February 27, 2023 • 41 mins
The vast majority of urban apartments in the US are geared towards single occupants, couples without kids or maybe young professionals with roommates. It's hard to find apartments with the kind of layout that would fit families. Anyone who's gone looking for that type of space is probably familiar with bedrooms that look and feel like closets, or if you do find an apartment that has multiple good-sized bedrooms, it probably costs a fortune. So why is this the case? Why is so much apartment construction skewed towards non-families, and why does there seem to be an inherent assumption in the real estate market that families will always want to live in houses out in the suburbs? On this episode of the Odd Lots podcast, we explore the hidden incentives and regulations that deter builders from making more family-friendly buildings. We speak with real estate developer Bobby Fijan, and also Stephen Jacob Smith, executive director at the Center for Building in North America, for their perspective.
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Speaker 1 (00:10):
Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wis Tracy. You know, we did a recent
episode on rent and whether the price of rent is
ever going to go down? And I asked the question, like,
why don't they ever build new apartment buildings for families?
Totally un self interested questions from now from here on out,
(00:32):
Now that our years of just doing supply chain episodes
are going to come to an end, let's just do
episodes about our own personal ground, our own personal frustration
of the economy. All right, where are all the dog
amenities for apartments? That's my question. That's the thing. Like,
there's plenty of buildings with dog amentities. And as a
you know, I have two kids, and sometimes we look
(00:53):
at like new apartments and they're like, I want like
a building with dog amentities and billiard rooms in gyms
and dorman and all that stuff. But they don't make
those buildings for like the actual units. And my kids
don't play pool. Well, you got to teach them, no.
But I think you're right. It seems like a lot
of apartment buildings are geared towards young professionals. For the
(01:17):
most part. It's studios, it's one bedrooms. Here in New York,
it tends to be larger apartments that have been cut
up at one point in time, and you end up
with these really weird floor plans where like the bathroom
is right next to the kitchen. Yeah, and it's it's
not a very pleasant experience for anyone. But I think
there is there is this overarching question of why are
(01:40):
these decisions being made in the way that they're being made, right, Like,
there must be some reason, And the people who are
building these buildings, you know, obviously they have, you know,
presumably some good business reasons, but I don't know what
they are, and I find it frustrating, And I guess
I'd like it to change, but I don't know, like
if any like developers are going to like change their
(02:00):
business models. For me, I think the expectation is, like,
I just got to move out to the suburbs. My
kids are really tired of sharing a punk bit. Okay.
What I will say also is I think this is
a peculiarly American problem because having lived in many other places,
apartments are well designed, even in Hong Kong, where the
(02:20):
average size of apartments tends to be incredibly small. They
are designed for that tiny square footage, and so they
tend to be quite functional even for families, and certainly
in Europe there's much more of a culture of renting
versus ownership, so that you do have families who spend
decades in the same apartment building. I think you're totally
(02:42):
right here. The basic idea is that if you live
in the city in an apartment, you're young, you're single,
and then if you have kids at some point, then
you move out to the suburbs, and the housing stock
is not made for people who would say like to
stay in the city and maybe be a renter in
one unit or one building for twenty years. Yeah. I
think that's exactly right. All right, So what explains the
(03:04):
state of affairs? Is there any reason to change it?
We're going to be speaking to two guests I think
they were both heard our last episode and then spend
a couple of days sort of debating it on Twitter,
and so it's like, well, why debate on Twitter when
you can come in. So we're going to come talk
to us. Yeah, just come talk talk to us. Rather
than wasting get all in tweets. We are going to
(03:24):
be speaking with Stephen Smith. He is the executive director
at the Center for Building in North America, I think
tank around construction policy. And we're also going to be
speaking with Bobby Fian. He is a real estate developer
and he there's all about apartment floor plans and the
thinking behind the business reasons behind these decisions. So, Bobby
and Stephen, thank you so much for joining us. Very
(03:46):
glad to be here. Yeah, thanks for having me so, Steven,
I'll start with you, but really, are we right? Like,
let's start with is the premise that we're talking about
that a lot of these new developments really aren't geared
towards families? Is that correct? Yeah? I mean the typical
new apartment building in the United States, the developer will
(04:07):
try to cram in as many studios in one bedrooms
as they can. You know, I think it's mostly driven
by policy. You have a lot of there's a lot
of planning policy that tries to encourage more family sized units,
but they're really pushing against some more fundamental regulations that
make it quite difficult to build family sized apartments in
any sort of affordable way in not just the US,
(04:28):
but also Canada, North America. Stephen can I ask you
a quick follow up before we bring in Bobby, But
why does it matter? Do we need to have families
in apartments? Why can't everyone just move out to the suburbs.
I mean that, you know, that's the that's the safety valve.
As you know in America, you can just move out
to the suburbs, and we make it quite easy to
build family sized houses. So I mean, you know, does
(04:49):
it matter? I guess you know, if you want our
cities to thrive, if you want, you know, people to
be able to raise families in them, you know, for
environmental reasons or you know, even for some social reasons. Yeah,
I would say it matters. I don't want to live
in I don't want to live in the suburbs. I
didn't either. I like living in Manhette. I don't want
Joe to have to live in suburbs. Point. Thank you,
thank you for recognizing that. All right, Bobby, all right,
(05:11):
let's bring you in. So you come from it from
the business perspective, What is like the sort of like
big picture math in your view of someone builds a
new apartment, they have an opportunity, they get the approvals
to put down apartments on a plot of land. Why
is it better to target young professionals and the types
that don't need that space for children. Well, it is
(05:33):
simple math in that smaller units generate higher rent per
square foot, and that is the primary driver of returns
for ground up apartments in the way that we finance
them here in the United States, which is, you know,
through private market capitalism, unlike other parts of the world.
So in those places, someone will look at the building
(05:57):
in their spreadsheet and they'll look at or comps from
the market, and the primary way that they compare units
to other units that they say, here's the rent, here's
the size, here's the number of bedrooms. I want to
try and make it slightly smaller. So like it's like
the power of diminishing marginal turns like in reverse, right,
a five hundred ninety nine square foot one bedroom will
(06:18):
get basically the same right in a six hundred square
feet So that dynamic ends up pushing all units to
being smaller. That's the basic math for why realistic developers
are incentivized to try and put as many of those
types of units they can into the building as possible.
There's a host of other things that I'd say have
to do with the different timeline of incentives, but that's
(06:41):
the largest driver. So walk us through as a real
estate developer. You know, when you are considering a potential
investment or a potential new project, what are the things
on your spreadsheet that you're looking at? How are you
making those calculations? While I like to think that I
make them a little bit differ than other people, but
I would say in general, what I and other people
(07:05):
are looking at is the trends in the market to
see which unit types are getting the highest rents. Those
obviously are going to be within the class a new
construction sub market, so you're not going to compare yourself
to a pre war building unless it's been heavily upgraded.
(07:25):
And well, i'd say it really is ends up being
that simple. If there's a large problem that we have
within real estate, which I hope to like advance in
the future, and I hope like our industry advances, it's
that the real estate data is very simplistic. Rents are
extremely opaque, and things get i'd say reduced down to
(07:45):
different unit types. There's a lot of different i'd say,
like data on new housing inventory that gets added individual
markets and that's almost never broken down into type, and
even when it's broken down into type, it's definitely never
broken down into is this three bedroom, four family or
is it essentially three one bedroom suites? Those kinds of
nuances are always lost in data. Yeah, that's something that
(08:08):
came up in our kind of in our last episode
on rent, which is that you know, we talk about
like multifamily, et cetera, but like it's kind of meaningless.
What city are they in, how many you know whatever?
It is like that sort of drill down is like,
you know, desert. It's not all fungible, it's not all
the same. I just realized we should probably talk about
what we mean by apartments meant for families, Like what
(08:30):
exactly is it that families would like to see here?
I mean, I would say fundamentally, what families want is
a lot of bedrooms. And you know, Joe, like when
you think about like what would you like, you'd probably like,
most of all, you'd like just one extra bedroom. You
don't need an extra walking closet, you probably don't need
an extra bathroom. You just want one extra bedroom. So fundamentally,
(08:51):
I think, you know, a family sized apartment might be
a three bedroom, one and a half bath, maybe a
three bedroom, two bath, but the second and third bedrooms
they don't need walking clos that they don't need on
suite bathrooms. And that's what you get in the US.
And that's maybe it's not by design, but it is
in some sense mandatory based on the building and zoning codes.
