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Comment by jccalhoun | Hacker News Reader

I live an hour or so away from the town I went to grad school so I still visit once a month or so. It seems like every time I visit another old building is torn down and another one of these 5 over 1 buildings are going up.

The stores are rarely successful and I'm sure that the companies building all these things just factor in the cost of building these as a cost of doing business in that town.

Most of the kids that rent these "luxury apartments" (which is how they are always described) are from cities with much higher cost of living so they can charge a ton of money and mom and dad will still think it is reasonable. This ends up recreating housing crises of big cities because people that live and work in the town are getting priced out of living there.

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Okay, so if the 5 over 1s weren't being built, where would all of these "kids" live? Wherever they live, by your same argument, they would be willing to pay more than the existing locals and the existing locals would still be priced out.

Pricing people out is primarily an income/wealth disparity problem that arises when in-demand areas move suddenly.

Building less in those areas certainly would not help. But it's also unlikely that enough can be built to preserve space for all existing residents in any realistic time-frame without subsidies and active efforts (which some cities do better than others).

Yeah, the key is to just build enough. Almost everywhere in the US that's booming just doesn't build all that much -- you may see a lot of cranes around, but the % increase year over year in housing is usually pretty modest.

As for why booming areas don't build enough: exclusionary zoning, burdensome processes, NIMBYism in local meetings, and learned government helplessness.

It's not just supply and demand. Expensive areas being expensive is partly by design.

Things like redlining are no longer legal, but the desire by people to exclude people that they do not want their kids to end up like remains. One legal way to do this is to make the cost of living sufficiently high that it guarantees your neighbors conform sufficiently to society's standards that they were able to accumulate wealth.

Here's a podcast episode on the particular issue if anyone wants to explore more

https://www.strongtowns.org/journal/2024/3/18/benjamin-herol...

Yeah, but I'm pretty sure that's not what's happening here. What jccalhoun is describing is actually a reduction in the cost of living. The younger people from the city are moving from the city because the town is cheaper. They didn't move before the aparments were built because the detached homes in the suburb were too expensive.

What's happening is two things 1) that people in detached homes in the middle of town the who aren't willing to live in apartments are seeing costs go up (because their land is more valuable) and 2) more people from the town are working it the city.

Of these two thing, I'd say that #2 is generally bad, but also orthogonal to building apartments. It just happens to be that they often happen together.

People are going to move to trendy areas anyways, might as well make some effort to accommodate transplants before they displace the locals

The only ways to prevent this would be deliberately trash the neighbourhood to make it unappealing, or a hukou system like china

Pricing people out is the obvious way when there is too little housing on offer. No point in keeping or building smaller / lower cost when there is so much more demand than supply.

> The stores are rarely successful and I'm sure that the companies building all these things just factor in the cost of building these as a cost of doing business in that town.

One of the things you see people complaining about in cities like Seattle or SF is higher commercial rent prices pushing out all the "cool" but not particularly profitable businesses.

And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.

> And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.

It's part of it for sure, but there are lots of commercial vacancies that sit empty for years because landlords often keep storefronts vacant on purpose. It's a confluence of reasons and it depends on the locale -- sometimes there's a tax break if it's vacant, sometimes there's a tax increase if rent hits a certain threshold and the landlord wants even more to make up for the new tax, sometimes the mortgage is guaranteed by the rent price in some way and lowering the rent would cause the holder to pay back the difference immediately, etc.

There are tons of empty storefronts in NYC at the moment, for example, so more supply isn't really the issue here, often it's a web of really bad policy.

And I'm sure this is the place where people start saying Land Value Tax.

There are ways to deal with that though, and yeah there's LVT, or you could have higher taxes on empty storefronts, to incentivize landlords to rent.

Yeah, that all sounds like really horrible policy. Landowners in in-demand locations should be taxed heavily if the land isn't being used productively. They sure as hell shouldn't get a tax break for having a vacant lot or storefront.

Building cheaper commercial real estate will help with that issue, too, as it will cause the CRE landlord holdouts to realize the downward price pressure will only continue.

In the United States, they can't lower rents.

The loans that they got to build the building were underwritten assuming X square feet of retail space would be rented at $Y per square foot.

