Thursday, August 30, 2012

"some ridiculous numbers"

So while I try to shy away from stuff that looks like corporate PR... the Pittsburgh focus here is interesting.   Note the "some ridiculous numbers" quote about a third of the way in.. and points for the image of Downtown with a non-working fountain.


Anonymous BrianTH said...

We should really do something about the high barrier to entry thing.

But I am not 100% sure I believe the provided explanation (it doesn't help that I happen to know his description of the main sources of jobs growth was pretty off base--energy is a nice little addition to the mix, but little indeed compared to the growth in sectors like Finance, Professional & Business Services, and so forth).

Specifically, he implied the barriers to entry were due to difficulty finding sites, which frankly strikes me as a bit implausible. Just from casual observation, the problem is more getting together financing, and really that seems to be mostly a result of the poor national situation, and perhaps a continued problem with many outside investors not yet being willing to put Pittsburgh on their hot list.

With, of course, some notable exceptions--PMC, for example, has obviously taken a big interest in Pittsburgh, and it doesn't seem to me like they are struggling to find opportunities.

Thursday, August 30, 2012 8:35:00 AM  
Anonymous Anonymous said...

Pittsburgh's real estate growth isn't all that great because the taxes are so high, which in turn eats up potential profits for investors. We have some of the highest taxes per value in the country. Growth will no doubt be slow in creating new units to meet demand.

Thursday, August 30, 2012 9:03:00 AM  
Anonymous MH said...

You might be able to make that argument based on uncertainty about taxes, but unless you’re arguing that that we currently have a set of landlords who charitably pay property taxes without passing the costs to their tenants (or don’t pay enough property taxes because they got a sweet assessment), I don’t see how taxes matter for profitability with such a small level of vacancy.

Thursday, August 30, 2012 9:26:00 AM  
Anonymous Anonymous said...'s TAXES.....Taxes and big government and corruption...

Thursday, August 30, 2012 3:06:00 PM  
Anonymous Anonymous said...

The state with one of the highest growth rates has higher property taxes than southwestern Pennsylvania. Plus insurance costs that are twice as high due to hurricanes. So find another argument.

Thursday, August 30, 2012 8:30:00 PM  
Blogger C. Briem said...

The first problem with that argument is that you have to believe high taxes are scaring away investors, but don't seem to be scaring away the renters who are filling up the units.

More straightforward is that it goes against a lot of stuff obviously going on. I just saw a variance application for a 57 unit redevelopment of a former church in Lawrenceville. Infill like that does not happen in a lot of places and was once unheard of here with just a few exceptions. Hard/expensive to rehab a big old church. You only notice the few successful ones (Church Brew Works/Priory and others) but for each one that has been successful I bet there are 10 that are empty or demolished. Highland Building is being worked on as I type. Hotels have been going in all over in last decade.

Thursday, August 30, 2012 8:51:00 PM  
Anonymous BrianTH said...

As I recall there are actually a bunch of church-to-residential projects in the works--the one in Lawrenceville, another in Greenfield, I believe a smaller one in Swissvale, and maybe some other small ones I am forgetting about. You've also got substantial new builds like Lot 24 in the Strip, the Oakland Portal, a bunch of stuff in Lawrenceville, and a bunch of stuff on the Hill. Chris mentioned the Highland/Wallace project, and there are more projects in East Liberty, and Bakery Square 2.0 has a residential component. And PMC just added yet another building Downtown with vacant upper floors to its conversion pipeline.

So the idea there is some across-the-board factor like taxation holding back residential development is supported by neither theory nor observation. The real puzzle is just why the current pace of new units being developed isn't even faster than it currently is, and whatever explanation you hypothesize has to fit that specific dynamic.

Friday, August 31, 2012 10:58:00 AM  
Anonymous MH said...

The church development in Greenfield doesn't appear to be moving very quickly. I think that same guy tried, and is so far stalled, to develop that empty lot on the other side of Magee Rec Center.

Friday, August 31, 2012 11:04:00 AM  
Anonymous MH said...

So the idea there is some across-the-board factor like taxation holding back residential development is supported by neither theory nor observation.

I wouldn't go that far on the theory portion of it. I just can't figure out how taxation would hold back development when the market is tight enough to pass it on to renters.

Friday, August 31, 2012 11:12:00 AM  
Anonymous Anonymous said...

I don't think it is financing, per se. I think it is that rents have lagged in Pittsburgh for so long, it is tough for them to catch up. Even with high occupancy rates, it isn't as if you can increase rents 50% in one year.

Construction costs, however, have continued to go up over the years. So if rents, over the past decade or two, did not keep up with costs of construction, there is a mismatch. Which should decrease over time so that income (rents) increase and more projects can get financing.

Friday, August 31, 2012 3:34:00 PM  
Anonymous MH said...

That seems reasonable. When you have a declining populations, rents can be pegged to the cost to maintain, not build, until the population stabilizes or the housing stock gets so old it costs more to maintain than build.

Friday, August 31, 2012 4:34:00 PM  
Anonymous BrianTH said...

But if it is construction costs versus current rents, why are people doing Lot 24, Oakland Portal, and other new builds?

Sunday, September 02, 2012 10:30:00 AM  
Anonymous MH said...

I think what anon was saying is that past rents were too low so there is an under supply currently.

P.S. What's Lot 24?

