Inside the Housing Crisis: Why You Can’t Afford to Live Where You Work

[00:00:03] So today we're going to bring in Brian Kearney, my COO. And of course he was a developer, he was a city manager, he knows a lot about this subject. Yeah, affordable housing is a real issue and I think people don't understand what affordable housing actually is and why there are so many barriers to producing it. And he's going to break that down. Yeah, we're going to give you the inside look of what it really takes to build affordable housing.

[00:00:29] So let's first define affordable housing, Brian, because it's a loose term and a lot of people throw it around a lot, right? But it's a real issue because people are having a tough time with their money right now and wages are not growing like inflation. So affordable housing, people tend to think of it sort of in absolute terms, I think, in terms of a housing product that's offered at a lower rent or a lower cost and that there's some threshold that makes it affordable.

[00:00:55] But it's actually a relative term, right? It's all relative to the income that someone makes. And so by government standards, in order to be affordable, the rent that you're paying and the utilities or the mortgage that you're paying can't exceed more than 30% of your income. So obviously for somebody making $60,000 a year, they can afford, based on that math, about $1,500 a month.

[00:01:20] But somebody making $100,000 a year, what's affordable to them is $2,500 a month. So it's all relative to your income. Yeah. I think, you know, when people are talking about affordability, though, I think it's really kind of on the, you know, the low middle class, right? Would you say generally? Because that's really where a lot of government targets a lot of programs. I would say that that is true. I would say that it's an issue that's impacting more and more of the middle class.

[00:01:50] However, I mean, if you look at some of the statistics that are out there, you know, the term that's used is cost burden. So if you're paying 30% or less of your income, you're okay. If you're paying more than that, you're considered cost burdened. And the statistics are kind of alarming, frankly. In Greater Phoenix alone, or in Greater Phoenix, 52% of renters are cost burdened.

[00:02:13] So 52% of everybody renting is paying more than what at least the government feels, you know, is an acceptable affordability. 25% of renters are severely cost burdened, meaning they're spending more than 50% of their income. And those figures hold pretty close, whether you're looking at the state of Arizona or whether you're looking at the entire country. So it's a growing problem. But a lot of the affordability issue comes down to supply and demand, correct? It does. I mean, rents go up when there's no supply of housing in general.

[00:02:44] No doubt. Rents go up when supply is down. Rents also tend to go up as it costs more to build, but it absolutely is related to it's a supply and demand issue. The supply side in terms of affordability is low. That's the bottom line. I know it's funny because you and I have been doing this a long time, right?

[00:03:12] I mean, you more probably on the development and construction side than myself, but we were just looking in downtown Phoenix recently, and you can do a 12-month lease if you rent at a building down there, actually several buildings. You can get four months off on a 12-month lease. So that's the opposite. That's a spot where there's a lot of supply in an area.

[00:03:38] And the only reason I bring that up is because if you're a renter, that's a heck of a good deal. And that's not the way the market's supposed to be. No developer wants that. We wouldn't be in the business if we were doing that. Right, but at the real point, that's a supply issue. It is. It might be temporary, might be a little bit longer than probably they want, but it is a supply and it drives rents down. It does drive rents down.

[00:04:04] And obviously, I mean, as you know, multifamily is very geographically centric and very dependent upon where you are geographically and in particular submarkets. And the downtown Phoenix submarket has had just a tremendous amount of supply added to it. And so there's unbelievable competition for the renter there. And so you are seeing significant concessions there that you don't see elsewhere.

[00:04:32] Now, the west side, obviously, of the valley, you're seeing a fair amount of that as well because of the supply issue there. So there's no doubt you're seeing, and I think it is temporary, although it may be extended for a few years while all the products absorbed. You know, in general right now, there's a short of about 59,000 units in order to satisfy the need of the renters who are currently cost burdened. So it's significant.

[00:05:01] So let's ask the million dollar question, though, because like when I read our YouTube comments or I talk to people that are, you know, struggling with rent, they always ask, like, why isn't more affordable housing being built? And it's not quite that simple. So let's kind of break that down for our listeners. There's a number of reasons. It's really hard to build housing that's affordable for folks.

[00:05:25] You know, over time, cities, for instance, have implemented design standards where they want to see a lot of gingerbread on the product that's built. They want to see, in some cases, more parking that costs more to provide. And so the requirements that cities are imposing on developers, whether it's landscaping, whether it's architectural features, whether it's parking or fees that they're imposing,

[00:05:51] impact fees, permit fees, plan review fees, it all adds up. Right. And so it adds cost to a project. And you've got to charge rents that are going to obviously give you a return on the cost that you're investing. So that makes it difficult. Before you ever get to building, things like zoning. You know, traditional zoning has really been an impediment to building affordable housing.

[00:06:19] Zoning, cities tend to like to zone a lot of single family land. And single family is not really conducive to, at least on the rental side, to providing affordable housing because the more density you can get, the cheaper you can build, you know, a unit and spread it, spread the cost over more units. And so when cities are pushing low density, and by the way, neighborhoods who, you know, the NIMBYs, not in my backyard, they're pushing the city councils to do that.