I think we should have this. It should really just
(09:12):
be Tracy hosting this and I should just be like
the third guest. That's I have all these complaints. But clearly, Stephen,
like you must view this question somewhat differently than Bobby,
to identify zoning and codes as being a driver rather
than this simple unit math. Yeah, I mean I would
say in the United States to add an X. You know,
(09:34):
let's say, let's imagine your typical new construction apartment. There's
a long hallway in the middle of the building, and
then perpendicularly a rate off of it, there's apartments, and
you enter one of the apartments, and if it's a
two bedroom apartment, it's designed in what someone wants called
a bowling alley configuration. So you enter it, you enter
in the kitchen, you're about I don't know, thirty feet
(09:56):
from the window, probably, and there's not actually a whole
lot of window space in the apartment, and it's you know,
thirty feet away from you. So on the left you
have a bedroom, so you know, you enter in the
kitchen and then you go then you go forward and
then you see like a living area, and then on
the left you have a bedroom. On the right you
have a bedroom and those are by the window. But
what do you fill all that other space with. There's
(10:18):
a ton of this space that would not exist in
Europe or in Asia, mostly because the building is much
much thicker than it would be in another country. So
you know, when we think about what a family wants,
they want another bedroom. In a bedroom typically you know,
by codes and customs has to have a window, so
you know, you want to capture that extra window space.
(10:38):
But then you need to fill all this space, at
least in the United States, and you know, this is
square footage. It costs money to build, it cost money
to maintain. You have to fill it with something you're
probably going to fill it with, you know, bathrooms, which,
as you know if anyone's ever done at home renovation,
they're the most expensive part. So in the United States,
when you add an extra bedroom to a two betterom
apartment or a one bedroom apartment, you typically have to build,
(11:00):
you know, just within the apartment about three hundred square
feet of extra space. The bedroom itself is only about
you know, ten by ten, one hundred square feet, but
then you need to you know, fill all that space
in the middle, whereas in other countries in Europe, Latin America,
or Asia, to add the extra bedroom you might need
an extra I mean, in some cases you can just
add an extra hundred square feet, but maybe you'll add
(11:22):
another one fifty two hundred, but you're adding much less
space to add that bedroom. So, you know, buildings cost
money based on the rent per square foot. When you
rent an apartment or buy an apartment, you're probably not
looking at it based on a you know, you're not
looking for a number of square foot if you're looking
for a number of bedrooms. Bobby, you mentioned the lack
(11:58):
of floor planned data. What do you mean by that exactly?
Because when I think of floor plans, I think that's
like the one thing that is potentially available and kind
of standardized across every apartment building in America. Certainly, Oh Tracy,
where to begin answering that, Yes, so I'd say this
(12:21):
is the that question has been driving me in my career,
I'd say for the last like seven years and bothering me.
I'd say in looking at my own Excel models, like
when I've built ground up apartments, it always intensely bothered
me that in Excel there was no differentiation between square footage.
It's always a multiplier, like a base rent per sure
multiplier depending on type, right at just like a little
(12:43):
pivot table. If if one bedroom multiply by four square
four dollars to square foot if two bedroom multiply by
usually less three fifty, right, and there's no differentiation between
those two. So I'd say that is something that has
bothered me for a while, given that anyone who walks
into a unit knows that there are seven hundred squarefret
one bedrooms that are great and seven hundred squarefret one
(13:04):
bedrooms that are a piece of junk. Right, But it
has to be captured like in data somehow or else.
It's like the qualitative difference. I would say, yes, qualitative,
but like you have to use some sort of data
analytics or some sort of data columns just to say, well,
how large is I get similar things like we all
(13:25):
know that height matters, height should increase rent. But what
would be the only way to prove that, Well, you
would have to go through and measure the height of
every place, then equalize for all other like real estate
type attributes, and then say, aha, now we know that
height matters by this much, when in fact every person
knows that to be true, we just don't know exactly hownswer.
So I would say that the difficulty on that has
(13:47):
been driving me and my career for a while. It's
why I left a real estate development for a little
while to start two different sort of technology ventures and
now am in, like i'd say, the software data business
around floor plan data. I was just about to ask,
could you create an algorithm that takes in like data
inputs and then tries to spit out I don't know,
like a livability score. Well, I was just gonna say,
(14:10):
you know, Bobby, in your Twitter bio, you have quote
I don't know who made this quote, maybe you even
made it up Bill James of Apartments, Bill James, of course,
being the moneyball guy who famously took baseball and tried
to get it out of pure sort of like subjective
like yeah, that guy, that guy is good hustle and
tried to put nu miracle, you know, really quantify the
(14:32):
speed that someone could go, or how all these other things.
So how do you go about sort of like taking
these things that seems subjective, Yeah, that seems like good,
that's nice an area, it's roomy, and try to put
some like hard math behind it. So that is a
self that is a self chosen moniker, and it is
it is an homage too, I think like the mathematical approach,
(14:55):
and it is also meant to me to be a
reminder of how long it takes you that for those
people who remember the story of Bill James, he was
doing this by manually calculating things from box scores that
he got in newspapers thirty forty years ago, and it
took at least twenty five years for the general approach
to move forward. And the other thing that I also
greatly admire about that approach is that none of his
(15:17):
particular algorithms or that meaningfloor that that good anymore. But
it was the approach of saying, we're going to go
through and turn the sweet science into something slightly analytical.
So for me, how that works in floor plans is.
As you mentioned, Tracy, there are a tremendous number of
floor plans. Every apartment has one. The dimensions on them
are nearly always useless because it's not always clear whether
(15:41):
it's putting into a wall or whether it ends in
the middle of the room. Sometimes the dimensions just incorrect.
Sometimes they've taken room names and change them from something
useful to something useless, like from bedroom to dream and
some other some of the ridiculous things which so which
confuses people. But my basic approach has been to build
(16:02):
some software tools to take essentially these low resolution image
files and turn them into a lot more usable pieces
of data. So instead of a room or a unit
being described as a seven hundred and seventy five score
foot one bedroom, it would be described as there is
a room that has dimensions X and y. It may
or may not have a living room, it may or
may not have direct access to a bathroom, and it
(16:24):
has a closet with linear feet hanging of Z. And
by breaking things down into some more pieces, then you
can do some of the fairly straightforward statistical analysis on
apartments to say, in an area, do people want like
a kitchen that's fourteen feet or are they okay with eleven?
(16:45):
Does someone prefer that extra foot in their bedroom or
in their living room given like a fixed space. So
I'd say that's where it initially started. The family oriented
aspect of those apartments kind of came out of the
data and saying they're all lot of apartments and many
of them are not being built to these sorts of specifications.
(17:06):
Stephen touched on some of them, which is that the
size of closets in the United States is at least
two to three times what is in Europe, and I'm
not they're huge in Europe. We still use wardrobe, yes,
like a piece of furniture that acts like, yeah, Joe's
looking at no OA, I had a studio or I
(17:26):
had a loft in the financial district. Right, So you
have a rail that we're just like, we just bought
this like huge sort of yeah wardrobe from Ikea that's
dood like next to our TV. Basically, Stephen is absolutely
right that our building form does drive a lot of
this stuff. Right. So the general process for real estate
development is that a developer is going to go identify
(17:48):
piece of land and then first say go to the
city and say I would like to build this approximate
footprint with this many units, this money, parking spaces, this
amount of like mixed use. It isn't until after the
building is approved that then they'll go through and configure units,
because you're not going to spend money on full architecture
when you don't know the general layout. So once the
(18:08):
building footprint is defined, then it's a matter of how
do you shift around walls? How do you chop up
that space into a unit mix and type that maximizes
your returns. And that's why almost always small ends up
like driving small, and deep ends up like really pushing
them forward. And once the building is set at being
like sixty five feet wide in the long direction, well,
(18:31):
now we know the simple math, like your units are
going to be about thirty feet deep. Well, then that
means your smallest studio can be four hundred and fifty
feet a two bedroom. You need to be what what
does deep mean? Deep? So the difference the distance between
one window to the other window on the other side
of the Oh, so you're looking at it from the street,
(18:53):
how far back does the whole apartment go? And it
goes In the United States, it typically starts at about
sixty five feet. I would say, right, well, yeah, well
it depends, it depends on what market, but that is
that is quite typical. That is quite typical, I would say.
I mean when when we talk about you know, Bobby
was talking about the built form of the building, we
don't typically think about real estate as a field like
education or healthcare where there's like a lot of government
(19:15):
intervention because you know, it is all owned and developed privately.
But I think we probably should. I mean, the regulatory
burden is quite high in modern day society, even even
outside the United States. The architect isn't really designing the building,
you know, the codes are designing the building. So this
this form is sort of set from the start, so
(19:36):
there's not a ton of flexibility from the architect. And
a lot of cities they put out these little diagrams
of how the building should look and it's it's very
very close to how it actually works. And the architect
can do the finishes, they can do the interior layout
of the building, but the fundamental form that is pushing you.
You know, Bobby mentioned a seven hundred square foot one bedroom.
I mean, that's a concept that just doesn't exist in
other countries another countries, a seven hundred square foot apartment
(19:58):
would be a two bedroom apartment. And it's not just
because you know, our bedrooms are a little wider. They're
a little wider. It's not just because we have a
lot of more closets. We do have a lot more closets.
