By Roland Murphy for AZBEX
“What are the facts? Again and again and again – what are the facts? Shun wishful thinking, ignore divine revelation, forget what “the stars foretell,” avoid opinion, care not what the neighbors think, never mind the unguessable “verdict of history” – what are the facts, and to how many decimal places? You pilot always into an unknown future; facts are your single clue. Get the facts!” – Robert Heinlein
A May 21 op-ed in the Arizona Republic entitled, “Why building ‘affordable’ units only makes Phoenix’s housing crisis worse,” makes masterful use of the data chosen by author Kevin Erdmann, Gilbert resident and senior affiliated scholar with the Mercatus Center at George Mason University, in arguing that the Valley housing industry needs to produce more housing units at the top end of the price scale and that mandating policies to building units targeted at the lower “workforce-attainable” and “affordable” market spaces is actually detrimental to those segments, themselves.
A Well-made Argument
Nearly all the foundational points Erdmann makes are valid, and his citations are largely relevant.
Since the original piece is readily available, I won’t waste space by recapping it here in great detail, though I encourage readers to examine it for themselves. I will, however, summarize Erdmann’s primary points, since they are relevant to my counterargument.
- Rents have risen dramatically in the metro Phoenix market over the past several years, more than in most of the rest of the country;
- Lower income families have been disproportionately affected. ZIP Codes with average annual household incomes of $45K paid 29% of their incomes for rent in 2015. Now it’s 43%. By comparison, areas with averages of $150K had been 13% in 2015, versus 16% today.
- Wealthier households have the option of “trading down” and moving into smaller or more affordable apartments, whereas lower income households are already at or near the bottom and have little-to-no downward mobility to lower expenses. Trading down by upper income households creates greater demand pressure and increases prices for lower-tier units.
All of these points are true, and they are components, but not the only components, in a complex matrix of issues that is directly impacting daily quality of life for every Arizonan and that will, if not remedied, also likely harm the very economic development growth the state has enjoyed over the last decade.
Leaps of Fact and Faith Meet Misleading Packaging
After laying the factual foundation, there are two problems with the rest of the column. Erdmann solidly establishes the affordability impacts of the down-market supply and demand continuum, but then he says:
This is where our policy choices get tricky, because when we see inequality, our first instinct is to try to stuff it back down:
- Block real-estate investors from upgrading properties.
- Ban short-term rentals.
- Prevent foreigners from buying up homes.
- Control landlords.
- Build only affordable homes and not fancy-pants mansions in Scottsdale.
I’ll be the first to stipulate Erdmann may be privy to more backroom policy conversations at various levels than I am, but only two of these five points have had any serious degree of discussion in the marketplace of ideas, much less the public forum.
There’s no arguing the prevalence of short-term rentals, particularly in affluent areas like Scottsdale and Sedona, keep properties that could otherwise be owner-occupied or long-term rentals off the market. Still, there has been little traction for efforts to ban them outright, other than among some highly vocal NextDoor users.
When the Arizona Legislature rolled back its restrictions on municipalities regulating STRs, many cities and towns leapt at the opportunity and established licensing/registration requirements, along with some use prohibitions. While those requirements will likely stifle use to some degree, it’s a fairly minor impediment and one that’s unlikely to see any additional restrictions attached in the near future.
As to controlling landlords, I have to assume Erdmann is referring to the default liberal argument about instituting rent control. Rent control, and it’s more gently branded cousin “rent stabilization,” have been an unmitigated failure everywhere they’ve been implemented and have universally raised rents in targeted areas, since landlords raise rents by the maximum allowable amount every time they’re able, rather than adjusting rents up or down in accordance with market forces. It also leads to more owners switching to selling units as condos ASAP, thus contributing to the shortage of rental units across price points.
Except for some fairly radical and minutely populated affordable housing advocacy groups, particularly in enclaves like Tempe and Flagstaff, almost no one is talking about instituting rent control. Even the liberal policy research center The Morrison Institute for Public Policy at Arizona State University only left-handedly recommends the practice in its November 2021 report “State-Level Legal Barriers to Adopting Affordable Housing Policies in Arizona,” and even then it does so mostly by envisioning government subsidies and offsets to landlords.
As to prohibiting property upgrades, banning foreign ownership and mandating affordable-only development, these sound like more of a fever dream than a point anyone is seriously discussing, and there has been no forum I could find where these notions were trotted out for consideration. The closest policy under discussion is allowing (and in some cases mandating) that a portion of each new development be set aside as affordable, and that idea has leagues to travel before it risks becoming standard practice here.
This section was one of two where I took exception to the column. The second may not have been Erdmann’s doing at all. The headline, “Why building ‘affordable’ units only makes Phoenix’s housing crisis worse,” and an interior section headline saying, “Focusing on ‘affordable’ housing makes it worse,” are inflammatory and don’t match up at all with the tone of the column or its content.
I can’t fault Erdmann for these items out of hand, though. Giving readers a little peek behind the editorial/journalistic process curtain, writers often don’t write their headlines. Editors do. It’s entirely possible the offending headline and sub-head were inserted without Erdmann’s knowledge to stir controversy and engagement.
One of the many downsides of the current culture’s 280-character attention span, however, is the headline is often the only thing people take away from an article or column. What’s worse, in this case they’re inflammatory, incomplete and foundationally incorrect, as we’re about to tackle next.
