Chapel Hill: Opinion

Let the market sort out supply and demand – Mark Zimmerman

Mark Zimmerman
Mark Zimmerman

The question had the best of intentions. A Chapel Hill Town Council member asked, “How can the council know if the market for apartments is saturated?”

The short answer is “you probably can’t.” A better answer is “you certainly shouldn’t try.” All of which begs another question, how should a local government evaluate new investment in our community?

Rentals have long held a large share of our town’s housing. But in recent years, Chapel Hill’s new housing stock has shifted even more heavily to apartments. Most of the approved, but not yet built, housing units are also multi-family rentals. There are both national and local reasons for this. Nevertheless, with so many new apartments cropping up, it’s natural to wonder if we’re risking being overbuilt.

Such concerns should not be a factor when the Town Council considers applications for new apartment projects. Evaluating supply and demand should be left to the market and the developers risking their money on the investment. There are several reasons for this.

First, our Town Council members, indeed even our city planners, aren’t competent to do so. Judging how current capacity plus projects already in the pipeline will meet future demand is extremely complicated. Factors include growth trends, location, the product being offered and pricing. Government employees and elected officials are not in that business. They don’t have the knowledge base to make reliable conclusions.

Developers, on the other hand, have the expertise and real-world experience to best assess the prospects for a project. In the case of rental housing, they collect better data than is available publically. This is their business.

They also have more reason to care. After all, it’s their money on the line. Multi-million dollar investments are not made on a whim. In fact, the source of much of the money – banks and other institutional investors – provide a backup check on a project’s viability.

That’s not to say they are perfect. This is an inexact science even for the best practitioners. However, in business (as opposed to much government activity) poor decision makers are weeded out, while competency is rewarded.

Developers have the expertise and real-world experience to best assess the prospects for a project. ... They also have more reason to care. After all, it’s their money on the line.

What happens if a developer misjudges the market and builds a significant project which fails to attract the expected demand? Shouldn’t the town be concerned about having to deal with a failure, especially since we want successful use of our scarce land?

The simple answer is no. The only people who need to fear failure are the people whose money is on the line. If demand for new rental has waned, the building won’t be abandoned. The landlord will have to reduce monthly rates and/or offer concessions like free months to get the price down to where demand will support the project. Their return on the investment will suffer, but the building will eventually be filled. Lower prices will have the ancillary benefit of providing more competition around town.

Even if the developer itself fails, a new owner will be found at a price that will make the project viable. Indeed, that is exactly what happened during the recession with Greenbridge (a condo project, but analogous to apartments for this purpose). The original owners lost their investment, but the new owners profitably sold the remaining units at much lower prices. Importantly, the tax value of the property remained the same. The town didn’t suffer at all.

There are many aspects of development proposals that fall within the purview of the Town Council’s decision. Is the use appropriate for the area? How will increases of traffic be handled? Will the environmental impact of the building be satisfactorily mitigated? These are appropriate and important.

But basing approval on whether the Town Council thinks there is demand for a project is not. When government intervenes in the process of anticipating needs and efficiently allocating capital to meet them, bad results follow. One only has to look at the economic disorder inflicted when the market was superseded by the Soviet Union’s Gosplan or the Venezuelan Planning Ministry to understand that.

Mark Zimmerman lives and owns a small real estate business in Chapel Hill. It is not involved in the rental business. He can be reached at