It's because that's really the only way that you can
design the building. If you want a window in the bedroom,
at least that's exactly right. Right, So once the building,
once the unit is thirty feet deep, having a window
(20:20):
in the bedroom means the unit is going to meet
at least be like twenty three twenty four feet wide. Right,
So then basic geometry just tells you how your different
units step up in size as you had bedrooms. Just
to play Devil's advocate, and I know Joe says he
doesn't like the suburbs. But setting Joe aside, what evidence
(20:40):
do we have that families, you know, assuming that there
were good sized apartments designed for families, what evidence do
we have that families would want to stay in that
kind of presumably more urban environment. Are there other factors
at play where maybe people want to buy a house
and build up equity. May be they want different schools,
(21:01):
Maybe they want a garden for their kids to play in.
What evidence do we have that families actually want this?
Just to add on today, and I agree with I,
you know, even though Tracy started at Devil's advocate question,
I do wonder like, do people go to the suburbs
because the houses are ye or do they go to this,
you know, or do they go to the suburbs because
they want the suburban lives? I mean, the rent shows
(21:23):
you that there's the demand for it. The rent and
the prices, you know, like a typical you know, family
family housing unit in New York might be a townhouse,
and I mean the prices are extraordinary, so you know,
I would say the demand. The evidence of the demand
is there is the very low vacancy rate in our
cities and the high price. And you know, you look
at other countries that simply allow this kind of family
(21:45):
this you know, family oriented apartments, and you have a
lot more of a culture of families, you know, living downtown.
Just on that note, can you give us some examples
of how other countries handle this, because I often think
with the US housing market, it's really helpful to look
at how other places do it because there's often such
a big contrast. Yeah, So the design of a North
(22:06):
American apartment building is very globally unique and it is
what in other countries they might think of as a hotel.
So you enter the building, um, you might remember it
from the movie The Shining. There's a big law hallway
and there's you know, there's there's apartment. Great description of
American apartments. It's like The Shining. Yeah, and I mean
they all look like this, and maybe the hallway will
twist and turn a little, but it's going to be
(22:27):
a long hallway. There's going to be units a rate
to the left, rate to the right. On the end
of the building, there might be some you know, three bedrooms,
sort of reasonably sized departments because they're on the corner.
In the rest of the world, let's use Europe, because
the people have a lot of familiarity with it. Typically
there will not be as much of this hallway space,
if at all. So typically what it'll be is it'll
(22:48):
be you'll enter the building, there'll be a single staircase
till you know, if there's an elevator, it'll probably be
a little smaller. It'll definitely be a little smaller and
it'll go you know, you'll so you'll have this vertical
core of the stair case in the elevator and then
a raid off of it. There will be likely between
one and four, but probably two apartments on either side,
left and right. So each building, or at least little
(23:11):
core of a larger building, will you know, let's say
it's a six story building, pretty typical height, there will
be you know, twelve apartments in the building. There will
not you know, it's not going to be a you know,
one hundred unit building. There's not going to be a
long hallway and these units If if you're an American
or if you're familiar with New York, I'm really describing
a tenement, so you know, these units still go from
(23:33):
the front of the building to the back of the building.
In the rest of the world, the building will typically
be maybe forty five feet deep and the apartment will
go from front to back. So in general, there will
be a much higher ratio of surface area to volume,
which is to say, you're going to have more windows.
So in seven hundred square feet you're going to have
(23:55):
two bedrooms. In nine hundred square feet you're going to
have three bedrooms, whereas in the US those are one
and two better apartments. In the rest of the world,
you're much more likely to have windows in the kitchen,
windows in the bathroom. You just have more windows generally,
and much more flexibility with laying out the laying out
the plan. It's funny because if someone asked me what
the differences between a European and apartment building in the US,
(24:18):
apartment building is like, I don't know what I would
have said, But then the moment you said, like, oh,
those tiny elevators and that single central core staircase, I
was like, oh yeah, and I haven't spent that much
time traveling in Europe, but I like immediately got that.
It's like random Arabians have stayed in like Italy or Paris.
It's not just Europe, it's every you know from you know,
(24:39):
Daka to Switzerland, you know, from Bladesha, Switzerland. This is
this is how an apartment building is built. And this
was how an apartment building was built in America too.
If you think about like a Chicago three flat, or
in New York City tenement, or you know one of
those little two story four unit buildings in Los Angeles,
this is how apartment buildings by humans are designed. It's
(25:00):
just in North America we've taken it a different direction. Well,
can I ask why has that happened? It's a combination
of I would say two things. It's a combination of
our very very unique approach to fire safety rules, which
are in turn driven by our obsession with building buildings
out of lightwood frame. And then it's also, I would say,
our obsession with the way our society looks down on
(25:23):
apartments and confines them to very small pieces of the city.
So let's take the second one. First. To have an
apartment that has a lot of windows, you tend to
need a little bit more land. And in America, you know,
we have these competing planners, have these competing mandates. On
the one hand, there's clearly a housing crisis, and you know,
especially in our cities, we need to allow more apartments.
(25:43):
On the other hand, you know, the local politics are
such that nobody wants to live near an apartment. Nobody
wants it near them, so we confine them to these loud,
polluted arterial streets. So if you think about a new
apartment building, it's probably not being built on a leafy
side street. With a lot of land. So all you know,
most of our land is locked up in single family
houses and it would be pretty trivial to demolish them
(26:05):
and build something new, but that's not really allowed. So
in this attempt to try to fit so many apartments
on such a small piece of land, the buildings just
get like really thick, really deep. And this is a
good way of cramming in a lot of square footage.
It's not a great way of cramming in a lot
of bedrooms. Then, on the other side of things, the
United States has a very unique approach to construction. Something
(26:27):
that foreigners are very surprised about when they watch American
TV series. Is you punch through the wall and I
mean yeah, drywall. Yeah, you punch through the wall and
there's nothing there. It's built out of wood and drywall.
So we've traditionally allowed people to build out of lightwood frame,
whereas in the rest of the world, again from Bangladesh
to Switzerland, you build the building out of concrete. So
(26:47):
as a result, the buildings traditionally have been quite flammable.
America has a very high rate of fire deaths. You're
much more likely in America than in any other advanced
country in a lot of far less advanced countries to
die in a building than in other countries. So we
have all these mitigations. One of the mitigations, probably the
most important one in driving apartment design is two interior staircases.
(27:09):
There has to be two ways to get out of
the building by staircase. This is very unique globally in
other countries. This is really reserved for skyscrapers. So if
you need two entrances and since nine to eleven, in
most of the country, except ironically New York, they have
to be the term is remote from each other. They
have to be at a distance. So if every apartment
needs to get out two ways and they need to
(27:30):
be a distance from each other, well, the most logical
thing to do is have this long haul hotel light
corridor in the middle. So that's the simple version of
what's driving all of this. So, Bobby, as a developer
and as a floor plan expert floor plan knower, you know,
how much does that resonate And when you're thinking about
a new building, how much do you feel constrained ultimately
(27:53):
in design by some of the rules that Stephen's been
talking about. Oh completely, but I would say in sports
the way that I sort of approach it as these
are the stricters, like I want to try and make
things as good as possible within within the bounds of that,
within the bounds of those limitations. So Steven's absolutely right
that those are the design limitations. I'd say that there
(28:14):
were some other ones too that have to do with capital.
It is much more efficient to build a two hundred
and fifty unit apartment building double loaded, very quickly and
inexpensive out of wood. And that is one thing that
especially across the United States, we have done very well,
very very very quickly in Texas in the suburbs, and
(28:35):
those projects are the ones that institutional investors want to
put their money and their tip. A large developer is
typically not going to waste their time doing any project
that's under two hundred two hundred and fifty apartments, both
from the equity side and just it is just as
complicated to build ten as it is to build two
(28:55):
hundred and fifty. So I think you mentioned before we
started recording this, but that you yourself are investing in
(29:19):
more projects that are explicitly designed for families. How is
that process like, how is it in terms of identifying
those projects, how common is it that they're being proposed?
And then secondly, what are the different calculations that you
would make for a family oriented project versus something you know,
(29:39):
I guess more normal for an apartment building. Well, I
think about it from a product perspective, which is another
area where I believe that real estate is lacking. The
product philosophy. Your most apartments, certainly in the United States,
is to offend as few people as possible. That's why
there's three different color or palettes of cabinet Country, and
(30:03):
that's exactly right, right, everyone uses the same light. There's
there's so that's a problem in general. So I would
say the way that I start by approaching and is saying,
I want to build something that is a product that
will actually delight families, which to me means it's going
to need to be a smaller project. A two hundred
and fifty unite project with kids would be unpleasant for everybody.
(30:24):
And I'd also say that I think there's a lot
of diversity within family and family oriented, which is why
I sort of use that phrase. I think that I
think that it needs to be a product that is
appealing to someone who doesn't not just people who have kids.
