7 ms·

Why would they drive up the rents in larger spaces? At least part of the demand in larger spaces is from roommates who would prefer to live alone, some of them

Why would they drive up the rents in larger spaces? At least part of the demand in larger spaces is from roommates who would prefer to live alone, some of them might decamp for options like these, or studios and one bedroom apartments, etc., if they are available. As with all types of housing, there is no one type of housing that solves the problem. Whether we live under capitalism or socialism, the only way we solve housing is when everyone who wants to live in New York, can, everyone who wants to live in Kansas, can, everyone who wants to live in Fort Myers, can. With markets, a shortage results in high prices and rates. Without markets a shortage results in long waitlists. There’s no way out, without quantity. If we want people to live in large indoor spaces, and not SROs, we can’t get there in 99% of our land use regime is focussed on limiting the total amount of floor space that is allowed to exist within a given area. Legalizing SROs is insufficient, but necessary, just like legalizing larger apartment buildings in more places, abolishing single-family zoning, etc.

clickety_clack 11mo ago
Well said. The only 2 ways out of a housing crisis are to: - turn the place into a hellhole nobody wants to live it - build more There’s no other option.
- pfannkuchen 11mo ago
  I think the whole problem is that global market access plus nearly limitless product replication (software, media) has resulted in extreme differences in money availability for different subsets of the population. So we have some people who can buy many properties, and some people who can’t buy a single property. This low level of product sales friction and reach hasn’t really happened before in human history, and I’m not sure classical free market economic theory accounts for it. Back in the day there were only so many boats/shoes/whatever one company could physically sell. Continuing to grow the population under these conditions doesn’t help either.
  - Schiendelman 11mo ago
    There's basically no evidence that big companies own enough property to matter in the market. Even if every individual unit was owned by a different person, you'd see exactly the same outcomes we do today.
  - appreciatorBus 11mo ago
    If this was true, it would be true of other durable goods like appliances and cars. But people with lots of money know that investing in appliances and cars is pointless because millions of new ones are created constantly. There is no scarcity to benefit from as an asset owner. Unfortunately, in North America and other Anglosphere countries, we have decided that a scarcity in residential floor space is a public good and our planning rules tend to create such scarcity and enforce it. This allows incumbent homeowners to profit, and they fight for vociferously to protect that profit. Of course, if a company also invests in residential floor space they can also profit, but it’s not clear why we are so concerned with who profits, rather than the fact that we are enforcing the scarcity that produces the profits.
    - pfannkuchen 11mo ago
      Land is fundamentally scarce, though, unlike other durable goods, so what you say does not follow. And by land, I mean land situated near geographically and/or economically useful areas. To make land like other durable goods, you need to convince people to treat all land equally, which is against human instinct (ie good luck with that). This doesn’t mean nothing should be done and things are great, but if we mischaracterize a problem we have little hope of solving it.
      - clickety_clack 11mo ago
        Land is scarce, but we are making residential floor space far more scarce than it needs to be through restrictive planning laws. Simplifying it a little but, say all 20M people in the greater New York area want to live in Manhattan, which has a population of about 1.7M. That means that people will bid up the price of housing until only the top 1.7/20=8.5% of people can afford it. We can pack manhattan full of sky scrapers and get a lot more people in there. On affordable housing: there’s no such thing. There are enough millionaires around that will live in a 600sqft apartment if it gives them the lifestyle they want. In fact, it might blow your mind to know that building luxury accommodation actually lowers house prices as well as affordable housing, because wealthy people have to live somewhere, and if all that’s available is mid-range housing then they’ll live in that. That will push the middle into the lower income housing, pushing the lower income people out of the city. Additionally, if you only build cheap housing to make it affordable, you end up with a city of cheap housing. If you build a ton of luxury housing, then in a few decades you have a ton of older high quality housing coming into the more affordable range as “luxury” buyers follow the new luxury construction around.
garciasn 11mo ago
Because the law of unintended consequences is always at play in the public sector. In this case, the threat of too much regulation will kneecap the governments ability to eliminate the cost structures that will end up happening because of the drive for increased revenue per sqft. The core reason SROs threaten larger spaces is that landlords can often extract more total rent from a single apartment by chopping it into pieces than by renting it as a whole. Hypothetically: A landlord rents a 1,000 sq. ft. 3-bedroom apartment to a family for $4,500/month. In order to extract more value, the landlord converts that same space into 4 separate SRO rooms with a shared kitchen. Even if they charge a "cheaper" rent of $1,500/room, the total rent roll becomes $6,000/month. The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units. Then there’s the potential for cannibalization of supply: If SROs become the most profitable way to use residential space, the market may see a "cannibalization" of family housing. Landlords of market-rate buildings may subdivide existing large apartments into SROs to capture the higher yield. Seeing this, developers then planning new buildings will design them with fewer large family units and more micro-units/SROs to maximize revenue. This reduces the supply of 2- and 3-bedroom apartments. If the supply of family units drops while the number of families needing them stays the same, the price for the remaining large units goes up. This will then potentially lead to increased land value as real estate prices are determined by the potential revenue a property can generate. If a plot of land can now legally host a high-yield SRO building (generating $100/sq. ft. in revenue), the value of that land rises. A developer who wants to build a standard family apartment building (generating only $60/sq. ft.) can no longer afford to buy that land because they will be outbid by the SRO developer. To compete, the family-building developer must raise their projected rents to justify the higher land price. This raises the "price floor" for everyone.
- crazygringo 11mo ago
  > The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units. Yes, this is the whole point! And the reason it's more profitable is that there is pent-up demand for them. There aren't enough of them. We want them to be more profitable, so more are built/converted. Here's the thing, though -- that's a temporary situation. As supply goes up, demand gets met. Once enough are built/converted, the price comes down, and an equilibrium is reached where a landlord will make the same profit whether it's a 3-bedroom or 4 SRO's. This means the market is now maximally efficient for both types of tenants. In a free market, the most efficient balance of apartment types will naturally come into being. By prohibiting smaller units, we prevent that balance and discriminate against people who can't afford a full-size studio with bathroom. So it's not cannibalization of family housing. It's just reducing the proportion of lots of other types of apartments a little bit -- including studios and one-bedrooms. Because this is desirable.

