Over the past few months, I have been shopping for a new car. As I have scoured the classifieds and looked at used cars, each new prospect has come with a consequence. A scratch here, stain there, tires that needed replaced, etc. After deliberation with my wife we went to a dealership. Being the deal junky that I am I haggled my way through the buying process and found that I was getting quite a deal. The new purchase included a lot of perks that were an added benefit over the life of the vehicle, upgraded styling packages, free car washes, tire rotation, oil changes, etc. The salesman explained to me how much I would save in maintenance over the life of the vehicle by buying new. I am thrilled and excited about my new vehicle, my gas mileage has decreased, and my commute is more enjoyable. How does this cost-of-ownership analysis relate to today’s real estate market? Let’s look….
Developers are often faced with rising land values, development fees, and construction costs, it can be difficult to find projects which are financially feasible. As developers continue to find ways to value-engineer buildings to attract tenants and stay competitive, their efforts often lead to decreasing the physical value of the development in order to increase returns. But here’s where my commuter car analogy presents an alternative approach Developers can use to drive returns in a competitive real estate market.
For-rent apartments are quickly becoming the only “attainable housing” available to the bulk of the population. Since the mid 1980’s, household incomes have increased at a slower rate than home prices. This trend has often made it difficult for middle-income home buyers to find ways to save enough money for a down payment on a house or to cover the rising costs of financing a mortgage. For example, lenders used to only approve loans if less than 25% of each paycheck would go towards housing. Nowadays that number has nearly doubled, with some FHA loans allowing people to pay up to 41% of their monthly income towards housing. Simply put, for-rent housing has become the gas-sipping commuter car everyone can afford.
This idea of “attainable housing”, non-subsidized housing that is affordable to households with incomes between 80 and 120 percent of the area’s median income, must therefore “sip gas” or otherwise decrease the cost of ownership accordingly. Tenants are obviously doing more than paying rent with their income; the total cost of living for an individual or a family includes expenses such as housing, groceries and food, health care, insurance, utilities, transportation, and entertainment, among many others. If a developer can find a way to incorporate bonuses for renters in some of these categories, they create a value proposition for prospective tenants and may get a broader range of applicants who can afford to live in their project, thereby decreasing vacancies and increasing overall returns and overall stability of the asset. An apartment project with weekly yoga classes on site can save a tenant from having to sign up at a local gym. Providing tenants with a public transit pass as part of their contract can decrease their monthly transportation costs. Such perks, offered with the execution of a residential lease, bring the total cost of living down for tenants and create a case for them to be able to pay more in total rent.
The commuter car analogy is about more than “free car washes and oil changes.” As developers and owners, we can look for innovative ways to meet investor returns without sacrificing project quality to consumers. This can mean adding in inclusive rent charges, adding new technology to existing buildings, incorporating new construction concepts in our processes, or combining product types. When prospective tenants are aware that they can have a better home without increasing their total cost of living, they will be more likely to execute a lease for a higher base rent. As developers put effort into advertising how these amenities can affect their tenants’ overall budgets, we can continue to convince potential tenants that now is better than ever to live in a for-rent project, Median income renters don’t have to live with your grandmas old “beige sedan” when it is attainable to pick up a vehicle with that “new car smell” we all love.