If there was a problem that Another problem that I'd
say within US apartments is that it's fairly monolithic. In turn,
(30:45):
who goes after right? Like I like billiard rooms, but
every building has, every rooming has a billiard room, Like
everyone has like a rock climbing wall here in New York,
they all have these. They all fit these same things.
So what I want to do is build something different.
How does that different differentiate from a typical building. It's
going to be smaller, it's going to be about six
two one hundred units. That is good for me, and
(31:07):
that I am not competing with, say the Trammel Crow
and Avalon Bays of the world, who would eat my
lunch operationally? And the difference in the type again fitting
within the double loaded quarter or means. One of the
metrics that I track in floor plants is something that's
called like bedroom ratio, which is the amount of square
footage that is behind bedroom doors, and the other one
(31:30):
is the ratio of the size of bedroom one to
bedroom two or bedroom one to bedroom three. So for
a family, the main thing that I look at is
reducing the size of those second and third bedrooms. Yeah, right,
because if it's like two roommates, then presumably they want
like the same size, whereas like, well, if it's kids,
they can have a small they don't need a masterom bedroom,
(31:50):
and they don't need an on sweet bath. Yeah that
might be nice, but when you're talking about like an
urban or expensive suburban markets bases at a premium, and
so it's all about making the best change you can.
So this might be one for either Bobby or Stephen.
But you know, Stephen talked a little bit about the
(32:11):
regulations in the US and how that impacts building designs,
specifically around fire safety. Are there additional regulations that kick
in if you know you're going to be having small
children living in a space. And the reason I ask
that is because I know in New York if you
live in an apartment, every once in a while you
get a form from the city asking you to fill
(32:31):
it out. If you have small children in that apartment,
they need to put like bars on the windows so
they don't fall out and other safety measures. Is that
a consideration or a thing that comes into play generally,
not with a new construction. Okay, so there are regulations
for children around things like lead. For older buildings, owners
have to continually certify. I don't have to have a
higher level of certification if there are people under certain
(32:54):
age living there. But for new construction those safety things,
I'm not aware of any building regulations or construction regulations
that are different for who occupies it. In fact, regulations
like the FHA require that anyone be allowed to rent
any unit that is there. Now, design will practically discriminate, right,
(33:15):
Like if you were design a three hundred and seventy
five square foot studio, a family I suppose could rent it,
but they're not going to, right Yeah, I mean even
for these big apartments. I mean the reason they don't
build them is if they did build them, you couldn't
afford it. Yeah, Like Joe, you know you're looking for
a bitter apartment. I'm sure you're seeing them. They're just
out of your price, right, Yeah, that's what we see
is like, Okay, there would be the one bedroom, the studio,
(33:36):
the one bedroom, maybe the two bedroom. And if you
you know, I don't even need three bedrooms, I just
need too But if you like go to that next level,
then a balloon so like the unit to do theoretically
exist they're just like so much more expensive. Well, you know,
again this gets to some of these questions about families,
like really want to live in cities, etc. But if
there's one sort of like policy change or prescription that
(33:59):
could really prove the family orientedness of the new housing
stock in New York, what would it be. I'm gonna
cheat and give you two. Okay, so well, actually in
New York, I can just give you one. We need
to zone more land for apartments. And I think when
people think of land, they think of big corn fields.
But most urban land is tied up in single family houses,
so you know, a single family you know, including in
(34:21):
New York City. So you know, we think about New
York City as you know Brownstone, Brooklyn and Manhattan. But
you know, the truth is a lot of New York
is Staten Island out of Queens, out out of Brooklyn.
So more of that land, more of those lots need
to be zoned for you know, low and mid rise apartments.
And then some things that need to be changed a
little in New York in a lot in other cities
(34:42):
is we need to change our building code so that
you can build a building with a single staircase. New
York you can in other places you can so maybe
make the construction material more resistant to fire, and then
if you do that you can achieve similar out with
points of egress. You could do that. Although you know,
(35:03):
a generation or so ago the United States started requiring
sprinklers in all buildings, which is globally extremely unique. You
won't find a sprinkler outside of a high rise skyscraper
in Switzerland, so, you know, at least in theory, and
I think in practice, a sprinkler should provide the same
fire protection that you know, just building the whole thing
out of concrete does. So I think, frankly, the buildings
(35:24):
are already I mean, the real fire traps in America
are the single family homes. You can still build a
single family home pretty much everywhere out of lightwood frame
and in most places, especially the places that actually build
them without a sprinkler system. So in America we you know,
we we we treat apartments as these you know, dangerous things,
and you know single family houses you know this, you know,
(35:44):
just a right and normal thing. But the truth is
our single family houses are quite dangerous. So I think
if we if we applied similar standards, either brought the
standards of the single family homes up or I wouldn't
do this, but you know, bring this the standards of
the apartments down, then I think would make a lot
more sense to build apartments. Like right now, it makes
a lot more sense for families to live in single
(36:05):
family houses, partly because they're you know, they're built as firetops,
so they're a lot cheaper. Bobby, what would you like
to see when it comes to maybe encouraging more family
oriented apartments in the US. I think developers have the
tools to do it. Currently. It is going to require
creative partnerships with the right tent, with the right kind
(36:26):
of capital. Short term private equity is going to be
a lot more difficult in financing these kinds of projects,
but they work, they pencil. Mainly, it requires, i'd say,
developers being willing to do the chicken in the egg.
I fundamentally believe that families do want to live in cities,
taking too sort of like product oriented approach to thinking
(36:47):
about real estate and demand for like normal consumer goods,
like it goes through fads and changes all the time.
Is there do you perceive a fundamental change in demand?
Are there more families like mine? That want to stay
in the urban core, and is this something that's different
in near twenty twenty three than might have been in
the year, say, nineteen ninety three. It's not something that
(37:10):
I can show yet, It's only something I can know
as being someone who's lived in the city and knowing
the number of people who are meeting people in the city,
falling in love with the city, like they have kids here.
They move after those things occur, So I would say,
at the moment, the option isn't there for them to stay.
So I mean, I believe and I'm willing to bet on,
and I think other developers should too, that that will work.
(37:34):
People in the United States are delaying having families or
there are having fewer kids, but they most people still
eventually make that decision, and that product is not being
built at all, which to me is even just as
an investor, is a compelling thesis. If even just a
small percentage of people staying, then at the moment they
(37:55):
have no new choices. Bobby and Stephen, I feel like
we could get there's so many sort of branches of
this conversation that we could take super fascinating. I'd love
to have you both back on sometime. Got to leave
it there. But seriously, like there's so many interesting like
aspects of the housing conversation we could take this. So
I appreciate you both coming on the podcast. Thank you
(38:17):
for having me. Thank you. Yeah, that was great, guys,
thank you so much. So Tracy, I mean, I know
you really want me to move to the suburbisode that
(38:38):
you can have more space in New York, etc. But
maybe there's an option, maybe it could have it that
we could both stay here. I just want more dog
amenage department building. Maybe we could have both. No, you
mentioned branches from that episode. And one thing that has
always sort of confused me is why in the US
the standard like building material is that yeah, that really
(39:00):
thin like would framing. I've never understood that. And sometimes
when you see especially single family houses going up to
Steven's point and you see the framing for those, it
really looks like nothing, and it does look like they
could a either go up in flames very quickly or
be just fall over with like one good gust of wind. Yeah.
You know, another aspect of this that we didn't get into.
(39:23):
It's just like you know, homeownership culture or rental culture
and whether the perception that you don't need to build
as well for rental. Maybe the problem is really just
like you know, capitalism and this need for everyone to
own a home, or the distortionary impacts of this idea
that everyone needs to own a home. Yeah, there's that,
(39:45):
But to me, the big like, yeah, the thing that
resonates is this idea that choice of building materials leads
to the need for additional regulation, which leads to design
choices that are not necessarily optimal. Well, and then you know,
you know, I don't know, I think we talked about
this and I haven't found it. There's like this famous
like post that someone put on medium about why like
(40:06):
all cars will look this same Yeah, and I think
it's just because they all have to design for the
same safety and fuel standards rags, and so there really
is like sort of one optimal design. And it kind
of sounds like, you know, to some extent, that's the
same thing that's happened with homes, which is that if
mainly you're sort of like feeling like you're optimizing for
(40:27):
one sort of set of regulations, then you do just
get these endless gray buildings, and then the only places
where you can exercise. Some creativity is in the rock
climbing wall, and I want there too. I want to,
you know, I also want to rock climbing ball. I'm
not against these things. How regulation ruined design? That's a
good topic. Okay, shall we leave it there. Let's leave
it there. This has been another episode of the Odd
(40:48):
Thoughts podcast. I'm Tracy Allaway. You can follow me on
Twitter at Tracy Alloway, and I'm Joe Wisenthal. You could
follow me on Twitter at the Stalwart. Follow our guests
Bobby Fiance He's at Bobby Yon. Stephen tweets under the
handle at market Urbanism. Follow our producers Carmen Rodriguez at
Carmen Rman and Dash Bennett at dashbot. And check out
(41:10):
all of our podcasts in Bloomberg under the handle at podcasts.
