How to get the cost of living under control, part 1b

It's a basic truism of real estate that in a given area, rents (or mortgages) tend to all fall within the same range on a per-square foot basis. That is, the rent on a 2000 square foot house tends to be about 4 times the rent on a 500 square foot apartment. This is not strict, of course -- yards, views, maintenance, etc. can all have a large effect on price -- but it tends to hold true overall.

Or to put this another way, the claim that "houses cost more because people want houses" is false. Houses typically cost more than apartments because houses enclose more square footage than apartments. A 2000 square foot apartment is likely to cost as much as (or more than) a 2000 square foot house.

Ultimately, the three components of cost in new residential development are the same for single- and multi- family housing: cost of land, cost of design/legal approval and cost of construction. For most developments, the cost of construction is far and away the biggest cost. In a given range of quality, cost is basically proportional to square footage enclosed, though taller buildings tend to cost more per square foot to construct (because each additional story calls for heavier materials, etc.)

But in more desirable areas, the cost of land becomes a bigger component of the overall cost, and as cost of land grows, it makes sense to use less land on a given residence. Accordingly, desirable area such as cores of cities have more apartment buildings and fewer houses.

Since the old downtowns of Valley cities are generally desirable areas, you'd expect to see lots of apartment buildings near the Valley's old downtowns, and to some degree, you do. But you don't see nearly as many as you might expect given the land costs, largely because the Valley's policies increase the cost of design and legal approval and shape developments into less efficient forms.

Take College Avenue, just north of the California Ave business district in Palo Alto. It's mostly zoned for medium-density multi-family residential (RM-30). It has a mix of low-density apartments buildings and single-family housing now, so at first glance, you'd expect building higher-density housing could be a good investment for a developer. And since the street is a short distance from both Stanford campus and Stanford Research Park and near a Caltrain stop, the California Ave business district is doing well even in the economic downturn, and the Palo Alto schools are among the tops in the nation.

But even with high property values, Palo Alto's codes don't leave room for developer profit. RM-30 zones require 60% of a lot to be open space, don't allow building above 35 feet, and require a maximum floor area ratio of .6 to 1. So assume a developer could buy two houses next door to each other, for a total 10000 square foot lot. Said developer could build a total of 6000 square feet of building, or about enough for 5 two-bedroom apartments or 8 one-bedroom apartments. Note that the "higher-density" housing we're talking about here is barely increasing density over an existing two houses -- even if both of the existing houses were no larger than the 3-bedroom bungalows typical of the neighborhood, we're talking about 2-4 extra bedrooms, total. The replaced houses wouldn't be cheap to start with and if we're trying to increase affordability, a developer would need to be able to sell or rent to more people to spread out the costs, so not being able to add many units bodes badly.

Back to the costs: According to the code, a building with 5 two-bedroom apartments needs to provide a minimum of 12 parking spaces. A building with 8 one-bedroom apartments would need to provide a minimum of 14 spaces(!). Parking spaces are big: the typical estimation is that a space plus its share of access is 325 square feet. 14 parking spaces would take up 4550 square feet, or basically half the double lot. This typically means the developer would need to bury the parking underground. Underground parking is very expensive -- even with efficient layouts, underground parking tends to cost on the order of $30,000-$40,000/space, and an underground garage for a mere 14 spaces probably won't be even that efficient. Since the cost of the 14 spaces would need to be spread across the 8 one-bedroom apartments, each apartment is looking to cost nearly $60,000 (or about $350/month in rent) for parking alone.

The excessive parking requirement is just the biggest of the many ways Palo Alto makes costs increase: Palo Alto requires design review on all projects, limits heights, requires all street trees to be fenced and preserved, etc. Some of these decisions may be justifiable (I love Palo Alto's street trees, personally), but they do increase costs.

So the situation we have today is this: we need new construction near old downtowns to get the cost of living under control, but that construction itself costs too much, in part because of policy decisions increasing costs. To improve the situation, so we need to make policy changes to make construction near old downtowns affordable. I'll leave it to another post to detail the specific changes.