alt Hacker NewsBecause the law of unintended consequences is always at play in the public sector. In this case, the threat of too much regulation will kneecap the governments ability to eliminate the cost structures that will end up happening because of the drive for increased revenue per sqft.
The core reason SROs threaten larger spaces is that landlords can often extract more total rent from a single apartment by chopping it into pieces than by renting it as a whole.
Hypothetically: A landlord rents a 1,000 sq. ft. 3-bedroom apartment to a family for $4,500/month.
In order to extract more value, the landlord converts that same space into 4 separate SRO rooms with a shared kitchen. Even if they charge a "cheaper" rent of $1,500/room, the total rent roll becomes $6,000/month.
The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Then there’s the potential for cannibalization of supply:
If SROs become the most profitable way to use residential space, the market may see a "cannibalization" of family housing.
Landlords of market-rate buildings may subdivide existing large apartments into SROs to capture the higher yield.
Seeing this, developers then planning new buildings will design them with fewer large family units and more micro-units/SROs to maximize revenue.
This reduces the supply of 2- and 3-bedroom apartments. If the supply of family units drops while the number of families needing them stays the same, the price for the remaining large units goes up.
This will then potentially lead to increased land value as real estate prices are determined by the potential revenue a property can generate.
If a plot of land can now legally host a high-yield SRO building (generating $100/sq. ft. in revenue), the value of that land rises.
A developer who wants to build a standard family apartment building (generating only $60/sq. ft.) can no longer afford to buy that land because they will be outbid by the SRO developer.
To compete, the family-building developer must raise their projected rents to justify the higher land price. This raises the "price floor" for everyone.
> The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Yes, this is the whole point! And the reason it's more profitable is that there is pent-up demand for them. There aren't enough of them. We want them to be more profitable, so more are built/converted.
Here's the thing, though -- that's a temporary situation. As supply goes up, demand gets met. Once enough are built/converted, the price comes down, and an equilibrium is reached where a landlord will make the same profit whether it's a 3-bedroom or 4 SRO's. This means the market is now maximally efficient for both types of tenants.
In a free market, the most efficient balance of apartment types will naturally come into being. By prohibiting smaller units, we prevent that balance and discriminate against people who can't afford a full-size studio with bathroom.
So it's not cannibalization of family housing. It's just reducing the proportion of lots of other types of apartments a little bit -- including studios and one-bedrooms. Because this is desirable.