As an appraiser who has valued real estate in Hawaii for more than 45 years, I am not surprised that a panel comprised almost entirely of government employees and people who make a living off the government dole should recommend more government spending on affordable housing (“‘No quick fix’ for shortage of affordable apartments,” Star-Advertiser, July Opens in a new tab28) Opens in a new tab.
I applaud one conclusion from the state-led panel’s report — “simply put, affordable housing is unprofitable” — but disagree entirely with the suggested remedy.
There is a misconception that developing real estate is a sure-fire way to make enormous profits. I have seen at least six real-estate cycles during my time as an appraiser and have watched major developers rise and fall.
Who remembers Hebb & Narodic, Reed & Martin, Grant? All of these were big developers that had to leave Hawaii as the market turned down. How about all those condos in Hawaii Kai that started construction in the late 1970s, only to go bust as the market fell apart in the early 1980s? The Pali Palms Plaza? The developer on this project went ahead to develop it against our recommendations and the property went into foreclosure. How about the twin towers in Pearl City that had zero buyers when they completed construction in the early 1990s? Several banks lost millions of dollars on construction loans that couldn’t be refinanced.
If one wants more development, one needs to make developing less risky. Currently, it can take years to get a project from a gleam in the developer’s eye to approval by the government and another year or more to completion.
What has been the government’s response? Tack on more restrictions and delays. Greater risk equates to a need for a higher profit. Requiring the developer to provide 30-40 percent “affordable” housing (remember, it isn’t profitable) means the developer must find ways to get compensating profit from his “market” units, driving up the cost of the market units or making luxury units the only dependable way of achieving the needed profit incentive.
In economics, there is a concept called “opportunity cost.” Resources devoted to one project are not available for another project. Current affordable housing policy flies in the face of this in at least two ways. First, it redirects resources to unprofitable projects. This has the impact of reducing the overall quantity of construction, increasing the housing shortage. Second, to the extent it depends on subsidies from the government, it siphons tax dollars out of potential buyers’ pockets, reducing their ability to buy.
The proper solution is to get the government as much out of the way as possible. This will encourage development. “Affordable housing” will result somewhat from current construction as costs of development (including carrying costs as developments wait for approval) lessen, but mostly due to the greater development of “market housing” because it will be cheaper and more affordable to buyers.
This encourages current owners to move from older housing into newer housing and the older housing becomes “affordable.” The downtown building I live in has almost 400 units, every single one of which would qualify as affordable housing. The 3-bedroom units are 1,400 square feet and sell for between $550,000 and $600,000. Newly constructed 3-bedroom units in Kakaako are closer to 1,200 square feet and sell for close to $1 million or more.
My building’s 700-plus square foot, 1-bedroom units sell for $350,000 to $400,000 and 1,000-plus square foot, 2-bedroom units sell for $400,000 to $500,000.
In other words, for about $400-500 per square foot you can buy in my building, while new “affordable” studio units are being offered at $1,000 per square foot.
Andrew Rothstein served on the Downtown Neighborhood Board from 1988 to 1994.