[00:06:50] You know, you have, it's very difficult to get political support for affordable housing, difficult to get neighborhood support for affordable housing. But I also want to say that there's a general perception that renters don't vote. Correct. This is a huge piece that isn't talked about a lot. So because they're kind of nomadic, right? That's right. So there's that issue too. So when a politician is looking at what do they do in an area, they're looking at,

[00:07:18] okay, I got the single family homeowner here that votes and is in my district. And then you've got this apartment. And it's going to be in my district. Yeah. You know, and they may or may not vote. So there's that too. So explain that. So do you mean that the single family homeowner would be pissed and then not vote for the politician? And then that's exactly what it means. That's it. Because they're like, why would that politician allow a multifamily building in my block?

[00:07:45] Conversely, what will the multifamily resident do for me once they're there? Because the perception is they don't vote. They don't participate in their community. And so they're of little value to me. All they do is bring me headaches because of perception, of course, because of traffic and crime. Yep. The neighbors being upset. Yeah. That's for multifamily. I was going to say that. Take it to affordable. Yeah. Right. Well, think about it. So this is a real issue that doesn't get talked about a lot.

[00:08:14] And so we will get to the costs. But if you're a single family homeowner and you're thinking about the neighborhood traffic, right? You're thinking about safety. You're thinking about the schools. You're thinking about all the things that you're thinking about. You have a negative connotation about apartments. Now, I don't. We don't because we are in the business. But that is what we fight every time.

[00:08:40] And the politicians sitting there that we're trying to get an apartment community approved is actually considering all of those things, too. And because the neighborhoods of what happens at these hearings, and I've been to a number of them, and I know you have, Brian, they'll have 50, 100 people show up at these things, right? Yeah. It's a lot easier to get people out for something they oppose than to get people out for something else. So the neighbors come out in droves.

[00:09:09] We do not want this. We do not want this. And they're there yelling at the city council, basically saying, don't allow it. So there's a resistance there. Before we get into cost, because cost is important, we'll get there. But you got to know that it has to be like the right circumstance, right? Yeah, it does. And like I said, the issues we're talking about have been pervasive in trying to build market rate, class A multifamily housing even for decades, right?

[00:09:38] I think it's changed a little bit. But it really, again, it depends on where you are. Downtown Phoenix, obviously, you're not going to build single family housing in downtown Phoenix. Bringing residential downtown was a huge priority for the city. That's how they ended up getting overbuilt because the city provided incentives and encouraged all of that development to happen. Other areas in the East Valley and the suburban locations, totally different story where they

[00:10:06] have exactly the issues that you're referring to. So yeah, it has to be absolutely the right set of circumstance. And you'll even find in the city, you'll find a city staff that's educated on multifamily, that understands the benefits of multifamily, that's looking for the tax base that it can bring and the retail shoppers it can bring, et cetera. And so they'll come up with programs and be very supportive of what a multifamily developer wants to do.

[00:10:36] But they better be in sync with their city council because it can still go the other way. Yeah. If you have a support. Take a look at the property we're buying right now, the core as an example, or Alta or any of the others. Look what they back up to, right? One side's a gas station, another side's Costco. Behind that's a Home Depot. It fronts a major road. And then in front of that is going to be a cigar store and a Tesla dealership, right? Okay.

[00:11:06] So single family homeowners aren't going to fight that. Right. And that's kind of the point, right? That's right. But you have to think with that single family homeowner, though. I think that crime is a big thing for them, especially when you start throwing in the word affordable because then they think that comes with crime. And whether it does or doesn't, that's just what people think. Right. But also the value of their home, right? Because any kind of multifamily next to a neighborhood, if there's issues, could cause the home values to go down. It could.

[00:11:36] I think the key is if there are issues. And generally speaking, if you've got a professionally developed, professionally managed multifamily community, the issues that people perceive are going to happen really don't happen. And the statistics bear that out in terms of the number of calls that police make on a per capita basis. For instance, the traffic that comes out of apartment communities. Now people are even working from home a lot, right?

[00:12:06] So they don't even go in and out on a daily basis necessarily. But even at the pre-pandemic levels, at the height of sort of traffic congestion, traffic came and went at different times. It's all perception. It really is all perception. But I get that you're 100% right that the single family homeowner worries about their property value and they have a right to worry about their property value. I get it. But that's why proper planning is so important for a city to, you know, do you want to put

[00:12:35] multifamily literally next door to the single family home? Not ideal. But there are definitely ways to create buffers around it that might be commercial uses, might be open space, might be a whole variety of different things. Well, it's funny because, you know, Ken and I always talk about, you know, you want home prices, like people want home prices to fall so they buy a house. Then they want home prices to just go up and up and up. And it's kind of the same thing.

[00:13:01] You know, people are probably all for, you know, multifamily and more units in their area so that rents go down until they buy a house. Then they don't want that because they don't want availability. Right. And so so it's just an interesting perspective of how we are as people where we want that until we don't. That's right. And, you know, trying to to fight off that NIMBY is a big, big part of all of it because that's a you know, Ken and I are having somebody who specializes in zoning on later this month.

