muppets at times struggle with me and I them. I try, when I see an order muppet struggling with the chaos that enters the room with me, to be more linear, but at some point, that’s like asking me to be thin. I just do not see things in hierarchies or lines, and my attempts to order them are often more disastrous than just letting them make order out of the information and experiences themselves.

What breaks my heart is the difference I see among men and women in my classes. These are generalizations, and they don’t apply to everybody, but I see real differences in gender in the way my students react to failures and setbacks in our explorations. My male students in general take it in stride, confident that they can and will do ok, or they blame me when they become frustrated. They externalize it. A disproportionate number of my female students internalize these moments as assessments of their capabilities. They worry they don’t have the skills or background knowledge to take the class. But nobody does! That means everybody does. The class goes where the muse takes us. You can’t plan or prepare for that. You just have to trust in your abilities, and that is a bigger stretch for some of my female students than it should be.

I want to tell them that they can do anything, that it’s normal to feel thwarted and frustrated, that these things are just setbacks, not indicators of what they can do in general, only indicators of what they did in a moment. I want to hug them and tell them that anybody who made them feel incapable is full of shit, and that they are magical and awesome and will do things that surprise themselves in amazing ways.

Talk, however, is cheap, and I don’t know how much of what I say ever hits home, and it feels corny. Mostly, I just want my class and the experiments we run to be a playground/training ground, and for all that to build them up…not add to their beliefs about deficiencies. Students have built-in grade-A bullshit detectors, and they know when you are condescending to them or plying them with easy success.

I also know about the many, many professional penalties I have paid for not hiding my intelligence, for not massaging the egos of the men around and above me, for failing to reassure them that I am at their god-damn service, and for refusing to apologize for being right, or more original and capable than they were. I have spent years being punished for this and internalizing that punishment to punish myself, too, and it took me a very, very long time to see my fierce intelligence as magnificence in addition to the reason that lots and lots of middling dudes just aren’t going to like me. I spent far, far too many years trying to fit in with people, trying to be good, when their conception of good demanded that I be less than I am.

I don’t know what to do. I know what awaits in the world for smart, confident young women, and much of it reacts to them with unmitigated hate and an organized effort to tear these young women down. I had one boss who told me he “hated my confidence that I could learn just about anything” while he was actively exploiting that capability and representing it as his own.

I don’t want these young women punished the way I have been, nor do I want them hiding when they should be free to fly.

Brian andreas for a long time she only flew Google Search

A friend bought me this StoryPeople piece from Brian Andreas years ago. It hangs in my house. Maybe I should take it to my office and hang it in a really prominent place.

Jennifer Dill has a blog!

Y NO TELL ME Jennifer Dill has a blog? If I post anything about housing supply, I have 50 smartest ones up in my grill ‘splaining “Econ 101” to me, but do any of you inform me of stuff I don’t actually know? No, no you do not.

Jennifer Dill is a faculty member at Portland State University; she directs the Nohad A. Toulan School of Urban Studies and Planning and the Transportation Research and Education Center because she’s awesome and people put her in charge of stuff (unlike me, whom USC locks in a closet whenever visitors come to campus) and she does research primarily on non motorized transport. Check it out if you haven’t.

People who have, People who do, People with, People

One of the perpetual complaints about political correctness is that people demand to be called one thing, then another, and people can’t say anything without offending somebody. As regular readers know, I have no time for political correctness whining. I do feel for people who examine unpopular ideas and opinions–it’s hard to run against group norms, for good reasons (Research that confirms racist and classist beliefs tends to be accepted just fine, though.) But using language in a decent, polite, and caring way strikes me as very little to ask.

I am old enough now that I have seen much of the language around gender binaries change in new and lovely ways–and in ways I’m not dialed in on. Often, you don’t learn how to speak in ways that welcome other people until you’ve done it wrong and get corrected–something that I strongly think fuels the resentment against political correctness. People used to being treated like authorities are suddenly corrected, and that wounds their pride. Fragility, in other words. Silly: it’s great when people correct you. It means people are telling you what they need, and that’s so much easier than guessing. And they help you become more welcoming and supportive to people who have the same preferences they do in the future.

The classroom, however, is a tough place. Students are often afraid to speak up. In order to navigate language when I don’t necessarily know, I have a practice that I has served me very, very well over the years: start with “people who.” I learned this from an autism researcher, Barbara Wheeler. She always, always said “Children with autism” or “Children who have autism” rather than “autistic children” and it’s a great habit of speech because it puts the individual’s humanity first. It follows the same construction practice as people of color, and over the years, it’s worked well for me.

It works for a bunch of things: “People who hold conservative views”; “People who are transgender”; “people who are blind”; “People who face mobility barriers”; “People who don’t fit male-female gender binaries”; “people who espouse libertarian views”; “people who are stateless”.

I could go on, but you get the idea. It’s polite, in general, but for me the biggest benefit has been as a self-discipline. We are not speaking of “Trump supporters,” we are speaking of “people who supported or support Donald Trump.” Language for me forms my habit of mind; I do not have a little voice in my head; I have a ticker tape of text. When I revise that text, it changes how I think and feel. This way of speaking reminds me that I am always dealing with and speaking about people first and then their characteristics, values, ideas, struggles, etc. second. They are foremost people, and it reminds me that they merit care whatever their story is.

Note that I don’t see “people who hold libertarian views” as being on par with “people who are stateless.” But there are ways of addressing differences of power, status, and oppression without using adjectives to reduce people to one part of their struggle or one part of their value set.

I fretted at various points about whether this practice would make me wordy, but in general, my sentences roll out of my face the way they always do. I’m a wordy person. Efficiency can wait on humanity.

I will be discussing Charlottesville and domestic terrorism with Erroll Southers @esouthersHVE @USCPrice Tues, Sept 12, RGL 101 at 12:15 pm

We initiated a series last spring to be more responsive to current events. I’ll be chatting with beloved colleagues Erroll Southers and Dean Jack Knott about the events in Charlottesville. Please come if you have the time. Let me know, too, if you have questions or issues I should think about ahead of time.

And Jack said there would be pizza!!