How are Commute Time and Rent Level Related?

Published by H. Blair Kincer on Wednesday, September 21, 2016 - 12:00am

Last month, Fivethirtyeight published analysis that shows a clear relationship between the commute time and rent level that aligns closely with what Novogradac & Company has found when evaluating locations for low-income housing tax credit (LIHTC) properties.

Fivethirtyeight analyzed the commute times to New York City and rents for 175,000 apartment listings from 2015 from StreetEasy From these listings they found a clear relationship between the commute time and rent. On average for each minute an apartment is closer to the central business district by subway, the rent for a one-bedroom unit increased by $56 per month. However, for apartments more than a 30-minute commute from the city, the relationship breaks down, indicating diminishing returns for proximity.

Novogradac’ & Company often evaluates the location of proposed LIHTC properties, and Fivethirtyeight’s analysis echoes comments we regularly hear from property managers during the research process for our market analysis.  Commonly referred to as “linkages,” a property’s location in relation to work, services and retail affect rent determinations. 

As Fivethirtyeight notes, its analysis does not take into account several factors. First, neighborhoods with shorter commuting times to the central business district have desirable features such as restaurants, shopping, and convenience stores, proximity to which all increase the value of a rental property. Next, the analysis does not take into account the distance to the nearest subway station. It assumes that all commuters are traveling to the central business district, when some number of residents might live and work in the same neighborhood, obviating the need for a commute. Lastly, the analysis does not factor in quality of the apartment listings.   

Still, the data illustrate that proximity to employment can be of value to a rental property. A longer commute costs an individual valuable leisure time. New York City and the New York Subway are unique in both their size and in the number of people who live in and commute to the city each day. However, in cities with large public transportation systems, the reliance on public transportation is an important factor when looking at the location of a property. Further, disruptions in public transportation that increase commute times may have a negative impact on properties’ operational performance. Conversely, development of public transportation that shortens commute times for residents, or makes commuting easier, can have a positive impact on the performance of properties.

With so many LIHTC properties achieving maximum income nationally, are locational differences such as these as relevant? Simply put, yes. Because Novogradac & Company’s clients often evaluate several locations when deciding to develop a property, comparative market and rental rate analysis is crucial. The design of the program exposes the LIHTC property to market risk; even in markets where maximum rent is viable a superior location will aid in maintaining strong occupancy and achieving a rapid initial absorption rate and release rate over the property’s life. This issue is even more significant with the increase in development of mixed-income properties. Finally, underwriters often evaluate rent advantage as an indication of the riskiness of proposed rents.  Understanding what drives rents in a market is relevant even in a restricted rent scenario.