Old, run-down apartments -- please explain the economics! (tenants, landlords)

[usc619]

Strict code enforcement...oh wait, we dont need big gov intervention.

[jfre81]

There are a number of those complexes that at least try to look nice. The one I was in for ~5yrs made an effort. Ivy on brick and whatnot. People still trashed the place, but still. In the end, looking nice isn't going to make it any less old and broken down inside. Lipstick -> pig -> still a pig. The added costs for superficial things are likely to come out of the maintenance budget. It's not going to justify much higher rents, especially where they're already asking far more than they should be for a 40+ year old 1br apartment.

Turning anything much different out of that area isn't that much different. The coffee shops and so forth follow the demographic. This is more payday-loan joint territory than coffee shop territory.

Now, suppose in a few years we follow Colorado's lead and we end up with some coffeeshops in the Amsterdam sense around early 2020s?

It'd be hard to argue that it was better off before, wouldn't it?

[MidCenturyMania]

It looks like little chunks of Gulfton closer to Bellaire proper are being bought by developers and turning into gated communities (with the typical Midtown floor plan/architecture.) I'm guessing those tracts were old warehouses or industrial type properties because it sounds like the slumlords apartments' are too profitable to interest them in selling? Considering that these 3 story, zero lot homes are starting in the $400's, I just can't get my head around that!

[LocalPlanner]

A lower-end apartment community can throw off lots of cash if:

1. It stays well-occupied
2. The owner doesn't do more than bare-minimum maintenance (or sometimes less than that)
3. The tenants pay their rent regularly and on time

The trick is to not be overly strict with tenant screening, yet make sure real low lifes and troublemakers don't drive the tenants who satisfy criteria #3 away. Once that happens, then you're in a downward spiral - reliable rent-payers leave, occupancy dips (so criteria #1 fails too), but the only ones who are willing to live there are unreliable rent-payers - your cash flow dries up, no money for even minimal maintenance, and if there's debt on the property it ends up in default / bankruptcy, getting sold to the next slumlord, who is likely also using debt to acquire. This cycle only ends if (1) the government intervenes forcibly (rare in Texas) or (2) the property is located in a place where a much much higher-end development could work and so a developer will make an offer that the existing owner can't refuse.

[jfre81]

Originally Posted by LocalPlanner

A lower-end apartment community can throw off lots of cash if:

1. It stays well-occupied
2. The owner doesn't do more than bare-minimum maintenance (or sometimes less than that)
3. The tenants pay their rent regularly and on time

The trick is to not be overly strict with tenant screening, yet make sure real low lifes and troublemakers don't drive the tenants who satisfy criteria #3 away. Once that happens, then you're in a downward spiral - reliable rent-payers leave, occupancy dips (so criteria #1 fails too), but the only ones who are willing to live there are unreliable rent-payers - your cash flow dries up, no money for even minimal maintenance, and if there's debt on the property it ends up in default / bankruptcy, getting sold to the next slumlord, who is likely also using debt to acquire. This cycle only ends if (1) the government intervenes forcibly (rare in Texas) or (2) the property is located in a place where a much much higher-end development could work and so a developer will make an offer that the existing owner can't refuse.

Spot on. Also, Section 8 makes #3 much easier.

Developers will make those offers in areas where their planned developments are most likely to be profitable. We've seen that a lot inside the loop in Montrose, Upper Kirby etc. Around the West Alabama HEB comes to mind. It sits on what used to be older, lower-end apartments. The Ashby high rise site is another example. One of the forces that has brought the average rent way up in that area.

Going out toward Gulfton, Fondren Southwest, Bissonnet - that profit motive isn't there to justify paying money for complexes that are making their owners money. The Montrose, Upper Kirby, Museum District type of demographic isn't there.

[Houston parent]

Old apartments can be real cash cows. Apartments with 20+ units per acre paying even cheap rents still results in a land value that greatly exceeds what home builders would pay for 3-5 residential lots per acre. I used to live in Sharpstown Country Club Estates and dreamt of buying the crappy apartments at the entrance to the neighborhood, bulldozing them and selling the land to a home builder. The economics of that turned out to be not even remotely feasible.