[00:13:28] And a big part of the reason you can't change zoning is the same reason you have a hard time getting multifamily approved. And the people that approve them are just voted and they're in these seats for a while and they're part of the public and they're part of the neighborhoods. And they're sitting there going, you know, I these people may or may not be renters. There's risks from their standpoint. Oftentimes they perceive the risks.

[00:13:56] It's easier just to say no, appease the homeowner and and try to get the vote for. Right. So there's that going on. Go ahead. Well, I was going to say I experienced NIMBY about a month ago. How so? I put a full price offer in on a house that was for sale. It was a great deal. House was totally underpriced. Full price offer. And the realtor is not getting back to me, not getting back to me, not getting back to me.

[00:14:22] And finally, I'm like, hey, like, you know, my offer is going to expire her in like 10 minutes. Like, what's going on? Yeah. She took another offer. She didn't really want to rent to someone who's going to make it a rental. So guess what that was? That was the HOA, her being involved, you know, pressuring her to not sell to a landlord. No, they don't want Airbnbs. They don't want rentals. They don't. I mean, you know, it doesn't just sit in our court here with the multifamily developments. No, that's right.

[00:14:51] That's right. It's everywhere. Yes. And I would say particularly on the single family side, in today's world, on the single family side, when you've got individual rentals scattered throughout neighborhoods, you can have bad experiences. You get the wrong tenants there who don't take care of the yard, don't take care of the house, et cetera. And, you know, it's a problem for that particular street.

[00:15:15] I think on the multifamily side, the industry has advanced to a real level, like I said, of professionalism that I think the issues may have been true decades ago when people built, you know, small size apartment complexes that didn't have professional management, didn't have amenities. These are huge institutional investments, right? That people are making and institutions are making.

[00:15:44] And they don't put them up to see them get run down, to see them have crime, to see them, you know, they put them up and maintain the quality so that they too can, you know, get a return on their investment. Well, let me throw it back to you because what we initially started this conversation is what is affordable housing, right? Right. So what the average person might think affordable housing is they go straight to Section 8, like affordable housing is Section 8, you know? So when you say I'm going to build an affordable building in your neighborhood, they think,

[00:16:14] oh my gosh, this is going to be a Section 8 building right next to my neighborhood. And they do associate that stuff with crime and everything else. And so, you know, there's different levels of affordable housing. So it's not just straight to Section 8. There's different things that are affordable that are not that. That's correct. And the incentive, you know, for the government to get involved in affordable housing, the incentives really vary based on the level of affordability.

[00:16:39] And what you might see the private sector trying to do on their own is really more or less what you would refer to as workforce housing or attainably priced housing, where it's not government incentivized or government subsidized. There's no income restrictions on it. But you try to build a product that is a quality product without perhaps all of the gingerbread, as I referred to earlier. Still have amenities, but, you know, basic amenities provide a high-quality lifestyle at the lowest

[00:17:09] possible cost. And you can offer those at prices that might be, you know, affordable to people between 80 and 120 percent of area median income, they call it. As you go lower on the income scale, that's where you start to see the government get more involved with things like Section 8, with low-income housing tax credits, with a whole variety of

[00:17:33] different funding sources that may come from the federal government, may come from housing authorities. And that's where you're going to start to see more and more restrictions on the level of affordability that needs to be maintained, how long that affordability needs to be maintained. And that's where I think you really start to get the worries from the NIMBYs, if you will, and the neighborhoods. Now, even workforce housing, you'll get pushback.

[00:18:02] It's still multifamily, and you get the pushback. But that's where you really start. And let me give you another spin on this, because I saw this specifically in San Francisco. You know, let's just pick on San Francisco or Paradise Valley or downtown Seattle or Scottsdale. It doesn't really matter. Those places generally don't want apartments, I would say.

[00:18:23] And so what happens is, you know, in Scottsdale, let's just say, let's say a teacher works at a high school there, just a public high school. They more than likely cannot live in Scottsdale. Same thing with the fire department. Same thing with the law enforcement. Same thing with, you don't go on and on and on.

[00:18:47] So what happens is the people who are keeping these properties out don't realize that the response rate could be 15, 20 minutes for an ambulance, potentially, right? You know, and there are studies. I know you've seen these. Right. It's actually a problem. Like if you live in a really expensive area and your response rate is, you know, 6, 7, 8, 10 minutes longer,

[00:19:17] that's a problem, potentially. And so you've got other things going on. Like if you want to be a teacher in the Scottsdale district, let's say, you know, and you're single, you're probably not going to own a home there. Correct. And you probably can't afford an apartment there. Oh, yeah. Right. So these things have other issues attached to them. And I think that's an important thing to understand. So we're constantly fighting that. That's what we're trying to deliver.

[00:19:47] Well, it is because, you know, if you have a teacher and she's offered a job in a more affordable district or a more expensive district and her commute is going to be significantly shorter, then she's going to definitely consider working at the place that's closer, even if the other place is nicer. Yeah. Just because now she's got to drive. You've got to calculate gas. You've got your time. All of the things. Right. That's true. And I think that's another layer that, you know, so what happens is the affordability is a problem. Yes.

