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Real Estate Economics • April 4, 2006

Condo Conversions: The Barton Report

 Condo Conversions:   The Barton Report

 

Last month, a few sleepless readers may have been able to wade through the BPOA submission to the City’s condo conversion workshop, then scheduled for February 14.  Very shortly after getting the BPOA document, the City re-scheduled the workshop for April 18.  Then, on March 2,  Steve Barton, Director of the Housing Advisory Commission, submitted his own exhaustive Report, and advised the City not to loosen the current rules against conversion. The following summarizes and comments on the Barton Report.

 

Steve Barton is a long-time friend of rent control and is the key staffer for the Housing Advisory Commission and the Housing Authority. His ultimate findings were predictable:  he thinks condo conversions are a direct threat to “affordable housing” in Berkeley.  He argues that a disproportionate number of tenants are low-income, and that rents would skyrocket if current rent controlled units were to become owner occupied. 

 

So far, no surprise.  The real shock comes on looking at the statistics Barton cites in support of his conclusions.  While for many of us the numbers prove the case against the status quo, for Barton they are a comforting reminder that after nearly 30 years Berkeley’s “all sticks, no carrots” approach to the housing market the correct one.  Here’s what he says:

 

1.“40 per cent of all tenant households had an income under $20,000, and median tenant household income was $27,341 in  1999”.

 

Here are the numbers cited by Mr. Barton to support his point:

           

            --in the year 2000, there were 44,995 living units in Berkeley

 

            --Of these, 25,745, or 57% of these units were rented.

 

--while Bay Area median household incomes were $63,100 in 1998 and $82,200 in  2005, the Berkeley median was only $27,341 in 1998, as reported by Barton for Berkeley.

  

How can it be that Berkeley tenants are so poor?  The answer is easy:  they aren’t. 50% of them are students with outside, unreported sources of income.  Mr Barton makes no effort to take them out of his numbers for the simple reason that they make it appear that the town is much poorer than is actually the case.

 

2. “From 1999 through 2005, median rents for all rent controlled units in Berkeley increased from $690 to $950, an increase of 38%.  This increase compares with a 30 percent increase an area median income and a 17% increase in the Consumer Price Index.”

 

Are Berkeley landlords that rapacious?  For the answer, take a closer look at Mr. Barton’s Table 2 (“Market Median Rents”):

 

 

1 BR

2BR

1998

$624

$777

1999

$950

$1300

2000

$1100

$1500

2001

$1200

$1650

2002

$1150

$1600

2003

$1100

$1500

2004

$1095

$1450

 

What the number actually say is that Mr. Barton’s “38% increase” occurred in a single year:  1998-99.  It is not pure coincidence that 1999 was the year that vacancy decontrol took full effect.  This meant that rents which for twenty years had been bottled up at 1978 levels were suddenly freed as units changed hands at market rates.  Essentially, twenty years of gradual increases in non-rent controlled cities took effect in a single year for Berkeley.  Since 2000, rents have, if any thing fallen.  Indeed they have fallen precipitously when measured against the increase in area incomes.

 

3. “As of December 2005, just 4423, or 25% of all rent controlled units have not had vacancy increases.  The average monthly rent for these units in $721. In contrast...median monthly rent of [decontrolled] units is $1204,  which is 67% higher than the average for long term rent controlled units.”

 

Here, push comes to shove. If the free market, unaided by rent control, has maintained level or declining rents since 2000, and if, as seems undisputed, vacancy levels are greater than 5%, where is the harm from converting, say, a thousand units over the next couple of years to condos?  Barton admits that  960 new units came on line between 200 and 2005 (this excludes student housing added by the University).  Additional thousands are in the pipeline. What is the harm in allowing a number of tenants to become taxpaying homeowners?

 

The answer is in the dwindling number of beneficiaries of old-style rent control.  These are the folks who got in under the pre-1999 rules and who continue to enjoy rents that are indexed to 1978 levels.  They are not necessarily “low income”; indeed the contrary is often the case. But they have a strong voice at City Hall, and powerful friends on the City’s staff.

  

There are lots of other tidbits in the Barton Report.  For example it is obvious that rental units in Berkeley are under-utilized:  46% have only one occupant. This too may be the result of policies which encourage landlords to limit the number of occupants in their buildings.  Mr. Barton also notes that most of the high-rise developers are obtaining subdivision maps and condo authorizations at the time of initial permitting.  This evades the City’s affordable housing fee, and shows that at least one, favored segment of the market will be able to respond to homeowner demand.  

 

Finally, Barton notes that the costs for converting to TICs (about $1005 per unit) are much lower than the costs of converting to condos ($16,154 per unit).  This difference does not include the current 12.5% affordable housing fee or the cost of bring older building to code (which is said to be a pre-requisite for conversion in Berkeley).  When the latter two factors are added to the mix, along with real estate commissions and closing costs, the total bill for converting a two bedroom unit to a condominium and selling that unit for $480,000 would probably be more than $130,000...not at all an attractive proposition.

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