And for more odd Lots content, go to Bloomberg dot
com slash odd Lots, where we have blog posts, transcripts,
and a news limb that comes out every Friday. Go
there and side up. Thanks for listening.
Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wis Tracy. You know, we did a recent
episode on rent and whether the price of rent is
ever going to go down? And I asked the question, like,
why don't they ever build new apartment buildings for families?
Totally un self interested questions from now from here on out,
(00:32):
Now that our years of just doing supply chain episodes
are going to come to an end, let's just do
episodes about our own personal ground, our own personal frustration
of the economy. All right, where are all the dog
amenities for apartments? That's my question. That's the thing. Like,
there's plenty of buildings with dog amentities. And as a
you know, I have two kids, and sometimes we look
(00:53):
at like new apartments and they're like, I want like
a building with dog amentities and billiard rooms in gyms
and dorman and all that stuff. But they don't make
those buildings for like the actual units. And my kids
don't play pool. Well, you got to teach them, no.
But I think you're right. It seems like a lot
of apartment buildings are geared towards young professionals. For the
(01:17):
most part. It's studios, it's one bedrooms. Here in New York,
it tends to be larger apartments that have been cut
up at one point in time, and you end up
with these really weird floor plans where like the bathroom
is right next to the kitchen. Yeah, and it's it's
not a very pleasant experience for anyone. But I think
there is there is this overarching question of why are
(01:40):
these decisions being made in the way that they're being made, right, Like,
there must be some reason, And the people who are
building these buildings, you know, obviously they have, you know,
presumably some good business reasons, but I don't know what
they are, and I find it frustrating, And I guess
I'd like it to change, but I don't know, like
if any like developers are going to like change their
(02:00):
business models. For me, I think the expectation is, like,
I just got to move out to the suburbs. My
kids are really tired of sharing a punk bit. Okay.
What I will say also is I think this is
a peculiarly American problem because having lived in many other places,
apartments are well designed, even in Hong Kong, where the
(02:20):
average size of apartments tends to be incredibly small. They
are designed for that tiny square footage, and so they
tend to be quite functional even for families, and certainly
in Europe there's much more of a culture of renting
versus ownership, so that you do have families who spend
decades in the same apartment building. I think you're totally
(02:42):
right here. The basic idea is that if you live
in the city in an apartment, you're young, you're single,
and then if you have kids at some point, then
you move out to the suburbs, and the housing stock
is not made for people who would say like to
stay in the city and maybe be a renter in
one unit or one building for twenty years. Yeah. I
think that's exactly right. All right, So what explains the
(03:04):
state of affairs? Is there any reason to change it?
We're going to be speaking to two guests I think
they were both heard our last episode and then spend
a couple of days sort of debating it on Twitter,
and so it's like, well, why debate on Twitter when
you can come in. So we're going to come talk
to us. Yeah, just come talk talk to us. Rather
than wasting get all in tweets. We are going to
(03:24):
be speaking with Stephen Smith. He is the executive director
at the Center for Building in North America, I think
tank around construction policy. And we're also going to be
speaking with Bobby Fian. He is a real estate developer
and he there's all about apartment floor plans and the
thinking behind the business reasons behind these decisions. So, Bobby
and Stephen, thank you so much for joining us. Very
(03:46):
glad to be here. Yeah, thanks for having me so, Steven,
I'll start with you, but really, are we right? Like,
let's start with is the premise that we're talking about
that a lot of these new developments really aren't geared
towards families? Is that correct? Yeah? I mean the typical
new apartment building in the United States, the developer will
(04:07):
try to cram in as many studios in one bedrooms
as they can. You know, I think it's mostly driven
by policy. You have a lot of there's a lot
of planning policy that tries to encourage more family sized units,
but they're really pushing against some more fundamental regulations that
make it quite difficult to build family sized apartments in
any sort of affordable way in not just the US,
(04:28):
but also Canada, North America. Stephen can I ask you
a quick follow up before we bring in Bobby, But
why does it matter? Do we need to have families
in apartments? Why can't everyone just move out to the suburbs.
I mean that, you know, that's the that's the safety valve.
As you know in America, you can just move out
to the suburbs, and we make it quite easy to
build family sized houses. So I mean, you know, does
(04:49):
it matter? I guess you know, if you want our
cities to thrive, if you want, you know, people to
be able to raise families in them, you know, for
environmental reasons or you know, even for some social reasons. Yeah,
I would say it matters. I don't want to live
in I don't want to live in the suburbs. I
didn't either. I like living in Manhette. I don't want
Joe to have to live in suburbs. Point. Thank you,
thank you for recognizing that. All right, Bobby, all right,
(05:11):
let's bring you in. So you come from it from
the business perspective, What is like the sort of like
big picture math in your view of someone builds a
new apartment, they have an opportunity, they get the approvals
to put down apartments on a plot of land. Why
is it better to target young professionals and the types
that don't need that space for children. Well, it is
(05:33):
simple math in that smaller units generate higher rent per
square foot, and that is the primary driver of returns
for ground up apartments in the way that we finance
them here in the United States, which is, you know,
through private market capitalism, unlike other parts of the world.
So in those places, someone will look at the building
(05:57):
in their spreadsheet and they'll look at or comps from
the market, and the primary way that they compare units
to other units that they say, here's the rent, here's
the size, here's the number of bedrooms. I want to
try and make it slightly smaller. So like it's like
the power of diminishing marginal turns like in reverse, right,
a five hundred ninety nine square foot one bedroom will
(06:18):
get basically the same right in a six hundred square
feet So that dynamic ends up pushing all units to
being smaller. That's the basic math for why realistic developers
are incentivized to try and put as many of those
types of units they can into the building as possible.
There's a host of other things that I'd say have
to do with the different timeline of incentives, but that's
(06:41):
the largest driver. So walk us through as a real
estate developer. You know, when you are considering a potential
investment or a potential new project, what are the things
on your spreadsheet that you're looking at? How are you
making those calculations? While I like to think that I
make them a little bit differ than other people, but
I would say in general, what I and other people
(07:05):
are looking at is the trends in the market to
see which unit types are getting the highest rents. Those
obviously are going to be within the class a new
construction sub market, so you're not going to compare yourself
to a pre war building unless it's been heavily upgraded.
(07:25):
And well, i'd say it really is ends up being
that simple. If there's a large problem that we have
within real estate, which I hope to like advance in
the future, and I hope like our industry advances, it's
that the real estate data is very simplistic. Rents are
extremely opaque, and things get i'd say reduced down to
(07:45):
different unit types. There's a lot of different i'd say,
like data on new housing inventory that gets added individual
markets and that's almost never broken down into type, and
even when it's broken down into type, it's definitely never
broken down into is this three bedroom, four family or
is it essentially three one bedroom suites? Those kinds of
nuances are always lost in data. Yeah, that's something that
(08:08):
came up in our kind of in our last episode
on rent, which is that you know, we talk about
like multifamily, et cetera, but like it's kind of meaningless.
What city are they in, how many you know whatever?
It is like that sort of drill down is like,
you know, desert. It's not all fungible, it's not all
the same. I just realized we should probably talk about
what we mean by apartments meant for families, Like what
(08:30):
exactly is it that families would like to see here?
I mean, I would say fundamentally, what families want is
a lot of bedrooms. And you know, Joe, like when
you think about like what would you like, you'd probably like,
most of all, you'd like just one extra bedroom. You
don't need an extra walking closet, you probably don't need
an extra bathroom. You just want one extra bedroom. So fundamentally,
(08:51):
I think, you know, a family sized apartment might be
a three bedroom, one and a half bath, maybe a
three bedroom, two bath, but the second and third bedrooms
they don't need walking clos that they don't need on
suite bathrooms. And that's what you get in the US.
And that's maybe it's not by design, but it is
in some sense mandatory based on the building and zoning codes.
I think we should have this. It should really just
(09:12):
be Tracy hosting this and I should just be like
the third guest. That's I have all these complaints. But clearly, Stephen,
like you must view this question somewhat differently than Bobby,
to identify zoning and codes as being a driver rather
than this simple unit math. Yeah, I mean I would
say in the United States to add an X. You know,
(09:34):
let's say, let's imagine your typical new construction apartment. There's
a long hallway in the middle of the building, and
then perpendicularly a rate off of it, there's apartments, and
you enter one of the apartments, and if it's a
two bedroom apartment, it's designed in what someone wants called
a bowling alley configuration. So you enter it, you enter
in the kitchen, you're about I don't know, thirty feet
(09:56):
from the window, probably, and there's not actually a whole
lot of window space in the apartment, and it's you know,
thirty feet away from you. So on the left you
have a bedroom, so you know, you enter in the
kitchen and then you go then you go forward and
then you see like a living area, and then on
the left you have a bedroom. On the right you
have a bedroom and those are by the window. But
what do you fill all that other space with. There's
(10:18):
a ton of this space that would not exist in
Europe or in Asia, mostly because the building is much
much thicker than it would be in another country. So
you know, when we think about what a family wants,
they want another bedroom. In a bedroom typically you know,
by codes and customs has to have a window, so
you know, you want to capture that extra window space.
