Supply/demand for RE

The size of the apartment I purchased was 3x the size of my rental apartment. People tend to get more space when they buy vs what they had when they were renting. You can probably compare the size of rental units vs owner occupied units to get an idea.

What is the implication for RE demand and pricing? Is it that when % ownership goes up, sq ft per person consumption goes up, creating a shortage of housing?

Also, is this not because you bought when you were ready to increase your space consumption probably based on income/stage in life etc? I also bought an apartment almost twice the size of my rental one, but was definitely ready to spend more either way.

Krolik, You are the queen of looking for single variable answer to real estate which is multi variable equation with fair bit of randomness.

As a counter example, I bought an apartment that was almost exactly the same size as the one I was renting. In your potential equation, there was no change in the regional demand for sq. ft., yet it had an effect on prices (albeit tiny).

But yes, on a macro basis, developers consider gross regional demand for space vs current space available when they think about where to invest in constructing housing or commercial space of any type. But this metric isn't fine grained enough to drive the type, style, and ownership structure of what's being constructed or purchased/rented. And 'type and style' defines a very broad range of the variables 300 alludes to (e.g., population age & wealth, currently available housing stock and age, demographic tastes and trends, development costs & times, availability of consumer credit, forward interest rates, expanding/contracting economy, subsidies*, etc.). Developers who get all or most of these other variables right will make a load of money. Those who get it wrong, not so much.

* shorthand for "the government's opinion about what should be done".

@300_mercer
ouch... of course there are a lot of factors, I am trying to figure out specifically the effect of % home ownership factor and its mechanism. Does Wall street buying homes to rent them out really result in material increase of "cost of housing"? This has been a popular headline in the news, but does it actually work like that in practice? Did Wall street landlords by increasing rental housing stock help keep rent affordable (which in turn might dissuade consumers on the margin from buying)?

Disclaimer:
Obviously there are multiple price/quality tiers and regional differences (less space demanded in urban areas). Government/tax policies affect the decision to rent or buy on the margin. Also, plenty of high end Manhattan real estate trades more like art, purchased as a store of capital, not in line with some "intrinsic value". Demand for those units seems to be often driven by capital market cycles and foreign country policies on moving capital across borders. And there are various subsidized units also sold/rented not in line with market value.

@Aaron2
>>As a counter example, I bought an apartment that was almost exactly the same size as the one I was renting. In your potential equation, there was no change in the regional demand for sq. ft., yet it had an effect on prices (albeit tiny).

In my equation that might have reduced rental prices in the area which might have convinced the next potential buyer to keep renting?

"Does Wall street buying homes to rent them out really result in material increase of "cost of housing"

I do not have data to support it but this is the intuition.

It does as buyers are competing with Wall Street cash buyers who do portfolio financing and have economies of scale when it comes to repair etc. Then Wall Street firms dress it up and charge a premium to renters for convenience of renting from some one whose properties are well maintained (with lower cost due to scale advantage) and marketing prowess. Those rental options were not available before Wall Street buyers. Wall Street buyers will say that they are just providing better quality product but we know Wall Street has ROE target which is higher than mom and pop owners. So some one is paying for that ROE. Think Related charging a premium per sq ft vs rentals by individuals. Is there exact analysis with numbers on that. I have not seen it but makes sense intuitively.

Lastly, wall street can accumulate these portfolios and exit as public REIT which gets a public equity multiple.

@300 yes - the intuition presented on the news channels is they make a profit, so that must be bad for the renters. However, if they have large enough economies of scale savings, can't they achieve their higher ROE target by lowering costs?

In my personal experience, the level of service from a professional landlord is a real and valuable thing. I was renting from Rose Associates and was very happy with the service. When my heating unit leaked, they came with a box of flooring material and replaced it within 2 days. It was the same flooring material in all apartments in a high rise, and potentially in few adjacent buildings also owned by them. And the handyman was on staff.

Prior to that I rented in LES from some smaller company in a building with 12 units. Could not get any repairs done for months. They were never picking up the phone because it was always some Jewish holiday, almost every day (which I firmly believe was part of their cost saving strategy). Not every professional landlord provides a great service.

Now I am in an owned unit and do not have any spare flooring material. If something leaks and damages my floor, I'd be scrambling and would need to pay $$$$ for a handyman.

The cost of financing is an interesting point, though a search through 10k of Equity Residential reveals "net interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year ended December 31, 2021 was 3.52% as compared to 3.94% in 2020." This is low, but higher than conforming loans for primary residence during the same period for a person with good credit, potentially only very marginally lower than mom and pop investor loans during the same period.

"can't they achieve their higher ROE target by lowering costs?"

Very hard with fat pay and multi million bonuses (effectively a part of cost structure) for top dogs on Wall Street. You can also look at Wall Street involvement as more money available to buy in that segment in the market with end result a sale to public market REIT. That almost always raises the prices.

@ Aaron2 "Developers who get all or most of these other variables right will make a load of money. Those who get it wrong, not so much."

Indeed, and the developers who get it right are the ones who force it right, with power and money to maneuver our local government.
Companies like Related, SL green, etc.

Indeed. If you are a large developer, zoning variance, rezoning and development incentives from local govts are critical.