The Harper was almost full — just a couple one-bedrooms still open — but Max Friedman and Eden Turkheimer had options.
“There’s a ton out there,” said Friedman, a 23-year-old commercial real estate broker with aviator sunglasses tucked into the collar of his blue-checked button-down. They had just emerged from the marbled lobby of a brand-new apartment building along Washington D.C.’s 14th Street corridor, after having toured one across the street with a rooftop pool and picnic area.
Right now in D.C., childless 20-somethings with good jobs like Freidman and Turkheimer have a glut of buildings available to them. But the choices for those a step or two down the economic ladder have severely diminished. How could it be that so much money is going into putting up apartments, and it’s still so hard to find a place to live for so many in the city?
Developers, who are offering move-in specials and throwing glitzy open house parties, see the reasons. Economic forces in the city make it all too easy to supply housing for high-income urbanites, not the cheap kind that once was plentiful in D.C. What’s more, even the ways in which the city harnesses the taxes from those luxury buildings — by subsidizing developers who build units affordable to low-income people — hasn’t filled the gap.
The dynamic is affecting what the rich and poor pay in rent. The city’s stock of “class A” apartments, which have luxury amenities, expanded from about 8,500 units at the end of 2010 to nearly 14,500 by end of June, an increase of 71 percent, according to Delta Associates. More than 11,000 more are in the pipeline. Rents for this kind of housing are rising, but barely. In Northwest D.C. — one of the most expensive areas in the entire region — the average rent fell by 1 percent, and now sits at $2,648, Delta says.
Meanwhile, the vacancy rate for “Class B” apartments, which are older and generally have fewer perks, remained extremely low from 2010 through 2014; it’s now at 3 percent, while the class A vacancy rate has risen to 4.5 percent. The average rent for the city’s older and generally less expensive housing is increasing about 2 percent a year, reaching $1,917 by the end of June.
In other words, there are plenty of new homes in the city, but fewer options for those who are strapped, a trend that also is playing out in New York, Chicago, Los Angeles and other major U.S. cities. It’s why, in the short term, prices don’t always respond seamlessly to increases in supply: Capital may flow to one part of the market, while entirely neglecting another.
So when Turkheimer and Friedman went house hunting on a recent Friday afternoon, they had choices aplenty.
Turkheimer, a tanned, blond 24-year-old teacher, had been living in Arlington, Va.; Friedman had grown tired of sharing a house with roommates in Adams Morgan in D.C. The couple decided to move in together, and with their combined income, they figured they could afford about $2,500 per month for a one bedroom in the center of urban life: Grocery store on the ground floor, metro stop nearby, a new bar or restaurant opening nearly every week.
“We’re trying to knock a few out all at once,” Friedman said. “It helps to show up to a building having already been to a few others.”
Back in late May, a bunch of architects, developers, and real estate financiers huddled in the basement of a downtown Washington, D.C. Hyatt to figure out how to target one type of person: The coveted Millennial. Over coffee and limp pastries, panelists held forth on the trendiest apartment designs and must-have amenities, from pet washing stations to floor plans without walls.
They needed, after all, to figure out how to rent all those rooms they’d already finished and had planned for the city’s trendiest corridors. After a short dry period during the recession, builders raced back into the market with an almost manic intensity — mostly geared toward young, upwardly-mobile urbanites with healthy incomes and no children to suck it all away. The demand, they’d been told, was insatiable: Cities are back in vogue, and D.C. was as hot as it got.
That target audience is now under more financial pressure than it used to be, which may be convincing them to rent rather than buy a home.
“We know these young people are making less money, and they have lots of student debt,” said Cindy Clare, president of Kettler Management, after a presentation showing years of negative rent growth in the future.
Despite their financial hurdles, these young people are still willing to pay a big chunk of their income for proximity to friends and fun. To keep prices under control, builders are now cramming their buildings full of “micro-units,” for people who spend most of their time working or out, coming home only to sleep. And even the “modest” rents contemplated by these new developments are healthy by any standard: $1,500 for a studio, typically, with communal kitchens and gathering places. They’re achievable because often, the demographic they’re going for isn’t interested in spending that money on a mortgage instead. “I just believe in not having debt,” says Friedman.
To really understand why developers only build for the higher end of the market, consider the situation of Toby Bozzuto.
