First off, I hope you had a very happy Fourth of July yesterday. 🇺🇸
Despite the many issues facing the US, it’s still the best place to own a business or real estate, and it’s the only place I want to call home. We’re blessed to live here.
I wrote last week about my main takeaways from the 2024 Investor Summit, but after sending that email, I realized there was another recurring theme I forgot to mention:
Affordable housing.
Several experts on the summit, including Ken McElroy and Jason Hartman, mentioned that one of the biggest opportunities in real estate over the next decade is addressing the shortage of affordable housing in the US.
But the major challenge, at least for the time being, is that most affordable housing isn’t profitable to build.
Housing developers deal with a lot of crap, including a mountain of bureaucratic red tape for even the most simple projects. These headaches are typically made bearable by the profit potential of new development.
But rising material and labor costs have squeezed developer profits, especially at the lower (i.e., affordable) end. As such, developers are focusing on high-end, luxury housing products, where the margins are fatter and the payoff is more worth the effort.
Material and labor costs aren’t likely to drop significantly, which means developers probably won’t be switching their focus to the affordable end of the market any time soon.
In other words, without some external action, there will continue to be no incentive for real estate developers or investors to focus on delivering new affordable housing products, because there’s no money to be made.
Both Ken and Jason referenced the need for local government action to help fix this problem and give developers incentives to build affordable housing. Ken even jokingly said “developers are dumb. Give them an opportunity to think they’ll make money, and they’ll over-build in a heartbeat.”
Further driving this point home, I came across a recent study from EY titled How local governments can address the housing affordability crisis. EY’s consultants gave several areas where local governments could implement policies to support the development of affordable housing, including:
- Zoning reform: using a process called upzoning, local governments can rezone parcels from only allowing a single house to allowing denser construction with more units. This can be coupled with mixed-use zoning, allowing stores, restaurants, and housing to coexist on the same parcel.
- Non-monetary developer incentives: local governments can reform their permitting processes to expedite approvals, switching from a discretionary approval model with lots of red tape to a by-right approval model where special approvals aren’t needed.
- Infrastructure investments: local governments can invest in strategic infrastructure like sewer, fiber internet, and enhanced public transportation that increases a developer’s desire (and reduces their cost) to build.
Unfortunately, too many governments (including the Federal government) are more focused on making a political show by attacking non-issues like alleged price fixing by a software provider instead of providing incentives that would actually make a difference. But I digress.
In closing, this is a space I’m keeping my eyes on. There is massive demand for affordable housing. So any solution that profitably supplies that demand, whether that’s driven by technology advancements or local government actions, is an investment opportunity worth exploring in more detail.