[00:20:16] If a developer could build, they will. Right? Right. Right. We have the money. Yep. We need the land. We can put a deal together. If the numbers pencil, we'll do it. The problem is that it's expensive. Now we can kind of go on to the economics of it. You know, so you've got all those restrictions. The people don't want it. Usually the city councils don't want it. But, you know, there's all this complexity.

[00:20:42] And then all of a sudden, if we do find a piece of land, like let's say in Scottsdale, one acre is a million bucks. Right. And in Temp or let's say Mesa, it's 200,000. Right? That's a big difference. You know, all of a sudden, so all that extra cost, and we haven't gotten into construction or impact fees or anything, that all layers into what we have to charge for rent. And so all of that complexity makes or breaks a deal.

[00:21:11] And unfortunately, today, there's almost no choice other than to build Class A. Right. Right. And that's where the supply-demand imbalance is right now. That there's, you know, a tremendous amount of Class A product that's been delivered. And there may be temporary concessions on it in places that have gotten overbuilt. But long-term, attainably or affordably priced housing is in short supply.

[00:21:37] And in particular, in the areas where it could do the most good. So if you were in the single-family market, the only thing we can build is custom. Well, that is happening. I mean, you don't build starter homes anymore. People don't build starter home neighborhoods anymore. Right. For the same reason. Right. Right. And so one of the things that, you know, Brian mentioned earlier is if we can get relaxed zoning, if we can get concessions from the cities, if we can get-

[00:22:07] Streamlined permitting. The timeframes. Timeframes are reduced. If the entitlements process, like you said, zoning. So the entitlement processes were shortened. And some cities are doing that. And, you know, some cities have recognized the need to have this product in the mix of housing choices that are available. And frankly, it's an economic issue, frankly, if cities really stop and think about it.

[00:22:35] Because you just mentioned teachers, firefighters, police, right? Labor force, right? You need a mix of household incomes to provide labor to your employers. But why do you want those renters? That's exactly right. I know. That's nimby right there. It is. You're 100% right. Yeah. And that's part of it. You know, the neighborhoods beat it. They fight against it.

[00:23:04] The city council supports it. And, you know, our battles to get affordable housing, you know, they're legendary, right? Like how many of these things- I've been in so many of these rooms. Yes, yes. Where they don't want it. So, okay. So here's what everyone's thinking now is, who cares about you developers? Why doesn't the government just build it? Because that's what you hear that all the time. I see that all the time on our YouTube.

[00:23:33] So government is very involved. Government doesn't have unlimited resources. And so, you know, even if government was 100- All levels of government, if they were 100% aligned on the need for affordable housing, the resources are limited.

[00:23:50] And so you do have the government, you know, providing everything from low-income housing tax credits to issuing tax-exempt bonds to Section 8 assistance where they're subsidizing, you know, rents that exceed the 30% of income. You've got community development block grants. There's a whole variety of things. Property tax abatements. All of that can be done. But it also makes these projects extremely complicated.

[00:24:20] So one, the resources are limited. You can't do it for everybody everywhere. Like a mass scale of government housing. You just can't. But two, all of those things make those projects very, very complicated, right? So even if you can get government assistance to finance an affordable housing project, it's not likely to finance 100% of what you need.

[00:24:43] So you issue low-income housing tax credits, depending upon which program that you're utilizing, the 4% or the 9% tax credits, it'll provide. You can sell those tax credits to equity investors, and it'll provide anywhere between, say, 30% and 70% of the equity you need. Well, you still got to go raise the other, right? Now you've got multiple levels of investors in there. You probably have multiple lenders involved. You've got the government involved.

[00:25:11] So the time, the complication, the legal expenses, et cetera, to get that done, it's difficult on a mass scale. But in Chicago, they do have government housing, right, where the government did build. Not good stuff. Exactly. It's not good. But they did do it. And they've done it in most big cities, and they've done it here. And some cities did it better than others. And some of it still exists, you know, the public housing.

[00:25:38] And, of course, when you think of Chicago and you think of New York and you think of the big high-rise tenement-type situations, it was not a good quality of life for the people there. There were no amenities. There was no anything. And it did kind of foster. It didn't give people a sense of hope, right? And that does kind of foster a tendency toward more crime and that type of a thing. There were maintenance issues. There were aesthetic issues. They were built like prisons, essentially, in a lot of ways.

[00:26:04] And so they provided a place for people to sleep in an affordable way with a roof over their head. But that was about it. And so, especially in dense cities like that, where that's what they did is they built the huge high-rises like that. Now, in Phoenix, for instance, they built very large swaths of land because land was available. Land was relatively cheap at the time. And they built lower-density things.

[00:26:32] And some of that still exists, and some of it's okay. But that is not the model going forward. It really isn't. That's the old model. The model now is to try to use government resources to leverage private investment and do it in a partnership. And that's really where it's heading. Can you imagine if your management office was basically the post office when you needed something? Right, right. Yeah. Well, you know, building something is a service. It's temporary, right? Right.