If they were to rent the spaces at lower rates, the bank would need to reassess the building, taking the lower rental rate into consideration. Then the Loan-to-Value would be higher, making it harder and more expensive to refinance after the 5 to 10 year term of the loan. The bank doesn't want that either, as long as the payments are coming in on time.

Strangely, keeping the space vacant doesn't require the bank to reassess the space as though it's renting for $0.

So, the financial incentive for the borrower and bank is to keep the space vacant at $Y than rent it for less.

So you raise property taxes based on the vacant space until it's financially worth it to rent out instead. Bam, done.

> Bam, done.

So simple. Effective. No side effects at all. Everyone does that. /s

Suggested Patch

* Banks must re-evaluate the loan once a year based on the average real lease rate for that year OR the next year's contractually committed income. (Not the 'we would love to least it at X' fabrication.)

* In addition to Land Value Tax and any applicable income tax, all not-leased units and spaces would be taxed as if any asking price over comparable units within a reasonable distance, like a 12 city block or mile square centered on that unit, were booked income. Example: Studio apartments currently leased within 20% that units size within the 1 mile square average 1000 USD/mo, a vacant apartment which asks for 950/mo has a taxed rate of 0, while an apartment asking for 1200/mo would be taxed as if they had rented that space for 200 that month, even though there was 0 income. The goal is to apply a small downward pressure to rents and also directly reward renting beneath the mean average within the area. Maybe it should even be at a higher rate, like taxed as if 50% or even the full asking rate had been earned. Of course the highest possible rate (E.G. renting for one single smallest unit of time every time) would be utilized, including any one time fees for background checks, etc.

> Banks must re-evaluate the loan once a year based on the average real lease rate for that year OR the next year's contractually committed income. (Not the 'we would love to least it at X' fabrication.

This already happens.

https://www.investopedia.com/terms/d/dscr.asp

yesfitz’ comment is not correct, and lenders do care about their collateral experiencing insufficient cash flow. They do not care about specific empty spaces, but if revenue is not as expected, then obviously risk of default is higher, and they will notice.

I think "not correct" is unfair. The comment's audience was people who are unfamiliar with the effect of financing on market rents. To that end, I left out some nuance and caveats.

I appreciate your expansion on my statement though: "The bank doesn't want that either, as long as the payments are coming in on time."

But Debt Service Coverage Ratio (DSCR) looks at Net Operating Income, not just the collateral property's rents. DSCR is recalculated at intervals based on the lender's policy. That policy varies from bank to bank.

All banks' policies are examined by regulators, so it's not as though banks can totally ignore DSCR, but there are ways to mitigate policy exceptions that range from business as-usual to "Extend and Pretend"[1] that's been common since the Federal Reserve rapidly raised rates in 2022.

1: https://www.loopnet.com/learn/why-extend-and-pretend-may-be-...

> And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.

In theory there is. But the reality is that ground level lingers empty, or is occupied by some cool office space - and seemingly never needs to come down in price.

Seattle is a little weak on this new supply-and-demand concept

> This ends up recreating housing crises of big cities because people that live and work in the town are getting priced out of living there.

Here is research that contradicts this assertion.

"We ultimately conclude, from both theory and empirical evidence, that adding new homes moderates price increases and therefore makes housing more affordable to low- and moderate-income families. "

https://furmancenter.org/files/Supply_Skepticism_-_Final.pdf

This doesn’t contradict theories of rising prices; it contradicts some theories of price acceleration.

Adding supply is important but it’s also not enough.

> Most of the kids that rent these "luxury apartments" (which is how they are always described) are from cities with much higher cost of living so they can charge a ton of money and mom and dad will still think it is reasonable

Calling apartments "luxury apartments" is just a marketing standard. It's like when Taco Bell says their food is "delicious." It's not the end of civilization.

Luxury apartment is just a buzzword. Why wouldn’t you market your apartment as luxury. And yet when I’ve lived in them they’ve been shoddy and cheap!

There was one apartment they built at my old college that was so expensive it pretty much exclusively targeted the subset of foreigners who parks supercars illegally full of tickets on campus. Not just your bostonites or whatever but children of saudi princes and chinese billionaires who effectively lived on a blank check.

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