Can High End Development Help With Housing Affordability?

Suzanne DranowI was persuaded to attend a roundtable on the effects of luxury housing on all strata of real estate. I’ll admit I went kicking and screaming, but I’m glad I went.
I was invited (dragged?) by Spencer Krull*, who can put me to sleep when he starts going on about surveys of infill mixed-use urban development trends, but he knows his stuff and he had an extra ticket and promised me a good sushi lunch.

New York and Los Angeles both suffer from a lack of affordable housing, which is evidenced by rental prices in Staten Island (Staten Island!) described as “being on fire!”. The difference between the markets is that Los Angeles is experience a building boom. But let me qualify that statement: The boom is in downtown luxury developments — one look at the skyline and you might think the construction crane is the new state bird.
But thereby hangs the tale: There is a glut of rental housing in downtown LA. 
Another hang of the tale: Most people don’t want to live downtown.
To be clear, more and more people are moving downtown, and there are supermarkets and other stores for certain neighborhoods to be “self-sustaining.” That said, downtown has still not come close to a critical mass, so a nighttime (9PM) tour of the city shows swaths of human-less landscape, only for one to surprise upon a pocket of activity that evinces life. And yet they build on.
So what does this have to do with affordable housing? 15 years ago the downtown housing stock consisted of older buildings with fairly low rents. About ten years ago there was a boom of renovated historic buildings (such as the Eastern Columbia Building, which I helped sell). Back then, there were only a few high-end offerings, so tenants still had their pick of where they could live. 
Fast forward to today and there have been a ton of new construction projects, but their occupancy and sales rates are slowed to a crawl (just look at the sales trends of downtown’s “Metropolis” as an indicator). And here’s where the affordable housing comes into play with rental properties: As new buildings are built, the older stock (even only 10 years old) is beginning to lose its luster; what passed as luxury is now surpassed by the newest projects; higher-end tenants are attracted to these newer luxury offerings; landlords of the former luxury trendsetters are dropping their rental rates; this effect trickles down to lower end properties as they lower their rates and using is becoming (infinitesimally) more affordable for lower income residents.
A city thrives on having housing at all ends of the spectrum — from affordable to the ridiculous. This dearth of affordable rental properties leaches its way into the sales market, as well.
Can Los Angeles and other cities build their way out a housing shortage with luxury housing? It can’t be the only answer, but every new unit helps. Oh, and by the way, if you’re interested in downtown, I  might know of a good deal or two.
(*Spencer Krull is the former broker of record of Teles Properties and we often partner on investment properties. If we’ve done a multi-family investment deal, you’ve probably met him or received his analysis spreadsheet on the property.)

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