[00:27:01] Yeah, and you do need help to be able to go in and out of it. But it'd be like, you know, why isn't the government involved in medical? Why aren't they doctors? Like, you know, why aren't they developers? Well, some people say that they should be, right? They should hire doctors and have those services. But the government can't do everything. And having a multifamily building, there's a lot that goes into that, right? There's a lot of maintenance issues, a lot of property management issues. There's a lot of non-payment issues.

[00:27:27] Well, and you take the profit motive out of it, and that causes a lot of issues as well. Yeah. That's what happened in public housing, right? I'll tell you what. If you Google, like, Los Angeles affordable housing and, you know, all the stuff that they've tried to do there, you'll see that specifically in Los Angeles, I think they were spending $200,000 or $300,000 more per unit in kickbacks and fees and all this other stuff, right? I mean, it's all over the news, right? Yeah.

[00:27:57] All you got to do is look at it. And so every time the government's got involved, at least, that I've seen, it's been a bit of a cluster because they're actually not in the business. But Brian said something interesting that I never really thought about, but now I'm thinking about it. You know, everyone thinks that private development is bad because it's profit motivated, right? So everyone thinks government housing would be great because it would not be profit motivated. Right. But kind of explain why that could be a problem. Well, it goes back to what I said earlier.

[00:28:24] Today, the multifamily industry today, it's a big business, right? And you have huge institutional investors that are involved. And as I said, they're in it, obviously, because of the profit motive. And they're in it to protect their investment. So they're going to make sure that they build a quality product, that they hire the right managers, and that the properties maintain accordingly, that they have the right screening criteria for residents, et cetera.

[00:28:52] And so it's all about maintaining the quality to protect the investment they're making. Where's that motivation in a completely, purely 100% public setting? It's not there. But you kind of see it with rent control, right? Because everyone's like, rent control is great. Well, guess what? If I'm a landlord, keeping you as a tenant under rent control is a disservice to me, not an incentive.

[00:29:14] So if you call me and your HVAC system's out or you're unhappy with the temperature of the water, I'm going to do legally what I have to. But I'm not trying to go above and beyond because if you are unhappy and you move, I actually can charge more to the next person. So to your point, the profit motivation is what keeps you on your toes as a landlord and on your toes as a tenant. That's competition. Yeah.

[00:29:38] So that's what, if somebody's, if there's a piece of land that the city of Phoenix says we want housing on it and they go out to eight or 10 groups, that is the right way. You got eight or 10 groups. Correct. Right. Trying to bid on something and sharpening. The city of Phoenix is well known for doing that and other cities are doing it as well. They use their, the land resources they have at their disposal to encourage private sector investment. And they'll provide incentives and maybe it's through writing down the land, maybe it's through a tax abatement.

[00:30:08] But rent control, right, that, that will keep you, what you said is exactly right. There's no incentive to maintain it beyond what you actually have to, but it may keep an existing tenant in place paying affordable rent, but it does absolutely nothing to encourage new supply. Right. So if you're looking to encourage new supply, affordable housing, rent control isn't going to do it. And maintenance too. Yeah.

[00:30:33] I mean, there's, there's historic cases about the maintaining of rent control builders because the landlord doesn't really have the incentive. No. But also like we were saying before, and once you own a house, you don't want housing prices to go down. Once you're in rent control, you're super happy with rent control, but until, you know, as a tenant, but until you get rent control, you know, that just makes prices go up as you're looking for an apartment and it makes no supply. Right.

[00:30:58] But the, the, the same city council person that says we need affordable housing is the same one that's actually, um, nixing the deal that, that they're trying, that the developers trying to bring it. Right. Right. Absolutely. Yeah. Well, that gets into an interesting question though. So what types of funding and incentives are available right now to developers who want to build affordable units that's working? Like what's working right now? Well, I think a lot of the things that I mentioned are working at one level or another.

[00:31:27] And so again, I think the low income housing tax credits is, is, is probably one of the biggest, biggest things. Can you explain what that is? Yeah. So, um, uh, developers, um, have the ability through, through the, through the federal government to be able to qualify for tax credits if they build affordable housing. And, and they can take those tax credits and essentially put them on the market and sell them to investors.

[00:31:55] And so investors will purchase the tax credits at some discount to the actual value of the credits. Um, and, and in exchange for, for, for that, they, they invest equity in the, for being able to take advantage of the tax credits, they now invest equity in the project. And so that's how low income, low income or affordable housing developers raise a portion of the equity and financing that they need to build it. So that's been a longstanding program.

[00:32:20] I think generally it works pretty well, but it's, again, it's only a piece of the puzzle. Um, you can get, you can have housing authorities in, in states or localities that will issue, uh, tax exempt bonds. Um, you can have, uh, you know, as we've got some experience now seeing in Texas, where you have housing authorities that are offering property tax abatement in exchange for not necessarily develop.

[00:32:44] It could be developing new product, but it could also be taking existing product and committing a portion of that longterm to, uh, to affordable housing. That's an, that's another method. Um, there are, there are block grants from the federal government. And again, all of those things are available. They're just not an unlimited supply and you tend to have to cobble several of them together. Um, uh, and, and that's what makes it more, more complex to get the, get any project. There is one other notable thing that we've done a few times.

