It’s no secret that Charlotte, like the rest of the US, has a housing affordability crisis. This is the result of two main factors: We don’t have enough housing units and the housing that we have is too expensive for many of our families.
The lack of available housing has several causes, insufficient new production being a significant one. Housing inventory was influenced by the collapse of production during the 2008-9 recession. Only time will show the impact of the current coronavirus shutdown on production, but it won’t necessarily be as bad as might be expected; construction, being deemed an essential service, is continuing (if at a slower rate).
Then, there’s the issue of “NOAH.” A large segment of the existing inventory of rental housing in Charlotte and elsewhere can be classed as “NOAH” units, an acronym for “Naturally Occurring Affordable Housing.” This simply refers to housing that’s available at a lower price than newly built units due to the aging of the building and related limitations. These limitations may include location, physical condition, amenities, functional obsolescence or other other attributes.
NOAH is often touted as a solution for our affordable housing problem. But we need to understand that NOAH units are one of many resources, not a solution, to our challenge. And this housing category has serious limitations: We can’t increase its supply, and the maintenance needed to keep it in habitable condition can be expensive.
The care, maintenance, availability and affordability of NOAH is a frequent bone of contention in housing discussions. Any change to the NOAH supply attracts consternation, usually because of fears that housing will be demolished or landlords will raise rents substantially. This is unfortunate and can be unreasonable, because NOAH units do not exist in a vacuum.
As anything ages, it tends to deteriorate. Nothing remains static. And the aging of a property is always an expense.
Generally, normal maintenance and repair by competent property managers will only offset the effects of aging. Proper capital budgeting can even provide the funds for non-routine expenses, like replacing a roof or major building systems. But both options assume that rent levels are adequate to fund them.
At the extreme, there are certainly examples of terribly managed (and thus poorly maintained) properties that are barely habitable. There are numerous instances of properties that, for whatever reason, cannot generate the income needed to support required maintenance. The Lake Arbor Apartments in Charlotte were one such an example where disrepair accumulated and tenants said units became uninhabitable.
The Lake Arbor Apartments have recently been sold and the new owner apparently proposes to rehabilitate the units. This will undoubtedly result in an increase in the rent structure. It’s yet to be seen whether this will work out — but at least the units will not be demolished.
Extensive upfitting of existing units usually requires rent increases to economically justify the expenditure. Excessive code requirements for upfits can compound this problem. A result may be the tendency to put off desired maintenance. The inability of current occupants to pay rent during the present coronavirus crisis may cut off the funds required to maintain and upfit existing NOAH units. And that could have broader implications. Because with real estate, it’s not just the state of the property itself that has an impact on value — each property affects the whole surrounding area. As neighborhoods change, any single property might be positively or negatively affected.
When neighborhood values decrease, it is usually the result of deteriorating properties that lack income to provide required maintenance. But the value of the land in a neighborhood can also increase to the point that it raises the value of the existing properties.
This potential increase in value might justify significant improvements to the existing property. However, the cost of these improvements may cause significant rent increases, which can be controversial. There is usually no loss of inventory — but some of the existing residents may be priced out of the neighborhood.
The value of land can increase to the point that simply replacing an older property makes the most economic sense. The area around SouthPark is one such case. Almost all of the previously existing apartments in this area have either been replaced or are in the process of being replaced. Though the overall housing supply hasn’t decreased — and may even grow — most of those new properties will have rents far higher than the older apartments they replaced. That could still result in tenants being displaced.
We must ultimately accept that demolition is always an option for landlords to deal with uneconomic units. Striving to avoid this while allowing landlords to provide for the responsible repair, maintenance and renovation of older housing is a worthwhile goal.
There are, however, possible solutions. Nonprofit groups could help upfit old units in exchange for a lower return than the open market might require, potentially avoiding rent increases.
Realistically, improving and preserving NOAH will not increase the supply of housing inventory. Any increase in NOAH that occurs is merely the result of existing housing units getting older, and has no impact on overall supply. On the other hand, any demolitions that occur will reduce the supply.
And at a time when lack of supply is one of our most pressing issues, we should work to avoid any further reductions in NOAH — while recognizing that this alone won’t solve the problem.
John Huson is the founder and Chairman Emeritus of Carocon, a major Charlotte contractor focused on multifamily projects.