I often hear people say things like:
“Real estate development just makes developers rich – it doesn’t do anything to help our economy,” or
“I understand why we need to bring more employers to Montgomery County, but building more housing just adds to the overcrowding of our schools – we should be pushing for more office projects,” or
“I’m not against growth but we shouldn’t allow more development until we have the infrastructure to support it.”
If you’ve read the previous posts in this series, you have some idea why I think these statements reflect mistaken premises about the relationship between real estate development and Montgomery County’s ability to attract high-quality jobs and the workers to fill them. The basic argument goes like this:
- If the supply of housing does not keep up with even modest growth in jobs and population, residents who don’t have much choice about where to live and work will get squeezed hardest while residents who have skills that are most in demand elsewhere (who also tend to get paid more and therefore pay more in taxes) may consider taking a job in a place where they can get more and better housing for their money.
- The people whose choices of work location are constrained tend to have fewer skills that command a premium in wages, but this is not uniformly true – for example, people who work for trade associations, think tanks, law and lobbying firms, and other employers oriented around the nation’s capital might not find jobs that suit their skills in Pittsburgh, Austin or Raleigh. On the other hand, if we want to diversify away from reliance on government as the foundation of our job base we need to draw and retain people (and employers) who aren’t tied to the government, such as computer scientists or biologists. In this instance, the relative cost of living (driven largely by housing) is highly relevant to our competitiveness.
That’s why real estate development is essential to what most people think of as economic development, i.e., the ability to encourage employers to bring high quality jobs to Montgomery County. Housing is only part of the equation – employers also look for office space that suits the needs of their businesses and their employees, and Bethesda, Tysons Corner and downtown Washington continue to see construction of new office buildings even as vacancy rates in suburban office parks remain elevated – but I have emphasized housing because I have observed a huge gap between perception (that new housing is getting built at a rapid clip) and reality (that housing starts have been anemic), with serious consequences for affordability and in turn for our economic competitiveness.
The point is that real estate development is infrastructure.
Whether it involves construction of housing, office buildings, or for that matter retail space, real estate development supports economic activity directly and indirectly by serving basic human needs, i.e., creating places for people to live and work (not to mention to get a haircut, visit a doctor, have their clothes dry cleaned or put their kids in day care).
Of course, as people start occupying and using the new buildings constructed by real estate developers, other infrastructure such as roads, rail and bus lines, schools, and water and sewer pipes are also required. The main difference between infrastructure in the form of roads and schools and infrastructure in the form of houses and office buildings is that the former is built by the government while the latter is constructed by private firms. This difference does not change the fact that the buildings themselves are a form of infrastructure.
Some of you are probably thinking, “Wait a minute – why should we be encouraging more people and more growth? Even if real estate development is infrastructure, allowing this kind of infrastructure to be built just draws more people to our community, where they will add to the overcrowding of our schools and the congestion on our roads. Don’t build it and they won’t come!”
As I’ve discussed in previous posts, people have continued to move to Montgomery County and to the Washington area despite the low rate of new housing construction. Housing production doesn’t drive population growth; it’s a response to it.
Luckily, our region has added jobs (albeit with weak wage growth) and people move here to take them. In an earlier post, I showed that while our growth rate has slowed, we are still projected to add 200,000 residents by 2040, a 40 percent increase in worker households:
These job projections are based on data from the Metropolitan Washington Council of Governments that don’t make any particularly aggressive or optimistic assumptions, e.g., that Amazon will choose the DC region for its second headquarters or that we will experience another dot-com-style tech boom.
With an aging population, we’re also going to see an increase in the number of non-worker households:
This phenomenon is a product of the aging of the Baby Boomers out of the workforce. As the Boomers retire, some will decide to move out of the county or region, but others will age in place and downsize to another residence in our community. Taken together, new worker households coupled with a growing older population that stays here means that we will need housing for the incoming workers who replace retirees over and above the housing required to accommodate new jobs:
As I showed in an earlier post, if we don’t provide enough housing to meet this projected demand we will continue to see rising costs, disproportionately affecting renters and low-income residents. Here you can see that Montgomery County residents with household incomes between $25,000-50,000 a year pay almost 90 percent of their income to housing – far in excess of the 35 percent guideline beyond which a household is deemed housing cost-burdened:
Yet in 2017, Montgomery County issued only about a third of the permits issued in 1998 and less than half the 20-year average. Here’s a simplified version of a chart I shared in an earlier post, but with an additional bar showing permits projected over the next five years:
The yellow segment of the bar on the right side of the chart indicates the number of building permits projected to be issued over the next five years. The green segment of the bar shows the additional number we would need in order to keep pace with projected demand. As you can see, over the next five years we expect to fall short by about a third.
As I’ve explained, this shortfall has consequences: more workers chasing fewer units continues to drive up costs for everyone. I said earlier that housing does not drive population growth, but in extreme cases, where construction of new housing persistently lags population, housing may become unaffordable to large segments of the population, which may tend to discourage people from moving here or encouraging them to go elsewhere.
This kind of approach to the problems associated with regional population growth is worse than the disease, as it pushes people who have few constraints on where to live out of our community and causes major economic hardships for people whose choices are constrained. This situation makes it harder for employers to attract and retain the workers they need to thrive, burdens middle and lower income people with higher housing costs, encourages sprawl and accompanying increases in vehicle travel, and ultimately makes everyone pay more money for lower quality housing.
We are already feeling this squeeze in Montgomery County, the DC region, and in many other metro areas that proved most resilient during the downturn but now face the need to adapt in order to encourage stronger job and wage growth.