[00:33:14] It's, it's, uh, the housing and urban development HUD, uh, has what's called a 221D4 program. And the 221D4 program is a, is a, uh, construction to perm and a 40 year amortization. So that's actually helps a lot. Can you explain that a little bit? Sure. Like, like if you most, most, uh, let's say you're getting a mortgage. Most of the time that's going to be amortized over 30 years, your payment.

[00:33:42] If you can make it 40 years, it just lowers your payment. Got it. So, but there's also things inside of that program that help. It's financing, government financing, government approved financing to build housing. So we've done several of those. That's called a 221D4 program. So the government is trying to do things. Well, one of the other things that, that I've seen recently, um, is, uh, you, you have developers,

[00:34:11] um, that will partner with major institutions or major employers. Um, and so you, it could be with the university where a university has as part of its mission or, uh, uh, to provide housing, you know, affordable, affordable priced or attainably priced housing for its employees. It could be hospitals that, right. We talk about essential workers, you know, that's a good example of nurses and so forth, technicians and so forth.

[00:34:35] Um, and, and so you, you see developers, um, and usually there's a city involved in it as well, um, but partner to develop, um, uh, sort of purpose-based housing, uh, for a particular, uh, institution or, or, or, or major employer. So we're seeing that with Amazon, Google, SpaceX, like it's in the news, like, uh, Bezos is involved in housing right now because it becomes a component of his employees. It's attractive. It helps them attract. Right. Right.

[00:35:05] So, you know, you, you know, it's mostly under the radar, but we certainly are reading about it. Yeah. And does that, um, create, um, kind of competition to the, the, uh, class A projects or is this mainly separate because they're bringing- Listen, we all need housing. So it, it, it's a small dent in a positive way. More supply is, you want the consumer to benefit more supply, more houses, more, more options, more option for houses and more options for rent.

[00:35:34] So on that, what are cities doing that aren't working? So what policies are they doing that- Brian was a city manager, so- I mean, what's not, what isn't working is, um, you know, if, if you're not taking a, um, a modern look at your zoning and, and you're stuck in just your, your, you know, basic zoning where you're, you're really focused on separating uses, keeping densities low, um, uh, and, and,

[00:36:03] and you, that those tend to be, to discourage the development of affordable housing because they do, um, raise costs and make it more difficult. Let's explain what that means. So, so as you're driving down a road, you'll have single family here, retail here, industrial here, a mall over here, office buildings over here, they tend to cluster. That's called zoning. That's a zoning map. Correct. Yeah. And so, so, so you have the, the, the old zoning model is you keep your residential here,

[00:36:34] you keep your commercial here and never, never do the two meet. Um, and, uh, and it's, and, and again, it's very difficult. Really what we're affordable housing works best is where it's part of, um, you know, a mixed use community where there's all sorts of things going on. People have no idea the housing's affordable, what the income that people make. You're just part of a large community, um, where there's a million things going on. Right. Um, and that doesn't happen when you have this complete separation of uses.

[00:37:02] But a lot of times now, especially because not everybody has a car and not everybody, you know, once long commutes to things like that's kind of changing anyways, right? Like the zoning just in general. It is. Wanting mixed use. So, so I said the cities who are behind the times, that's really what I was referring to, but I agree with you. I think you've seen most cities, um, moving toward more, um, progressive. I don't mean that politically, but progressive, um, zoning, uh, options that focus around transit, for instance.

[00:37:32] So there's been a lot of light rail developed in major cities. For instance, most cities that have light rail have developed zoning districts around light where, where they encourage density. They actually encourage multifamily housing. There may be incentives for, for creating mixed use districts or mixed income districts, frankly. So, um, you, you see that a lot. Now the, the, the, the flip side of that though, is oftentimes in those same districts, the cities will add design standards that you have to meet that then add costs back. So, so you're always working through these. The devil's in the details.

[00:38:03] Let's just touch on that real quick. So they might say, you know what? We don't want you to go that high. All of a sudden they lop off a whole floor. A floor. Yeah. Literally. Or they say, you know, we want you to be, 20 or 30 feet back from the street. So all of a sudden it takes 50, 60, 70 units right out of the project. Those are real. Those are real things that happen. And all of a sudden you go from wanting to do 200 units and you're doing 120.

[00:38:26] Or we think you ought to have, um, you know, two and a half spaces per unit, parking spaces per, per unit in an area where you have to build structured parking. Right. I mean, that's, yeah, it's going to kill it. The things, those are real. And those, that, that's what actually kills deals. Right. Because that's what makes a deal have to be class A, right? Because if you can build 200 units, you can have more affordable rent. Exactly. But then when you go down to 125, now the rents have to be way more. Right.

[00:38:54] What people think is if we're a 200, if we're a 200 unit, what we want, you know where the sweet spot is? It's affordability. There's way more people that need affordable housing that can afford expensive stuff. Oh yeah. You know what I mean? Like, we wouldn't love if you could build it. That's right. I think that's why people get confused because I've talked to so many, they're building so many class A in my area, like luxury. I know. Like, you know, I don't know why they don't build, you know, the more basic stuff, you

[00:39:22] know, because everyone, to your point, wants that. In my opinion, it's multiple factors, but it's a matter of, you can't afford to build it and then charge affordable rents and make a profit. And I'm sorry, but that's how things get built, right? Nobody's going to invest the money if you can't make a return on investment. Two, although I think it is getting better in many places, it's just so much harder to

[00:39:51] build affordable, set aside the cost. The neighborhood opposition, the city council opposition, it's so much harder to do that, even if you can make the cost work, but the costs are difficult. And then if you can get the cost to work, you still got to go find the financing. And the financing is also much more difficult than a market rate project. So all of those things just work against, you know, mass construction of affordable housing.

