Tuesday, May 20, 2014

Empty Buildings & Rising Rents

I'm no real estate expert, but something is out of whack with affordable living in New Orleans. People I know who lived here before The Thing often cite how much living space they could get with a much lower pricetag, and this seems to be backed up with the triumphalism of actual real estate folks singing the praises of higher home values in the new New Orleans. There's a palpable sense of nervousness among those of us who will be forced to find somewhere else to live if these trends continue.

The insanity in this market is actually caused by something very simple: more people are looking to live in or visit desirable areas of Orleans Parish than exist places for them to stay. Cost increases really can be boiled down to something as simple as supply and demand, but that's where the simplicity ends. Causes of housing scarcity in high-demand areas - that's where things start to get interesting. Getting deeper into those weeds, you start to figure out that the fundamentals of this market are all messed up, and that mess is what drives up costs for everyone without much rhyme or reason.

As an example, let's talk about the guy who owns a bunch of historic but unused buildings at the foot of Canal Street. This is blocks away from the inexplicably empty "most valuable piece of property in the city," and the owner would like to tear down these units and put up a big $100 million hotel. Of course, preservationists are against allowing this, and the plans for the hotel appear to violate the area's zoning anyway. While this sounds like another episode of nosy neighbors putting the brakes on badly needed economic development in New Orleans, I've got a different set of questions.

With property values skyrocketing all across the city, people getting priced out of their homes by rising property taxes and flood insurance premiums, how is this guy sitting on an entire block of underutilized, historical housing stock in one of the most high demand neighborhoods in the city?

I mean, if he's a honey badger type of dude who just doesn't give a crap about paying massive property taxes on empty buildings, there's not much we can do about that. But I generally subscribe to the "follow the money" school of thought - millionaire property owners generally don't happily hand over piles of money to governments without A) expecting something in return or B) considering that cash an investment on potential later earnings. There has to be some incentive at play.

In this case, the later earnings are easy to spot: the $100 Million hotel will turn a tidy profit in this city in that neighborhood, and will do so for years and years. But here's the rub: those potential earnings have to be enough to justify not only sitting on those mostly empty properties for years, but also foregoing the serious money he'd make in the short term by getting those properties back into commerce. That's a LOT of opportunity cost money he's spending on long term potential earnings.

Let's not kid ourselves, that's a BIG problem. If your city's real estate market is set up to reward speculators from keeping high dollar, high demand properties off the market and out of commerce, you've got a completely upside down incentive structure. An incentive (or disincentive) structure like that will do more damage and drive up cost of living more than all the short term rentals laid end to end.

How much money are we currently talking about? Luckily, the folks at The Lens have a property tax calculator set up so we can make some guesses. Again, I'm no real estate expert, but I'm going to take a stab at how much historical stock buildings are worth at the foot of Canal Street by looking at the prices of nearby properties on Zillow.

Oh, look. The cheapest property on the next block is a 1 bed, 1.5 bath condo for $255K. Go up to 2 bedroom, 2 baths, and you're talking an average of $500K per unit.

Let us look at these properties with a conservative estimate and find out just how much potential is being wasted here. Right now, there are three buildings on Tchopitoulas, one building on Canal, a parking lot, and a one-story t-shirt and liquor store on the corner. Let us posit that each floor of each of these buildings could be renovated into two 2 bed, 2 bath condos per floor. That's a potential of 32 units. With each unit averaging $500K (based on Zillow proximities), we can figure out what those properties would hypothetically be worth with a simple equation:

32 X 500,000 = $16,000,000

Are we talking real money yet? Yeah, it may not be close to $100M, but $16M in potential short term value is a lot of cash to leave on the table chasing a potential development that isn't allowed by zoning. That's especially true when you consider the parking lot and t-shirt/liquor store are building sized parcels that can be upgraded into buildings as big if not bigger than the existing 4 buildings. Two hypothetical new buildings raised to 5 stories and similarly subdivided would add 10 more units, or hypothetically $5,000,0000 in additional value.

Using The Lens' handy property tax calculator, we can estimate that the property taxes on just the 4 existing buildings as divided into hypothetical units is just over $238,000 per year. For the purposes of this mental exercise, we're not counting the parking lot or the t-shirt & liquor store potential. But a quarter million a year just on those hypothetical properties ain't chump change.

So how is this guy sitting on these potential millions in real estate potential while paying piles of cash in property taxes? The rub is, he's not. I wouldn't even begin to know how to check the records and see what he is actually paying, but I'd wager it ain't close to the potential those properties are worth, even in my hypothetical exercise. No, I'm sure those buildings are assessed as unoccupied and in disrepair, and don't command the assessment value of renovated property. If his tax liability was closer to what those properties could potentially be worth, he'd have less incentive to keep them out of commerce, underutilized, banking on a potential pie-in-the-sky future development. The structure of the market, absent incentives that reward speculation, would demand he get renovations underway to get the most out of those parcels.

So what does this have to do with housing prices and rising rents in the rest of the city?

First of all, think about those upside down incentives and spread them all across the city. Speculation & sitting on underutilized properties is rewarded over getting properties back into commerce. That's a big, big problem when your real estate market's prices keep going up and up and up because there are more people who want to live and visit here than there are places for them to stay. This isn't just about a block of historical buildings at the foot of Canal Street. This is about shuttered buildings on Canal Street in Mid-City, parking lots in the CBD, weed strewn empty lots in Gert Town, empty shopping centers on Paris Avenue, blighted motels on Tulane Avenue, every "church" that owns falling down properties that they never use, every non-profit sitting on land in the Lower 9th Ward.

Second, those upside down incentives have to be paid for somehow. Every blighted house or empty building isn't contributing much property tax to the city's coffers, so those costs have to be spread out among those properties that ARE back in commerce and have folks living in them. That translates to higher property taxes, higher fees, higher rents (and higher median rents for those on housing assistance), and less city services. I mean, you know how the Mayor comes on TV, hat in hand, and asks to raise everyone's property taxes? Next time he does that, think about the $238,000+ left on the table by some dude who wants to tear down historical buildings and chase hotel chain money.

But I'm no expert in stuff like this. I could be completely wrong. All this could be the result of hipsters.

Related posts:

The G Word (Gentrification)
Short Term Thinking (Short Term Rentals)

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