(10:38):
But then you need to fill all this space, at
least in the United States, and you know, this is
square footage. It costs money to build, it cost money
to maintain. You have to fill it with something you're
probably going to fill it with, you know, bathrooms, which,
as you know if anyone's ever done at home renovation,
they're the most expensive part. So in the United States,
when you add an extra bedroom to a two betterom
apartment or a one bedroom apartment, you typically have to build,
(11:00):
you know, just within the apartment about three hundred square
feet of extra space. The bedroom itself is only about
you know, ten by ten, one hundred square feet, but
then you need to you know, fill all that space
in the middle, whereas in other countries in Europe, Latin America,
or Asia, to add the extra bedroom you might need
an extra I mean, in some cases you can just
add an extra hundred square feet, but maybe you'll add
(11:22):
another one fifty two hundred, but you're adding much less
space to add that bedroom. So, you know, buildings cost
money based on the rent per square foot. When you
rent an apartment or buy an apartment, you're probably not
looking at it based on a you know, you're not
looking for a number of square foot if you're looking
for a number of bedrooms. Bobby, you mentioned the lack
(11:58):
of floor planned data. What do you mean by that exactly?
Because when I think of floor plans, I think that's
like the one thing that is potentially available and kind
of standardized across every apartment building in America. Certainly, Oh Tracy,
where to begin answering that, Yes, so I'd say this
(12:21):
is the that question has been driving me in my career,
I'd say for the last like seven years and bothering me.
I'd say in looking at my own Excel models, like
when I've built ground up apartments, it always intensely bothered
me that in Excel there was no differentiation between square footage.
It's always a multiplier, like a base rent per sure
multiplier depending on type, right at just like a little
(12:43):
pivot table. If if one bedroom multiply by four square
four dollars to square foot if two bedroom multiply by
usually less three fifty, right, and there's no differentiation between
those two. So I'd say that is something that has
bothered me for a while, given that anyone who walks
into a unit knows that there are seven hundred squarefret
one bedrooms that are great and seven hundred squarefret one
(13:04):
bedrooms that are a piece of junk. Right, But it
has to be captured like in data somehow or else.
It's like the qualitative difference. I would say, yes, qualitative,
but like you have to use some sort of data
analytics or some sort of data columns just to say, well,
how large is I get similar things like we all
(13:25):
know that height matters, height should increase rent. But what
would be the only way to prove that, Well, you
would have to go through and measure the height of
every place, then equalize for all other like real estate
type attributes, and then say, aha, now we know that
height matters by this much, when in fact every person
knows that to be true, we just don't know exactly hownswer.
So I would say that the difficulty on that has
(13:47):
been driving me and my career for a while. It's
why I left a real estate development for a little
while to start two different sort of technology ventures and
now am in, like i'd say, the software data business
around floor plan data. I was just about to ask,
could you create an algorithm that takes in like data
inputs and then tries to spit out I don't know,
like a livability score. Well, I was just gonna say,
(14:10):
you know, Bobby, in your Twitter bio, you have quote
I don't know who made this quote, maybe you even
made it up Bill James of Apartments, Bill James, of course,
being the moneyball guy who famously took baseball and tried
to get it out of pure sort of like subjective
like yeah, that guy, that guy is good hustle and
tried to put nu miracle, you know, really quantify the
(14:32):
speed that someone could go, or how all these other things.
So how do you go about sort of like taking
these things that seems subjective, Yeah, that seems like good,
that's nice an area, it's roomy, and try to put
some like hard math behind it. So that is a
self that is a self chosen moniker, and it is
it is an homage too, I think like the mathematical approach,
(14:55):
and it is also meant to me to be a
reminder of how long it takes you that for those
people who remember the story of Bill James, he was
doing this by manually calculating things from box scores that
he got in newspapers thirty forty years ago, and it
took at least twenty five years for the general approach
to move forward. And the other thing that I also
greatly admire about that approach is that none of his
(15:17):
particular algorithms or that meaningfloor that that good anymore. But
it was the approach of saying, we're going to go
through and turn the sweet science into something slightly analytical.
So for me, how that works in floor plans is.
As you mentioned, Tracy, there are a tremendous number of
floor plans. Every apartment has one. The dimensions on them
are nearly always useless because it's not always clear whether
(15:41):
it's putting into a wall or whether it ends in
the middle of the room. Sometimes the dimensions just incorrect.
Sometimes they've taken room names and change them from something
useful to something useless, like from bedroom to dream and
some other some of the ridiculous things which so which
confuses people. But my basic approach has been to build
(16:02):
some software tools to take essentially these low resolution image
files and turn them into a lot more usable pieces
of data. So instead of a room or a unit
being described as a seven hundred and seventy five score
foot one bedroom, it would be described as there is
a room that has dimensions X and y. It may
or may not have a living room, it may or
may not have direct access to a bathroom, and it
(16:24):
has a closet with linear feet hanging of Z. And
by breaking things down into some more pieces, then you
can do some of the fairly straightforward statistical analysis on
apartments to say, in an area, do people want like
a kitchen that's fourteen feet or are they okay with eleven?
(16:45):
Does someone prefer that extra foot in their bedroom or
in their living room given like a fixed space. So
I'd say that's where it initially started. The family oriented
aspect of those apartments kind of came out of the
data and saying they're all lot of apartments and many
of them are not being built to these sorts of specifications.
(17:06):
Stephen touched on some of them, which is that the
size of closets in the United States is at least
two to three times what is in Europe, and I'm
not they're huge in Europe. We still use wardrobe, yes,
like a piece of furniture that acts like, yeah, Joe's
looking at no OA, I had a studio or I
(17:26):
had a loft in the financial district. Right, So you
have a rail that we're just like, we just bought
this like huge sort of yeah wardrobe from Ikea that's
dood like next to our TV. Basically, Stephen is absolutely
right that our building form does drive a lot of
this stuff. Right. So the general process for real estate
development is that a developer is going to go identify
(17:48):
piece of land and then first say go to the
city and say I would like to build this approximate
footprint with this many units, this money, parking spaces, this
amount of like mixed use. It isn't until after the
building is approved that then they'll go through and configure units,
because you're not going to spend money on full architecture
when you don't know the general layout. So once the
(18:08):
building footprint is defined, then it's a matter of how
do you shift around walls? How do you chop up
that space into a unit mix and type that maximizes
your returns. And that's why almost always small ends up
like driving small, and deep ends up like really pushing
them forward. And once the building is set at being
like sixty five feet wide in the long direction, well,
(18:31):
now we know the simple math, like your units are
going to be about thirty feet deep. Well, then that
means your smallest studio can be four hundred and fifty
feet a two bedroom. You need to be what what
does deep mean? Deep? So the difference the distance between
one window to the other window on the other side
of the Oh, so you're looking at it from the street,
(18:53):
how far back does the whole apartment go? And it
goes In the United States, it typically starts at about
sixty five feet. I would say, right, well, yeah, well
it depends, it depends on what market, but that is
that is quite typical. That is quite typical, I would say.
I mean when when we talk about you know, Bobby
was talking about the built form of the building, we
don't typically think about real estate as a field like
education or healthcare where there's like a lot of government
(19:15):
intervention because you know, it is all owned and developed privately.
But I think we probably should. I mean, the regulatory
burden is quite high in modern day society, even even
outside the United States. The architect isn't really designing the building,
you know, the codes are designing the building. So this
this form is sort of set from the start, so
(19:36):
there's not a ton of flexibility from the architect. And
a lot of cities they put out these little diagrams
of how the building should look and it's it's very
very close to how it actually works. And the architect
can do the finishes, they can do the interior layout
of the building, but the fundamental form that is pushing you.
You know, Bobby mentioned a seven hundred square foot one bedroom.
I mean, that's a concept that just doesn't exist in
other countries another countries, a seven hundred square foot apartment
(19:58):
would be a two bedroom apartment. And it's not just
because you know, our bedrooms are a little wider. They're
a little wider. It's not just because we have a
lot of more closets. We do have a lot more closets.
It's because that's really the only way that you can
design the building. If you want a window in the bedroom,
at least that's exactly right. Right, So once the building,
once the unit is thirty feet deep, having a window
(20:20):
in the bedroom means the unit is going to meet
at least be like twenty three twenty four feet wide. Right,
So then basic geometry just tells you how your different
units step up in size as you had bedrooms. Just
to play Devil's advocate, and I know Joe says he
doesn't like the suburbs. But setting Joe aside, what evidence
(20:40):
do we have that families, you know, assuming that there
were good sized apartments designed for families, what evidence do
we have that families would want to stay in that
kind of presumably more urban environment. Are there other factors
at play where maybe people want to buy a house
and build up equity. May be they want different schools,
(21:01):
Maybe they want a garden for their kids to play in.