[00:40:21] So the other programs that aren't working, like you had mentioned rent control and, you know, we're not big advocates of rent control because it dampens the supply and it doesn't really help. It's totally counter to market forces, right? I mean, it's the government telling you for no reason other than you built a building that you cannot charge more than this. Now, if you go into the situation, I'd like to work with you city to build a mixed income or an affordable project.

[00:40:48] Well, then you're, you're going into it eyes wide open and you're, you're working on a partnership to, to deliver a product that the community needs. Rent control is a little different. I'll give you an example. I got, I got something today where a guy said, uh, I can buy this apartment building at a 40% discount. I said, where is it? Oregon. I go, that's why, you know, because Oregon has a rent control law and he's like, yeah, they're jacking my property taxes and they're, and they're hedging what I can do on rent. Yeah.

[00:41:18] Yeah. And so you have rising expenses and a capped income. Yep. Right. And so thus, so what's happening is the, the value of whatever the value was based on that law, um, you know, the smart money goes where it's treated best. That's right. And that's not Oregon at the moment. Yeah. Yeah. Now, is there any other programs that you're seeing that aren't working? Um, I, I mean, I think we've, in terms of not working, I think we've probably hit, hit on the major ones.

[00:41:47] I think the, the issue is it's not a black and white issue. Is it working? Is it not working? The, the, the key is, um, is, is to take the programs that, that, that are available and make them as accessible and as easily, um, executable as possible. All of the, all of the programs that are out there with perhaps the exception of rent control, I would say.

[00:42:11] Um, and I'm sure there's some others I'm not thinking of, but in general, um, can be beneficial, but it's how hard do you make it to use them? Um, and, um, uh, and, and, and, and, and if you make it easy to use them, then I think they can all provide some benefit. So what strategies do you see cities starting to implement in order to meet these housing needs? Well, we talked about some of them.

[00:42:35] I think, you know, using their land, if they have excess land, um, and, and, uh, I think here in the West, that tends to be, uh, something that's more available to cities than back East where, you know, for hundreds of years have had densely populated cities. So I, I think doing that, I think partnering with the, the major employers and the institutions that we talked about, I think taking, so there's a, there's a type of zoning called inclusionary zoning, um, where, um, uh, oftentimes inclusionary zoning is regulatory.

[00:43:05] So it's, it's, it's, it's, it's, if, if you're going to build housing, you have to include X percent of affordable housing, right? So it can be mandatory like that, or it can be incentive based. And I think that's another tool that you see more and more cities using where instead of dictating that you have to build X amount, you provide incentives like more density, more height, streamline permitting processes, maybe fee waivers, maybe there, maybe it is tax abatement.

[00:43:32] But, but oftentimes it's non-financial in terms of, you know, literally handing a check type of thing or writing off an expense. It's about making the process easier or allowing more density. Well, I know MC companies uses, uses that as a bargaining tool too, when trying to negotiate with cities, right? To be able to build is throwing in some affordable housing, putting in something for them is, and also building more. Sometimes it's a requirement by the city.

[00:44:00] Sometimes it's a requirement of financing, you know? Yeah. Yeah, it can be. Yeah, it can be. So yes, obviously, I, you know, I'm telling you, and all our friends have to build class A, right? Yeah. Yeah. We have to. We actually have no option. Yeah. And we know that it's, it's probably what, the top 20%. So we can't build for the bottom 80%, even if we wanted to.

[00:44:30] We need the city to help. Period, right? City or state. City or state. You have to have help to do it. You can't deliver, you know, cost of a two by four and a cost of drywall and a cost of appliances is the same for me as it is for you. Right? There are, right. There are a few developers who are building, again, what I would call workforce, a tamely priced housing without government assistance. But that's, that, that is definitely the, the, the middle and not the true lower income

[00:44:59] housing that's, that's needed. Um, the, the other thing that I've seen is, um, or you hear about is, um, more flexible building because we're allowing modular, uh, housing. So that, that is a, uh, you know, a cheaper, less expensive. Well, essentially prefabricated housing that can be built in a, in a, in a plant and then delivered on site. And, and that is theoretically cheaper and quicker to build.

[00:45:23] Um, you know, it tends to be, um, although the technology is improving on that historically has not been, um, as high quality, but I think technology is improving that a bit. ADUs too. Uh, yeah. Right. ADD will use is another one. You could do plexes, triplexes, ADUs. Yeah. Yeah. Those are important. Yes, they are. So like if you have a half acre and you could put four units on it versus one, that helps because the land cost doesn't change.