His family-owned company has built and maintains thousands of units in the D.C. area, but he can’t get anything out of the ground without convincing someone to underwrite it. Though the District has large, developable areas outside the bustling core, the city’s professional newcomers don’t stray far from the familiar. Neither do the banks that make construction loans: Having never heard about the District’s farther-flung neighborhoods and their potential, they tend not to look far beyond statistics like incomes in the immediate area and distance from the White House. If other buildings in those areas have performed well, they’ll go in on a project that has exactly the same specs.
“Any new development needs investors, and we cannot get that if the reward doesn’t justify the risk,” says Bozzuto. “Affordable housing, by its very nature, when it’s built, the return is de minimis. What you’re seeing is, capital flows to where it works. So what’s left is public subsidy.”
The D.C. government has made housing a strong priority. Building with public subsidies, though, is no cakewalk — and they certainly haven’t kept up with the burgeoning demand.
First of all, they’re not always available when they’re needed most. In D.C., the main source of money the city uses to fund affordable housing projects is supplied by taking a slice of the fees charged on property when it’s sold. During the real estate crash of 2008 and 2009, almost nothing was changing hands, so the fund was essentially empty at a time when low-cost units were disappearing at an alarming rate: According to the D.C. Fiscal Policy Institute, the city lost half of its apartments priced at less than $750 between 2000 and 2010, while the number of those costing more than $1,500 tripled.
Second of all, even when subsidies are available, not many builders have the patience and expertise to work with them. The city’s housing fund has money now, refilled by a gangbusters housing market. But the process for getting it out the door takes time, since everything has to be competitively bid, and other funding streams like federal low-income tax credits are complicated to manage. (It doesn’t help, of course, when the process is mismanaged, as it sometimes has been in the past.)
Meanwhile, the very fact that a project is subsidized makes it a target for opposition from communities that don’t want more low-income people next door — and also gives them more points of leverage to hold it up in the public approval process. That’s especially true in places where it’s cheapest to build, where existing residents often want market rate development rather than subsidized units, thinking that wealthier people will attract more restaurants and retail. Community resistance can hold up housing projects for years, and sometimes torpedo them altogether.
But wait: Must “affordable housing” be synonymous with “subsidized housing”? In a time when the federal government’s funding for traditional public housing has largely dried up, the private sector is going to have to deliver more of it. Isn’t there a way to expand the supply of relatively inexpensive units by building cheaper, and thereby gaining access to a whole new market?
Not as much as you’d think, in a place like D.C. Sure, you can streamline permitting processes, and allow developers to build more densely than zoning allows in exchange for keeping a certain percentage of units below market rate (Montgomery County has done this successfully for years; the District’s program is still getting moving). And there are also ideas in the academic world for creating housing targets through immutable comprehensive plans that weaken the power of communities to resist development. In D.C., you could even ditch the large historic districts that make it extremely difficult to build anything substantial in many desirable neighborhoods.
Those approaches, however, are a huge political lift. Affordable housing advocates haven’t gotten behind them, preferring instead to push the shorter-term fix of more subsidies. With the number of jobs on the low and the high ends of the wage spectrum increasing, and those in the middle decreasing, they argue that the public needs to fill in the immediate gap. As a result, more radical reforms that could allow the market to organically supply more units at a lower rate over time — like removing the city’s height limit, which the city tried to accomplish and failed — are essentially off the table.
Short of a comprehensive rethinking of how the city approaches development, Tim Chapman, who’s done several subsidized projects in Southeast D.C., thinks there’s not much the city could do to speed things up — most steps in the process are there for a reason.
“What regulation do you want to cut?” he asks, rhetorically. “Getting frustrated about it is like getting mad at a dog when it barks.”
Some of the city’s newest residents, though, have no reason to be frustrated.
For their last stop of the day, Friedman and Turkheimer swung by the CityMarket at O Street, a shining new complex with a grocery store, hotel and the sleek, modern front desk with a suited concierge now typical of the city’s new developments. They sit with one of the building’s leasing agents, before ascending a glass staircase to tour a unit with distressed wood floors and white granite countertops. It’s got everything — not to mention a month’s free rent — but Friedman still quibbles with the slightly less buzzy location.
“There’s just not as much to do over there,” he says later. “It’s the bones of an amenity base, but the surrounding area is still very much residential.”
It’s no problem, though, really. They have options.