Sunday, September 02, 2012 10:38:00 AM  
Anonymous BrianTH said...

Lot 24 is a new apartment complex under construction in The Strip:

Anyway, I can buy that there were fewer projects in the pipeline than you would expect given current rents due to lower rents in the past. But some high profile projects also got cancelled or delayed during the recession.

Sunday, September 02, 2012 4:42:00 PM  
Anonymous MH said...

The recession has been everywhere, so by itself it wouldn't explain why Pittsburgh would move up in the list of apartment vacancies.

Sunday, September 02, 2012 10:50:00 PM  
Anonymous BrianTH said...

The hypothesis would be something like this:

On the demand side, Pittsburgh's relatively strong performance during the recession and recovery has led to it attracting job-seeking migrants who favor rentals;

But on the supply side, the recession and associated financial crisis has made it more difficult to finance residential projects, even in places which have done relatively well such as Pittsburgh.

And that local mismatch (growing demand but financially-constrained supply) would help explain the numbers in the video.

Tuesday, September 04, 2012 6:54:00 AM  
Anonymous MH said...

Still seems a bit off to blame the recession for long-standing lack of investment. Even during boom years, and even of other regions, plenty of projects didn’t make it for lack of financing. I guess I’m not certain I’d assume the developers of the failed projects were just a bank loan officer’s approval away from success. Also, even with no financial constraints, it takes years to plan and build a residential project of any size. Pittsburgh hasn’t been having much better job performance that the national average for more than a couple of years but the housing stock has been under-maintained for decades.

Tuesday, September 04, 2012 8:39:00 AM  
Anonymous BrianTH said...

Pittsburgh has actually been on this general employment-growth track since about 2005 or so (subject to a brief setback during the recession). That is more than enough time for the residential construction pipeline to have caught up, if other factors were not interfering.

I can't prove anything with respect to specific projects without access to confidential documentation and such, but we know from widespread reporting there was a virtual freeze nationwide in residential construction financing, and this was specifically cited as a factor in cases such as Riverparc:

So while I am describing this as a hypothesis, I think it is a pretty promising one. It also has the virtue of making sense of what we can observe: residential projects are in fact moving forward, but not at the overall scale/pace the market would require to maintain a more normal vacancy rate and rent dynamic. To explain that pattern you need a particular sort of constraint (significant enough to constrain pace, but not so sweeping as to prevent projects in general), and a limited pool of available financing is one such possible explanation.

Tuesday, September 04, 2012 11:35:00 AM  
Anonymous MH said...

Developers always blame the credit market or banks. What it often means is that they didn't have enough of their own capital or committed reserves to deal with even the slightest set-back to the optimistic starting assumptions (see Rivers Casino).

I still like the rent increases lagging construction costs idea better. It explains why when banks were throwing residental money around like water we didn't get much residental development.

Tuesday, September 04, 2012 11:55:00 AM  
Anonymous MH said...

On the consumer end, I'd see maybe a bigger role for financing difficulties. The restored need for down payment money has made it harder to buy and put people back into the rental market.

Tuesday, September 04, 2012 12:02:00 PM  
Anonymous BrianTH said...

Whether developers are generally credible or not, it is a demonstrable fact that financing for residential projects crashed to extremely low levels during the recession, and still are not back to normal levels.

I think the rent/construction-cost hypothesis does indeed make sense when looking at why many years ago, local residential projects were underfunded in relation to local non-residential projects. But again, things have been changing, for many years now, and in fact a good number of residential projects are in fact being built, just not enough to keep up with rising demand.

So how did those projects escape the box if the box is made out of something as universal as high construction costs in relation to rents?

Meanwhile, mortgage requirements may help explain why the condo side of residential has been slow, and in fact continues to lag locally. But people need a place to live, and as you note, when condo demand is low, apartment demand tends to increase in a roughly corresponding fashion. And that is what we are seeing (very robust demand for apartments).

So the question remains: where are the new apartments this market wants? Again, we are too long into this process to just blame normal pipeline lag, and meanwhile we have a very plausible, and factually well-established, explanation staring us in the face.

Tuesday, September 04, 2012 3:19:00 PM  
Anonymous BrianTH said...

Lots of graphs showing the national crash in spending on residential construction, and the only very limited recovery to date:

So the hypothesis is basically just that the industry has not made enough of an exception for Pittsburgh, even though Pittsburgh has in fact been an exception to many of the relevant national trends.

Tuesday, September 04, 2012 3:34:00 PM  
Anonymous MH said...

Have other places with smallish increases in renters seen their vacancies go that low?

Tuesday, September 04, 2012 5:49:00 PM  
Anonymous BrianTH said...

Apartment vacancy rates in general are indeed at very low levels and apparently heading lower still, predictably leading to rent increases:

Note this is despite a crash in household formation, but the shift in preference from owning to renting has compensated:

All that said, the video suggests that Pittsburgh is out on the far edge of this effect among large metros. That is where the relatively good performance of the local economy and job market comes in--I don't have any handy data, but I would bet household formation did not crash as much here (if at all), and again I think it is quite likely we are experiencing relatively high rates of job-seeking migrants.

Wednesday, September 05, 2012 11:26:00 AM  
Anonymous MH said...

Pittsburgh is also at the far of edge for the age of its housing stock, but I do see the trend for increased rental demand.

Thursday, September 06, 2012 1:21:00 PM  

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