Redeveloping old, higher density apartments into new lower density housing only works in places like Memorial or Bellaire. It doesn't work in places like Sharpstown or Greenspoint. Assume you have some crummy apartments worth $30,000 per unit at 20 units per acre. That equates to $600,000 per acre. Now add demolition, replatting, developer profit, etc. and divide that between maybe 5 single family lots per acre after you lose some portion to streets. That's well over $125,000 per lot and you're still probably in a sketchy neighborhood with crappy schools. That same lot in the suburbs might fetch $40,000 and the schools would be much better.

[LocalPlanner]

Originally Posted by Houston parent

Old apartments can be real cash cows. Apartments with 20+ units per acre paying even cheap rents still results in a land value that greatly exceeds what home builders would pay for 3-5 residential lots per acre. I used to live in Sharpstown Country Club Estates and dreamt of buying the crappy apartments at the entrance to the neighborhood, bulldozing them and selling the land to a home builder. The economics of that turned out to be not even remotely feasible.

Redeveloping old, higher density apartments into new lower density housing only works in places like Memorial or Bellaire. It doesn't work in places like Sharpstown or Greenspoint. Assume you have some crummy apartments worth $30,000 per unit at 20 units per acre. That equates to $600,000 per acre. Now add demolition, replatting, developer profit, etc. and divide that between maybe 5 single family lots per acre after you lose some portion to streets. That's well over $125,000 per lot and you're still probably in a sketchy neighborhood with crappy schools. That same lot in the suburbs might fetch $40,000 and the schools would be much better.

Exactly, any such redevelopment can only happen where you can fetch home prices that equate to the urban wealthy. And they're only attracted to an area once it's been thoroughly "pioneered", for the most part, by less wealthy folks who are generally regarded as "trend makers" such as artists or gays, or middle-rung educated folks. Oh, and it strongly helps for those trend makers to be Anglo. This is sort of "Step 0." Where the Heights and Montrose were in the early to mid 1990s. Southwest Houston, north Spring Branch, Inwood are just getting into this stage now, so it will be awhile. Briar Forest is further along - I could start to envision a developer acquiring an apartment complex or two near Lakeside / Walnut Bend for a luxury gated community.

[Glossa]

Originally Posted by LocalPlanner

Exactly, any such redevelopment can only happen where you can fetch home prices that equate to the urban wealthy. And they're only attracted to an area once it's been thoroughly "pioneered", for the most part, by less wealthy folks who are generally regarded as "trend makers" such as artists or gays, or middle-rung educated folks. Oh, and it strongly helps for those trend makers to be Anglo. This is sort of "Step 0." Where the Heights and Montrose were in the early to mid 1990s. Southwest Houston, north Spring Branch, Inwood are just getting into this stage now, so it will be awhile. Briar Forest is further along - I could start to envision a developer acquiring an apartment complex or two near Lakeside / Walnut Bend for a luxury gated community.

I wish they would acquire those disgusting apartments on Kimberly near Tully stadium (Memorial area).

[jfre81]

It's the gentrification cycle. We've seen it in action on the East End with "EaDo." It happened earlier in the Heights, which was once home to a much different crowd.

It works this way everywhere. I was in Cincinnati last night, and got to observe it under way in the Over-the-Rhine and Pendleton neighborhoods north of downtown. This was strictly "hood" as recently as a few years ago, and was the site of a Ferguson-like race riot in 2001 that began under similar circumstances. Now, the hipsters, artists, gays etc. have moved in. You can still go off into the side streets and find hood, the kind even I probably wouldn't hang around in, at least not with expensive equipment strapped around my neck.

This step-zero "pioneer" group, being generally young and/or childless, isn't looking for what buyers of single-family subdivision homes are looking for. School quality is a non-factor. More or less, they want to live in the city, and either don't want to or can't pay a lot of money to do it. They work. They're part of the economy. They still have the ability to drive the kind of development that makes this whole phenomenon happen. The recent surge in housing prices close in will certainly spread it in Houston, but there are a lot of closer-in, more urban areas still inside or near the loop. The new rail lines will bring it on the north, east and southeast ends of the loop. It's got a long way to go before it gets to the far southwest side, which is not drastically different in form from the outer suburbs, if different in demographics and socioeconomics.

[MidCenturyMania]

Thanks to you last several posters for breaking it down for me. I think I'll go buy a lottery ticket!