[00:45:51] I'll tell you one thing that I think you asked about tools that aren't working, um, the adapt. So there's a lot of office buildings, right. That are, that are obsolete and aren't going to be repopulated as office. So you see a lot of, uh, of conversions or at least desire to convert office buildings to residential. And that can happen, but it's really difficult to do. It's difficult to do at all. Number one, uh, you might luck out and get an office building.

[00:46:17] It's got the right floor plate and so forth, but you know, the floor plates are often really deep, uh, for, and, and, and so you don't get a lot of natural light. You got, um, mechanical plumbing, electrical systems that have to be adapted from, you know, whole floors to now individual units. So it's expensive to do. And it's a, it's a good goal to take those buildings and convert them into housing that the, the chances of those becoming affordable housing without significant public assistance or nil. Yeah.

[00:46:45] Very, you're better to, you're better to write it down. Yeah. But now then you have the land plus the cost of the demo of some big buildings. Yeah. No, but it's true. Now all those things are accurate. Yeah. You get the conversion is almost impossible. Yeah. You know, we had talked about that cause we had a engineer or something explained to us that, you know, the HVAC units are different and the ceiling heights are different and you only have one or two bathrooms, a floor and. Exiting requirements are different as well. Yeah. It's a lot. Yeah.

[00:47:14] I will, I, I will say the low hanging fruit is, um, if it was allowed would be people are just fine living in 500, 600 square foot that it's clean, well maintained. Wouldn't you agree with that? I agree. But nobody wants that. Like that, particularly out in the West, I would say. Yeah. If we could build that, if you could build a, a 500, 600 square foot is plenty, right? Got a bathroom. It's got a kitchen. Maybe it has a bedroom.

[00:47:44] You could probably slip a bedroom in there. And I'm telling you that if we could build a ton of those, they would fly out. And you do. But is, is it, is it a cost issue that you can't? Do you think Scottsdale is going to want 400 of those? Right. You do see it. So you do have some of those in downtown Phoenix. You do have some of those in downtown Tempe now. And oftentimes they're referred to as micro units. Um, and so, um, and, and, and they can be student purpose, but they don't, they don't have to be.

[00:48:09] Um, and so you can have four to 600 square foot units, sometimes even less. Even less. But particularly when you put them in areas where, where people want to be in those areas and the urban areas, right. Where they, they've moved there for the bars and the nightclubs and the restaurants and the museums and the sports and everything else. And the walkability and the employment, um, they, they can really work because people want to be in those areas. They're willing to sacrifice size for affordability and the ability to actually live in the, in

[00:48:38] the, in the environment that they want to live in. Yeah. It's called walkability. Do you think so that, you know, people want those units right now because rent is unaffordable, but if we were to have an issue of oversupply continued and we had like a lowering of rent significantly, then, you know, those would kind of be not as popular, right? Back to downtown Phoenix at four months free. Right. That's where it is right now. That's where it is right now. But I still think that's a relatively. Even three year one. Right.

[00:49:06] And the, and the big scheme of things, it's a relatively short term situation. I think that, that, um, the micro unit type of project is, is, is a viable medium to long term solution. Yeah. If we could do those, we would embrace that crazy. I mean, that, that would really solve a lot of things. It would, it would hit the market perfectly. We would, we could provide really nice, well-maintained, well-managed affordable, affordable units. It would be a win-win for everyone.

[00:49:34] Uh, I mean, probably no one can do those. No one would want it. Well, they, I mean, you can, you can drive very high per square foot rents on those. Right. So the, the, the, the, the big, the nut for the unit is small, but the per square foot is high. Um, and, and there's institutional investment going into those. We, we were involved in some of those, uh, down around the ASU campus and, uh, uh, they, they can work. They can work. Arizona State, uh, Ryan was quarterbacking all that, uh, all that development right around the university there.

[00:50:03] And, uh, you know, and these are 300, 350 square footers. Correct. Correct. And you get $2.50, $3 a foot. Over three bucks each. Yeah. So that, that means the 350 square foot is a thousand dollars. Well, you know where we saw that on the single family side was in the ADU market or, you know, how people were buying those modular like homes and putting them, you know, cause we had talked to people that were doing, um, that were doing that, right. Putting an ADU on their property. Right. And their, their rents were high for the size of the unit.

[00:50:31] It's just crazy to think that, I mean, you know, um, Brian and I are a little bit older than you, but a thousand dollars is an affordable rent now. That's ridiculous. It's incredible. Right. Isn't that ridiculous? Yeah. That is so money. Well, I'll start with the stat I said earlier. So, so, so $1,500 a month for someone making 60,000 is considered affordable. $1,500 a month. Yeah. Yeah.

[00:50:55] And that's, that's about, not in Scottsdale certainly, but, uh, that's, that's about the right number right now these days. Yeah. It's about, I mean, that's, that's, that's basically whether it's the average or the, or the median, they're both right, right in that area. Um, that's, that's about what you're going to find, but that also means half of the units are, or I should just go this way. Half of the units are much, much higher than, than that. So, yeah. Yeah. Well, thanks for being on Brian. My pleasure. I think it was really, uh, informative.

[00:51:25] Good. Thanks. Well, thanks for having me. Appreciate it.