What evidence do we have that families actually want this?
Just to add on today, and I agree with I,
you know, even though Tracy started at Devil's advocate question,
I do wonder like, do people go to the suburbs
because the houses are ye or do they go to this,
you know, or do they go to the suburbs because
they want the suburban lives? I mean, the rent shows
(21:23):
you that there's the demand for it. The rent and
the prices, you know, like a typical you know, family
family housing unit in New York might be a townhouse,
and I mean the prices are extraordinary, so you know,
I would say the demand. The evidence of the demand
is there is the very low vacancy rate in our
cities and the high price. And you know, you look
at other countries that simply allow this kind of family
(21:45):
this you know, family oriented apartments, and you have a
lot more of a culture of families, you know, living downtown.
Just on that note, can you give us some examples
of how other countries handle this, because I often think
with the US housing market, it's really helpful to look
at how other places do it because there's often such
a big contrast. Yeah, So the design of a North
(22:06):
American apartment building is very globally unique and it is
what in other countries they might think of as a hotel.
So you enter the building, um, you might remember it
from the movie The Shining. There's a big law hallway
and there's you know, there's there's apartment. Great description of
American apartments. It's like The Shining. Yeah, and I mean
they all look like this, and maybe the hallway will
twist and turn a little, but it's going to be
(22:27):
a long hallway. There's going to be units a rate
to the left, rate to the right. On the end
of the building, there might be some you know, three bedrooms,
sort of reasonably sized departments because they're on the corner.
In the rest of the world, let's use Europe, because
the people have a lot of familiarity with it. Typically
there will not be as much of this hallway space,
if at all. So typically what it'll be is it'll
(22:48):
be you'll enter the building, there'll be a single staircase
till you know, if there's an elevator, it'll probably be
a little smaller. It'll definitely be a little smaller and
it'll go you know, you'll so you'll have this vertical
core of the stair case in the elevator and then
a raid off of it. There will be likely between
one and four, but probably two apartments on either side,
left and right. So each building, or at least little
(23:11):
core of a larger building, will you know, let's say
it's a six story building, pretty typical height, there will
be you know, twelve apartments in the building. There will
not you know, it's not going to be a you know,
one hundred unit building. There's not going to be a
long hallway and these units If if you're an American
or if you're familiar with New York, I'm really describing
a tenement, so you know, these units still go from
(23:33):
the front of the building to the back of the building.
In the rest of the world, the building will typically
be maybe forty five feet deep and the apartment will
go from front to back. So in general, there will
be a much higher ratio of surface area to volume,
which is to say, you're going to have more windows.
So in seven hundred square feet you're going to have
(23:55):
two bedrooms. In nine hundred square feet you're going to
have three bedrooms, whereas in the US those are one
and two better apartments. In the rest of the world,
you're much more likely to have windows in the kitchen,
windows in the bathroom. You just have more windows generally,
and much more flexibility with laying out the laying out
the plan. It's funny because if someone asked me what
the differences between a European and apartment building in the US,
(24:18):
apartment building is like, I don't know what I would
have said, But then the moment you said, like, oh,
those tiny elevators and that single central core staircase, I
was like, oh yeah, and I haven't spent that much
time traveling in Europe, but I like immediately got that.
It's like random Arabians have stayed in like Italy or Paris.
It's not just Europe, it's every you know from you know,
(24:39):
Daka to Switzerland, you know, from Bladesha, Switzerland. This is
this is how an apartment building is built. And this
was how an apartment building was built in America too.
If you think about like a Chicago three flat, or
in New York City tenement, or you know one of
those little two story four unit buildings in Los Angeles,
this is how apartment buildings by humans are designed. It's
(25:00):
just in North America we've taken it a different direction. Well,
can I ask why has that happened? It's a combination
of I would say two things. It's a combination of
our very very unique approach to fire safety rules, which
are in turn driven by our obsession with building buildings
out of lightwood frame. And then it's also, I would say,
our obsession with the way our society looks down on
(25:23):
apartments and confines them to very small pieces of the city.
So let's take the second one. First. To have an
apartment that has a lot of windows, you tend to
need a little bit more land. And in America, you know,
we have these competing planners, have these competing mandates. On
the one hand, there's clearly a housing crisis, and you know,
especially in our cities, we need to allow more apartments.
(25:43):
On the other hand, you know, the local politics are
such that nobody wants to live near an apartment. Nobody
wants it near them, so we confine them to these loud,
polluted arterial streets. So if you think about a new
apartment building, it's probably not being built on a leafy
side street. With a lot of land. So all you know,
most of our land is locked up in single family
houses and it would be pretty trivial to demolish them
(26:05):
and build something new, but that's not really allowed. So
in this attempt to try to fit so many apartments
on such a small piece of land, the buildings just
get like really thick, really deep. And this is a
good way of cramming in a lot of square footage.
It's not a great way of cramming in a lot
of bedrooms. Then, on the other side of things, the
United States has a very unique approach to construction. Something
(26:27):
that foreigners are very surprised about when they watch American
TV series. Is you punch through the wall and I
mean yeah, drywall. Yeah, you punch through the wall and
there's nothing there. It's built out of wood and drywall.
So we've traditionally allowed people to build out of lightwood frame,
whereas in the rest of the world, again from Bangladesh
to Switzerland, you build the building out of concrete. So
(26:47):
as a result, the buildings traditionally have been quite flammable.
America has a very high rate of fire deaths. You're
much more likely in America than in any other advanced
country in a lot of far less advanced countries to
die in a building than in other countries. So we
have all these mitigations. One of the mitigations, probably the
most important one in driving apartment design is two interior staircases.
(27:09):
There has to be two ways to get out of
the building by staircase. This is very unique globally in
other countries. This is really reserved for skyscrapers. So if
you need two entrances and since nine to eleven, in
most of the country, except ironically New York, they have
to be the term is remote from each other. They
have to be at a distance. So if every apartment
needs to get out two ways and they need to
(27:30):
be a distance from each other, well, the most logical
thing to do is have this long haul hotel light
corridor in the middle. So that's the simple version of
what's driving all of this. So, Bobby, as a developer
and as a floor plan expert floor plan knower, you know,
how much does that resonate And when you're thinking about
a new building, how much do you feel constrained ultimately
(27:53):
in design by some of the rules that Stephen's been
talking about. Oh completely, but I would say in sports
the way that I sort of approach it as these
are the stricters, like I want to try and make
things as good as possible within within the bounds of that,
within the bounds of those limitations. So Steven's absolutely right
that those are the design limitations. I'd say that there
(28:14):
were some other ones too that have to do with capital.
It is much more efficient to build a two hundred
and fifty unit apartment building double loaded, very quickly and
inexpensive out of wood. And that is one thing that
especially across the United States, we have done very well,
very very very quickly in Texas in the suburbs, and
(28:35):
those projects are the ones that institutional investors want to
put their money and their tip. A large developer is
typically not going to waste their time doing any project
that's under two hundred two hundred and fifty apartments, both
from the equity side and just it is just as
complicated to build ten as it is to build two
(28:55):
hundred and fifty. So I think you mentioned before we
started recording this, but that you yourself are investing in
(29:19):
more projects that are explicitly designed for families. How is
that process like, how is it in terms of identifying
those projects, how common is it that they're being proposed?
And then secondly, what are the different calculations that you
would make for a family oriented project versus something you know,
(29:39):
I guess more normal for an apartment building. Well, I
think about it from a product perspective, which is another
area where I believe that real estate is lacking. The
product philosophy. Your most apartments, certainly in the United States,
is to offend as few people as possible. That's why
there's three different color or palettes of cabinet Country, and
(30:03):
that's exactly right, right, everyone uses the same light. There's
there's so that's a problem in general. So I would
say the way that I start by approaching and is saying,
I want to build something that is a product that
will actually delight families, which to me means it's going
to need to be a smaller project. A two hundred
and fifty unite project with kids would be unpleasant for everybody.
(30:24):
And I'd also say that I think there's a lot
of diversity within family and family oriented, which is why
I sort of use that phrase. I think that I
think that it needs to be a product that is
appealing to someone who doesn't not just people who have kids.
If there was a problem that Another problem that I'd
say within US apartments is that it's fairly monolithic. In turn,
(30:45):
who goes after right? Like I like billiard rooms, but
every building has, every rooming has a billiard room, Like
everyone has like a rock climbing wall here in New York,
they all have these. They all fit these same things.
So what I want to do is build something different.
