Landmark Links June 15th – Size Matters


Lead Story… The Census Bureau released it’s Characteristics of New Housing report last week.  My biggest takeaway from the report was how much the gap between for sale and rental housing construction has narrowed in recent years – most of this has come from the massive decline in for-sale housing construction but multi-family completions are up substantially as well.  However, there is also a big story within the multi-family data: the units that are getting built are increasingly in larger buildings.  Bloomberg’s Justin Fox highlighted this trend in a couple of fascinating graphs that illustrate this striking trend.

Fox goes on to give several reasons for the trend towards larger units including NIMBYs forcing construction out of the suburbs and into denser downtown areas, increasingly large investors desiring scale and changing consumer tastes.  However, there is one factor that largely goes unaddressed in Fox’s Bloomberg View article – cost, especially when economies of scale in operations are taken into account.

In theory, building smaller new buildings sounds great – it’s an under-served niche and one would think that yields are superior since the unit counts are well below the massive projects where institutional investors tend to bid land values up.  However, this rarely plays out in reality.  The problem is that there is simply not the economy of scale in operating a 20 unit building that there is in operating a 150 unit + building.  This means that expenses are often substantially higher as a percentage of revenue which leads to lower profitability on a cash flow basis.  Couple that with the fact that these projects are not desirable to large investors and often trade at higher cap rates than large buildings as a result and you have a recipe for under-performance which is why so few are getting built in the US.  This isn’t nearly as much of an issue when construction costs are low and yields are relatively high which helps to explain why it has gotten worse over time.  Unfortunately, the opportunity today is not to construct more small apartment buildings but to rehab older buildings and position them below the new larger projects.  We have seen this strategy deliver strong returns over the past few years, in part because the barriers to entry from new small product are so high.  US cities and suburbs could absolutely use more small apartment buildings which tend to be cheaper to rent and more desirable for families.  However, I don’t see it happening without some major advances in operating efficiency.


Narrowing: The Fed’s latest interest rate hike this week brings the yield curve one step closer to inversionBut See: Just because this economic expansion has been long does not necessarily mean that the US is due for a recession.

Missing Piece: How the rise of e-commerce helps explain why inflation has remained stubbornly low for so long.


That Didn’t Take Long: The Seattle City Council repealed their stupid head tax less than a month after passing it unanimously, apparently due to pressure from Amazon.

Just Take It: Landlords are having a difficult time selling struggling malls at any price.


Insatiable Demand: Despite their best efforts, western cities have thus far been unable to slow the flood of home buyers from China.

Size Matters:No one is developing small apartment buildings anymore.

Correlation or Causality? Since 2010, birth rates in the US dropped most in counties where home values grew most.

Only a Matter of Time: Based on the historical relationship, the 30 year mortgage should hit 5% when the 10-year treasury gets to roughly 3.25%.


Long Way Down: As recently as 2013, a taxi medallion in New York was worth $1.3MM.  Today, thanks to ride share services like Uber, they are worth somewhere between $160,000 – $250,000 each.

Long Shot: A proposal to split the state of California in three (which definitely won’t pass) will be on the November ballot because, why not?

World Cup Roundup: The story of how the USMNT fell apart and missed the 2018 World Cup.  See Also: The Brits may get all of the press but there ain’t no soccer hooligans like Russian soccer hooligans.

Hot Air: Researchers have found that Bitcoin’s price was artificially inflated by as much as 50% last year before the beginning of futures trading as large players effectively cornered the market.

Chart of the Day


Performance Anxiety: A group attempting to set the world record for the largest orgy in history in Las Vegas had to pull out after not enough people signed up.

Tastes Like Chicken: A guy served his friends tacos made from his own amputated leg without their knowledge, which is somehow (shockingly) not illegal in the US. (h/t Henry Baskerville)

Meow: A deaf and apparently clairvoyant cat is picking winners in this years’ World Cup and he was correct on the result of the opening game.

Reasonable Defense: A Kentucky man was pulled over by the police in Florida when they found a hatchet hidden in his car.  His excuse for having it?  “For protection from scumbags in Florida,” which is probably the most reasonable answer ever given.

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