clickety_clack 11mo ago

Well said. The only 2 ways out of a housing crisis are to: - turn the place into a hellhole nobody wants to live it - build more There’s no other option.

pfannkuchen 11mo ago
I think the whole problem is that global market access plus nearly limitless product replication (software, media) has resulted in extreme differences in money availability for different subsets of the population. So we have some people who can buy many properties, and some people who can’t buy a single property. This low level of product sales friction and reach hasn’t really happened before in human history, and I’m not sure classical free market economic theory accounts for it. Back in the day there were only so many boats/shoes/whatever one company could physically sell. Continuing to grow the population under these conditions doesn’t help either.
- Schiendelman 11mo ago
  There's basically no evidence that big companies own enough property to matter in the market. Even if every individual unit was owned by a different person, you'd see exactly the same outcomes we do today.
- appreciatorBus 11mo ago
  If this was true, it would be true of other durable goods like appliances and cars. But people with lots of money know that investing in appliances and cars is pointless because millions of new ones are created constantly. There is no scarcity to benefit from as an asset owner. Unfortunately, in North America and other Anglosphere countries, we have decided that a scarcity in residential floor space is a public good and our planning rules tend to create such scarcity and enforce it. This allows incumbent homeowners to profit, and they fight for vociferously to protect that profit. Of course, if a company also invests in residential floor space they can also profit, but it’s not clear why we are so concerned with who profits, rather than the fact that we are enforcing the scarcity that produces the profits.
  - pfannkuchen 11mo ago
    Land is fundamentally scarce, though, unlike other durable goods, so what you say does not follow. And by land, I mean land situated near geographically and/or economically useful areas. To make land like other durable goods, you need to convince people to treat all land equally, which is against human instinct (ie good luck with that). This doesn’t mean nothing should be done and things are great, but if we mischaracterize a problem we have little hope of solving it.
    - clickety_clack 11mo ago
      Land is scarce, but we are making residential floor space far more scarce than it needs to be through restrictive planning laws. Simplifying it a little but, say all 20M people in the greater New York area want to live in Manhattan, which has a population of about 1.7M. That means that people will bid up the price of housing until only the top 1.7/20=8.5% of people can afford it. We can pack manhattan full of sky scrapers and get a lot more people in there. On affordable housing: there’s no such thing. There are enough millionaires around that will live in a 600sqft apartment if it gives them the lifestyle they want. In fact, it might blow your mind to know that building luxury accommodation actually lowers house prices as well as affordable housing, because wealthy people have to live somewhere, and if all that’s available is mid-range housing then they’ll live in that. That will push the middle into the lower income housing, pushing the lower income people out of the city. Additionally, if you only build cheap housing to make it affordable, you end up with a city of cheap housing. If you build a ton of luxury housing, then in a few decades you have a ton of older high quality housing coming into the more affordable range as “luxury” buyers follow the new luxury construction around.

garciasn 11mo ago

Because the law of unintended consequences is always at play in the public sector. In this case, the threat of too much regulation will kneecap the governments ability to eliminate the cost structures that will end up happening because of the drive for increased revenue per sqft. The core reason SROs threaten larger spaces is that landlords can often extract more total rent from a single apartment by chopping it into pieces than by renting it as a whole. Hypothetically: A landlord rents a 1,000 sq. ft. 3-bedroom apartment to a family for $4,500/month. In order to extract more value, the landlord converts that same space into 4 separate SRO rooms with a shared kitchen. Even if they charge a "cheaper" rent of $1,500/room, the total rent roll becomes $6,000/month. The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units. Then there’s the potential for cannibalization of supply: If SROs become the most profitable way to use residential space, the market may see a "cannibalization" of family housing. Landlords of market-rate buildings may subdivide existing large apartments into SROs to capture the higher yield. Seeing this, developers then planning new buildings will design them with fewer large family units and more micro-units/SROs to maximize revenue. This reduces the supply of 2- and 3-bedroom apartments. If the supply of family units drops while the number of families needing them stays the same, the price for the remaining large units goes up. This will then potentially lead to increased land value as real estate prices are determined by the potential revenue a property can generate. If a plot of land can now legally host a high-yield SRO building (generating $100/sq. ft. in revenue), the value of that land rises. A developer who wants to build a standard family apartment building (generating only $60/sq. ft.) can no longer afford to buy that land because they will be outbid by the SRO developer. To compete, the family-building developer must raise their projected rents to justify the higher land price. This raises the "price floor" for everyone.

crazygringo 11mo ago
> The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units. Yes, this is the whole point! And the reason it's more profitable is that there is pent-up demand for them. There aren't enough of them. We want them to be more profitable, so more are built/converted. Here's the thing, though -- that's a temporary situation. As supply goes up, demand gets met. Once enough are built/converted, the price comes down, and an equilibrium is reached where a landlord will make the same profit whether it's a 3-bedroom or 4 SRO's. This means the market is now maximally efficient for both types of tenants. In a free market, the most efficient balance of apartment types will naturally come into being. By prohibiting smaller units, we prevent that balance and discriminate against people who can't afford a full-size studio with bathroom. So it's not cannibalization of family housing. It's just reducing the proportion of lots of other types of apartments a little bit -- including studios and one-bedrooms. Because this is desirable.