Would unbundling parking have a large impact on the profits of landlords?

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Question: 

My city has residential parking minimums and "bundled parking" so that the cost of parking is included in tenant's rent. This means that people without cars are subsidizing the cost of parking for people with cars. Some people in the city government want to unbundle parking so apartments can charge tenants for parking. Property owners would set the price of the parking. My initial reaction was that landlords would charge much more than the actual cost of parking, and make additional profit off their tenants, since, in most places, the only competing parking would be street parking. But now I'm not so sure. Presumably, car owners would consider the cost of rent + parking when picking an apartment, so that price would be subject to the same market forces as rent, so the profit for landlords wouldn't change very much. I guess my question is this: in the long run, would unbundling parking have a large impact on the profits of landlords? In the short term, is there a risk of price gouging, which would be politically disastrous?

Answer: 

This is an interesting question with a complicated answer. The short answer is that in the long run unbundling parking would probably 1) benefit landlords, 2) benefit tenants without cars, 3) increase costs for tenants with cars, and 4) lead to more street parking and associated externalities. 

Yes, bundling parking with rents shifts some of the burden of car ownership from tenants with cars to tenants without cars. This is inefficient and inequitable, so why does any place do it? One rationale is that requiring landlords to bundle parking with rent may cut down on street parking. Street parking often leads to congestion, increased traffic, and other problems that involve costs shifted from the car owner to others. 

Note that if parking is very abundant, this whole discussion is irrelevant. The problem is that parking is often scarce, especially in apartment communities and other areas of high-density development. Economists typically suggest that scarce resources can often be most efficiently allocated via markets, which implies that unbundling parking and charging for it would be more efficient. 

One concern is that landlords may have market power and charge inefficiently high rates for parking. That is not a major concern in the long run because, as you note, tenants could and should consider the cost of rent + parking when picking an apartment. This injects competition into the market and helps facilitate an efficient allocation of resources. Specifically, unbundling would allow a more efficient pricing of parking and housing. The explicit price of parking would go up, but the price of housing (rent) should go down. Those with automobiles would pay more than they do currently and those without automobiles would pay less than currently. 

Furthermore, being able to charge for parking might incentivize some landlords to provide more parking. Some landlords could also market low cost or “free” parking as an amenity. However, landlords will only voluntarily do this if it is profitable and it probably would not be profitable for all landlords in a densely populated area. Furthermore, some tenants can respond to high parking costs by not having a car, which limits the parking pricing power of landlords.

Overall, the additional flexibility from eliminating the bundling requirement would increase long-run profits for landlords. However, my hunch is that the increase in profits would be relatively modest.

You are correct to be worried about the short run. As with many policy changes, the devil will be in the details. It would be concerning if tenants keep the same rent as before and have to start paying extra for parking. A policy change would need to carefully consider the timing and how it affects previous lease contracts. Additionally, moving is costly, and the policy change may alter the optimal location decisions for some individuals; in other words, having to pay for expensive parking may incline some people to move to another apartment with cheaper parking. A politically shrewd policy might limit parking charges during the first year and then limit the annual increase over the first few years for previous tenants before parking charges are eventually completely unregulated.

Finally, local policymakers should expect unbundling to increase the demand for street parking, which may result in increased parking violations.

Answered by:
Dr. John Winters
Professor
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Last updated on February 8, 2021