How does that different differentiate from a typical building. It's
going to be smaller, it's going to be about six
two one hundred units. That is good for me, and
(31:07):
that I am not competing with, say the Trammel Crow
and Avalon Bays of the world, who would eat my
lunch operationally? And the difference in the type again fitting
within the double loaded quarter or means. One of the
metrics that I track in floor plants is something that's
called like bedroom ratio, which is the amount of square
footage that is behind bedroom doors, and the other one
(31:30):
is the ratio of the size of bedroom one to
bedroom two or bedroom one to bedroom three. So for
a family, the main thing that I look at is
reducing the size of those second and third bedrooms. Yeah, right,
because if it's like two roommates, then presumably they want
like the same size, whereas like, well, if it's kids,
they can have a small they don't need a masterom bedroom,
(31:50):
and they don't need an on sweet bath. Yeah that
might be nice, but when you're talking about like an
urban or expensive suburban markets bases at a premium, and
so it's all about making the best change you can.
So this might be one for either Bobby or Stephen.
But you know, Stephen talked a little bit about the
(32:11):
regulations in the US and how that impacts building designs,
specifically around fire safety. Are there additional regulations that kick
in if you know you're going to be having small
children living in a space. And the reason I ask
that is because I know in New York if you
live in an apartment, every once in a while you
get a form from the city asking you to fill
(32:31):
it out. If you have small children in that apartment,
they need to put like bars on the windows so
they don't fall out and other safety measures. Is that
a consideration or a thing that comes into play generally,
not with a new construction. Okay, so there are regulations
for children around things like lead. For older buildings, owners
have to continually certify. I don't have to have a
higher level of certification if there are people under certain
(32:54):
age living there. But for new construction those safety things,
I'm not aware of any building regulations or construction regulations
that are different for who occupies it. In fact, regulations
like the FHA require that anyone be allowed to rent
any unit that is there. Now, design will practically discriminate, right,
(33:15):
Like if you were design a three hundred and seventy
five square foot studio, a family I suppose could rent it,
but they're not going to, right Yeah, I mean even
for these big apartments. I mean the reason they don't
build them is if they did build them, you couldn't
afford it. Yeah, Like Joe, you know you're looking for
a bitter apartment. I'm sure you're seeing them. They're just
out of your price, right, Yeah, that's what we see
is like, Okay, there would be the one bedroom, the studio,
(33:36):
the one bedroom, maybe the two bedroom. And if you
you know, I don't even need three bedrooms, I just
need too But if you like go to that next level,
then a balloon so like the unit to do theoretically
exist they're just like so much more expensive. Well, you know,
again this gets to some of these questions about families,
like really want to live in cities, etc. But if
there's one sort of like policy change or prescription that
(33:59):
could really prove the family orientedness of the new housing
stock in New York, what would it be. I'm gonna
cheat and give you two. Okay, so well, actually in
New York, I can just give you one. We need
to zone more land for apartments. And I think when
people think of land, they think of big corn fields.
But most urban land is tied up in single family houses,
so you know, a single family you know, including in
(34:21):
New York City. So you know, we think about New
York City as you know Brownstone, Brooklyn and Manhattan. But
you know, the truth is a lot of New York
is Staten Island out of Queens, out out of Brooklyn.
So more of that land, more of those lots need
to be zoned for you know, low and mid rise apartments.
And then some things that need to be changed a
little in New York in a lot in other cities
(34:42):
is we need to change our building code so that
you can build a building with a single staircase. New
York you can in other places you can so maybe
make the construction material more resistant to fire, and then
if you do that you can achieve similar out with
points of egress. You could do that. Although you know,
(35:03):
a generation or so ago the United States started requiring
sprinklers in all buildings, which is globally extremely unique. You
won't find a sprinkler outside of a high rise skyscraper
in Switzerland, so, you know, at least in theory, and
I think in practice, a sprinkler should provide the same
fire protection that you know, just building the whole thing
out of concrete does. So I think, frankly, the buildings
(35:24):
are already I mean, the real fire traps in America
are the single family homes. You can still build a
single family home pretty much everywhere out of lightwood frame
and in most places, especially the places that actually build
them without a sprinkler system. So in America we you know,
we we we treat apartments as these you know, dangerous things,
and you know single family houses you know this, you know,
(35:44):
just a right and normal thing. But the truth is
our single family houses are quite dangerous. So I think
if we if we applied similar standards, either brought the
standards of the single family homes up or I wouldn't
do this, but you know, bring this the standards of
the apartments down, then I think would make a lot
more sense to build apartments. Like right now, it makes
a lot more sense for families to live in single
(36:05):
family houses, partly because they're you know, they're built as firetops,
so they're a lot cheaper. Bobby, what would you like
to see when it comes to maybe encouraging more family
oriented apartments in the US. I think developers have the
tools to do it. Currently. It is going to require
creative partnerships with the right tent, with the right kind
(36:26):
of capital. Short term private equity is going to be
a lot more difficult in financing these kinds of projects,
but they work, they pencil. Mainly, it requires, i'd say,
developers being willing to do the chicken in the egg.
I fundamentally believe that families do want to live in cities,
taking too sort of like product oriented approach to thinking
(36:47):
about real estate and demand for like normal consumer goods,
like it goes through fads and changes all the time.
Is there do you perceive a fundamental change in demand?
Are there more families like mine? That want to stay
in the urban core, and is this something that's different
in near twenty twenty three than might have been in
the year, say, nineteen ninety three. It's not something that
(37:10):
I can show yet, It's only something I can know
as being someone who's lived in the city and knowing
the number of people who are meeting people in the city,
falling in love with the city, like they have kids here.
They move after those things occur, So I would say,
at the moment, the option isn't there for them to stay.
So I mean, I believe and I'm willing to bet on,
and I think other developers should too, that that will work.
(37:34):
People in the United States are delaying having families or
there are having fewer kids, but they most people still
eventually make that decision, and that product is not being
built at all, which to me is even just as
an investor, is a compelling thesis. If even just a
small percentage of people staying, then at the moment they
(37:55):
have no new choices. Bobby and Stephen, I feel like
we could get there's so many sort of branches of
this conversation that we could take super fascinating. I'd love
to have you both back on sometime. Got to leave
it there. But seriously, like there's so many interesting like
aspects of the housing conversation we could take this. So
I appreciate you both coming on the podcast. Thank you
(38:17):
for having me. Thank you. Yeah, that was great, guys,
thank you so much. So Tracy, I mean, I know
you really want me to move to the suburbisode that
(38:38):
you can have more space in New York, etc. But
maybe there's an option, maybe it could have it that
we could both stay here. I just want more dog
amenage department building. Maybe we could have both. No, you
mentioned branches from that episode. And one thing that has
always sort of confused me is why in the US
the standard like building material is that yeah, that really
(39:00):
thin like would framing. I've never understood that. And sometimes
when you see especially single family houses going up to
Steven's point and you see the framing for those, it
really looks like nothing, and it does look like they
could a either go up in flames very quickly or
be just fall over with like one good gust of wind. Yeah.
You know, another aspect of this that we didn't get into.
(39:23):
It's just like you know, homeownership culture or rental culture
and whether the perception that you don't need to build
as well for rental. Maybe the problem is really just
like you know, capitalism and this need for everyone to
own a home, or the distortionary impacts of this idea
that everyone needs to own a home. Yeah, there's that,
(39:45):
But to me, the big like, yeah, the thing that
resonates is this idea that choice of building materials leads
to the need for additional regulation, which leads to design
choices that are not necessarily optimal. Well, and then you know,
you know, I don't know, I think we talked about
this and I haven't found it. There's like this famous
like post that someone put on medium about why like
(40:06):
all cars will look this same Yeah, and I think
it's just because they all have to design for the
same safety and fuel standards rags, and so there really
is like sort of one optimal design. And it kind
of sounds like, you know, to some extent, that's the
same thing that's happened with homes, which is that if
mainly you're sort of like feeling like you're optimizing for
(40:27):
one sort of set of regulations, then you do just
get these endless gray buildings, and then the only places
where you can exercise. Some creativity is in the rock
climbing wall, and I want there too. I want to,
you know, I also want to rock climbing ball. I'm
not against these things. How regulation ruined design? That's a
good topic. Okay, shall we leave it there. Let's leave
it there. This has been another episode of the Odd
(40:48):
Thoughts podcast. I'm Tracy Allaway. You can follow me on
Twitter at Tracy Alloway, and I'm Joe Wisenthal. You could
follow me on Twitter at the Stalwart. Follow our guests
Bobby Fiance He's at Bobby Yon. Stephen tweets under the
handle at market Urbanism. Follow our producers Carmen Rodriguez at
Carmen Rman and Dash Bennett at dashbot. And check out
(41:10):
all of our podcasts in Bloomberg under the handle at podcasts.
And for more odd Lots content, go to Bloomberg dot
com slash odd Lots, where we have blog posts, transcripts,
and a news limb that comes out every Friday. Go
there and side up. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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