All We’re Building is Upper End
Speaking against adopting all-affordable or similar policies, Erdmann is absolutely right. We cannot afford to target affordable development to the detriment of market rate. His statements, “To help reverse our housing problem, then, we need richer families trading up again, which leaves more options for poorer families. That means building more homes at market rates, rather than policies further limiting what is being built or redeveloped,” and “Insisting that new housing be “affordable” or subsidized can make the problem worse,” could not be more accurate.
They are, however, operationally irrelevant in the face of market conditions. The truth is, we’re already building upper end market rate units to the near exclusion of everything else.
Yardi Matrix is a default data source for multifamily development data, so we’ll use their numbers. Yardi divides multifamily properties into five or six classes, depending on the report. At the low end is Fully Affordable, followed by Workforce – Lower, Workforce – Upper, Low Mid-Range, Upper Mid-Range and Discretionary at the very top.
As of this month, Yardi shows the metro Phoenix inventory of 1,637 properties and 348,663 units broken down across classes, units, and percent of market as follows:
- Discretionary: 73,330, 21.0%;
- Upper Mid-Range: 112,334, 32.2%;
- Low Mid-Range: 73,808, 21.2%;
- Workforce – Upper: 59,972. 17.2%;
- Workforce – Lower: 5,601, 1.6%, and
- Fully Affordable: 23,618, 6.8%.
That inventory is certainly not the bell curve distribution one might assume a market with decades of apartment development under its belt would approach. More than 50% of the inventory exists in the top two tiers, indicating that Phoenix is now and traditionally has been a comparatively affluent market.
The numbers get really interesting when we look at the data both from pre-pandemic to now and from the start of the pandemic to today.
For units planned, under construction and delivered from 2017-2023, the numbers take a decided shift.
- Discretionary: 30,003, 35%;
- Upper Mid-Range: 46,643, 54.4%;
- Low Mid-Range: 3,277, 3.8%;
- Workforce – Upper: 1,816, 2.1%, and
- Fully Affordable: 4,063, 4.7%.
Nearly nine of every 10 projects (89.4%) are in the top two classes. The 2020-2023 numbers are a near match, with 89% of projects in the top two tiers.
Things don’t shift much when we factor out planned and under construction and focus solely on completions from 2020 to the present moment.
- Discretionary: 11,666, 31.3%;
- Upper Mid-Range: 21,027, 56.5%;
- Low Mid-Range: 1,764, 4.7%;
- Workforce – Upper: 1,019, 2.7%, and
- Fully Affordable: 1,762, 4.7%
Of the 37,238 units Yardi reports as being completed in metro Phoenix between 2020 and 2023, 32,693 (87.8%) have been in the top two tiers of development. Workforce and Fully Affordable deliveries were just 2,781 units, or 7.4%.
Despite the inflammatory headlines, Erdmann’s content actually agrees with the data and message economist Elliott D. Pollack and HOME Arizona have been preaching to anyone who will listen since at least early last year: The best way to alleviate the ongoing affordability crisis is to build vastly more units at every price point. Putting more units of any and every type into the available mix will relieve pressures on units lower income residents can afford, provide options for upper-income residents who want to scale back and provide choices for all classes who want and are able to move upward.
That the market is not delivering units at the lower end of the spectrum is understandable: The Return On Investment is lower. With the rapid acceleration of construction costs we saw during and immediately after the pandemic, the historic interest rate increases we’ve seen since the pandemic, the ever-present lack of available labor, and the types of firms actually developing projects, it’s amazing anyone is developing affordable or workforce units at all.
Despite the fact that many component prices have moderated, Associated Builders and Contractors reported earlier this month that construction input prices are still more than 39.2% higher than they were in February 2022.
The Federal Reserve has raised its key interest rate 10 times since last March, moving the Federal Funds Rate from 0.25% to 5.25%.
April 2023 saw Arizona’s Construction sector with a total reported employment of 197,900 people. Despite continuing to generally post gains, the sector still has 42,400 fewer workers than it did at its peak of 240,300 in 2006.
These local and national trends dovetail into a worrisome article recently posted by Bisnow. After ramping up production post-pandemic, more deliveries are hitting the market, making it harder for landlords to justify rent increases and leading to a marked decrease in new construction starts, which will, in turn, lead to more increases down the road. That’s good for the CRE sector but bad for residents who have seen little to no relief from the massive rental price increases of the last three years.
On top of that, the increase in construction and capitalization costs mean mid-level, independent developers are being largely squeezed out of the market, leaving publicly traded Real Estate Investment Trusts, which target upper-level developments almost exclusively, as one of the few spaces in the market able to get projects funded.
While policies that freeze out development at any price point must certainly be met with full-throated opposition, they are a little more than a boogeyman under the bed in the current environment. The problem leaders, developers and the public at large need to focus on is how to get more projects moving and more units delivered given the current constraints.
Misrepresentation: Coming Soon to a Council Chambers Near You?
There is one more potential problem with the packaging of Erdmann’s column, if not with its actual content. It presents the potential for a ripple effect of unintended consequences. Given the reckless and relentless willingness of the NIMBY community and their henchpeople on various city councils and other approval bodies to engage in misinformation, disinformation and outright lying to stop new multifamily development—particularly if there is even the faintest whiff of affordability or attainability associated with a project—I fear rezoning and land use plan amendment hearings in the very near future will start to hear the phrase: “Building affordable units just makes the housing crisis worse,” uttered with enough variations to keep even ardent Bach aficionados riveted.