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If you’ve ever watched HGTV, you’ve seen real estate investors buy run-down or outdated properties, spend a fortune updating them with high-end finishes and then sell them for mind-blowing profits. But I’ve spent roughly 20 years in the real estate industry as an investor, manager and developer, and in a time of staggering income inequality, I have to wonder: Would it make more sense to forgo the 1% and instead target buyers and renters of more modest means?
A look at several cities across the country — San Francisco, St. Louis and Charlotte, North Carolina — shows real estate prices exploding. According to Business Insider, the median rent in San Francisco is $1,700 — with a one-bedroom going for nearly $3,700 — while the average asking price for a house is $1.3 million, making the city by the bay the most expensive in the U.S. for home buyers. San Franciscans need to earn at least $172,000 annually to afford to buy a home there; the city has, of course, experienced a tech boom in recent years, but the San Jose Mercury News reported that just 21% of Bay Area jobs are in the technology industry. The average salary is $88,000, leaving most residents priced out of the market. To make matters worse, half of the city’s nearly 400,000 housing units were built before 1940, and thanks to all that water, there is really nowhere for new construction to go. Business Insider goes so far as to describe San Francisco as “an unaffordable city for all but the super wealthy, where even middle-class residents find it hard to hang on.”
Even in less expensive parts of the country, the middle and lower classes are being squeezed. St. Louis and Charlotte have both recently undergone economic booms of varying degrees, with St. Louis’ resurgence including the rebound of its housing market. Although some rents in the area have actually decreased since 2014, rent for a two-bedroom apartment went up by an average of 2.7% during that time frame, with some rents in the region increasing by as much as 10.8% due to many new luxury condominiums and apartment complexes that are under construction or recently opened. The higher overall rental price points limit the federal government’s housing subsidies for lower-income populations, making for “a difficult search for those of limited means” in St. Louis. And in Charlotte, there is a shortage of “affordable housing for people who earn less than 50 percent of AMI [area median income].” In the latter city, the median home sales price has gone up 10% in the past year, and residents have seen the third-highest annual rent growth of the nation’s 50 largest markets at 4% year on year.
And housing costs are going up at a time when mobility is going down. Recently The New York Times reported that Americans are moving less than ever before — just 9.8% of the population relocated last year, down from a high of around 20% that moved each year during the 1950s. Why the change? “These days, rents in many larger cities have exploded, making it much harder for a young person seeking better opportunities to afford to move. And low-wage jobs, after adjusting for the local cost of living, pay about the same everywhere,” the Times says.
So there’s a huge percentage of the population that isn’t being served by the current real estate climate and is also finding itself unable to relocate, leading to, to put it bluntly, a captive audience for housing for lower- to middle-income renters and buyers — especially with a recession potentially looming. “The rental market is likely to be buffered by those nervous about making what could be the largest purchase of their lives, a home, in uncertain economic times,” realtor.com reports. “Those folks may decide to live in a rental until the economy is booming again.”
So how can decision-makers in the real estate space cater to this demographic?
First, investors can prioritize renovations that are more modest, which reduces capital costs and, thus, keep rental prices lower. Why spend extra money on luxury backsplash materials, for instance, when subway tile is both classic and affordable, and can also be assembled in a creative way for a more unique look?
Second, investors and developers can turn their attention to smaller housing that still fits renters’ needs and is on-trend. According to the Washington Post, many developers are starting to focus on “building more housing for middle-income people at smaller sizes,” with “the average size of new houses [falling] for the third straight year in 2018.”
And finally, local governments can get involved. San Francisco voters just passed Prop A, a $600 million affordable housing bond that the Mayor’s Office of Housing and Community Development estimates will build or rehab 2,800 units of housing, and Minneapolis recently became the first city in the country to end single-family zoning while also spending tens of millions on affordable housing and planning to implement another zoning law that requires developers to include affordable apartments in new buildings.
Although there are other pressures that affect this issue — such as the rise of Airbnb, building codes, etc. — these are a few tactics that are actually in developers’ and local governments’ control that can make a difference. And by focusing on lower- to middle-income properties, investors can be part of the solution to the affordable-housing crunch while also potentially growing their own portfolios.