The DC Rent Bubble and the "Quick Buck" Business Model

It is the "quick-buck" business model that has dominated most American corporations over the past three decades and caused the demise of many of them.
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Declining unemployment, growth in the last quarter of 2011 and "in-sourcing" that brings manufacturing jobs back to America are all great news for this nation. However, more remains to be done if we plan to save American businesses and consumers from the delusions of prosperity of the past three decades.

I am an economically diligent person. Since I moved to Washington DC in early 2004, I've been following the news of the then-growing real estate bubble and have thus preferred renting over buying. I was right. Many of my friends who bought property are now struggling with their under-water mortgages.

But unlike most of America's big cities, Washington -- the seat of the federal government and spending -- was spared a burst and saw instead mild decline in housing prices. Eventually, house buyers feared federal cuts would result in further property depreciation. Sellers, for their part, held on to their property, waiting for better days. This wait-and-see game resulted in low housing inventory and forced more people to stick with their rented housing. As such, a robust rent market attracted the big companies from around the country.

I had been living at my address on Massachusetts Avenue, North West, for years when a Chicago-based company bought the building and several other on the same street. The new owner started implementing a business model that mimics the one used by most big corporations: Instead of offering good quality services at competitive prices, they cut services, raise prices and scorch the barrel for hidden fees.

Of the fees that my new owners added was a $25 "billing fee" for water and trash that they started billing me separate from my rent. To save on expenses and maximize profits, the new owner company drastically cut on concierge hours, removed a complimentary coffee machine in the lobby, and demanded that we buy mandatory renters' insurance from a firm it probably owned.

The company then increased my rent drastically by $500 a month when offering me a lease renewal. Until then, I had been paying a raise of $50 a month with every annual renewal, presumably "to adjust for inflation," even though actual economic inflation stood near zero at times as the nation feared deflation.

In the Washington Metro area, the economy had stopped growing ever since the government started running out of bailout dollars in 2010. Unemployment was on the rise and the real estate market was dead. But it seems the company that bought my building was pressed to make money in DC, maybe to cover its losses in other cities or simply to show profit to its shareholders.

The problem with such business model is that it is disconnected from "market forces" that in principle regulate prices in free economies. Demand for house renting in DC was not rising as fast as the number of companies buying buildings and artificially forcing the prices up. The end result has been high prices and empty apartments that get rented away only when these companies give special offers by renting them for much less, and then hiking the rent after a year during lease renewal.

If you rent in DC, you cannot but notice how frequently people are moving in and out of their apartments, and I was no exception. After six years, I moved out of my apartment that remained on the market for 12 weeks. Had the rent been increased reasonably, and had I stayed, this 12-week rent, in addition to required maintenance between rents, would have saved the company more than the extra money that they were trying to make me pay.

Also when leaving, I could feel that this company would not pay me back my $500, even though I handed back the apartment in excellent shape. I was right. A few weeks later, I received a $225 check. I emailed asking for a breakdown of the discounted money. They sent me -- among other bogus expenses -- "$53.68" for carpet cleaning. Who charges such a fee, with fractions, for carpet cleaning of a two-bedroom apartment in Washington DC?

It is this "quick-buck" business model that has dominated most American corporations over the past three decades and caused the demise of many of them.

Airliners are a great example. First they started charging for food, then for luggage. They then shrank leg space, and added a dozen fees and penalties for virtually everything.

My wife travels a lot for her work and has accumulated tens of thousands of miles, which we sometimes use for upgrades during our trips. When we upgrade for free, they offer us bigger upgrades for some extra bucks. The problem is that even after upgrading the upgrade, we still felt the service is lousy. Complaining rarely goes anywhere and often costs more time and money.

After airliners, banks started charging fees for the money you keep with them, and for every other service that had been complimentary until not so long ago. Mobile companies followed with all kinds of fees, hidden and otherwise. My cable bill has increased from $75 a month in 2004 to around $165 today, and the service has remained the same.

Today, America's business model is about offering the most basic service, presumably at an affordable price, and then charging extra for all the other essential items, or leaving the customer using half a service. Who travels without luggage? Who rents an apartment but opts out of water or trash service? Who has a choice with titan cable companies monopolizing whole neighborhoods?

Those who were here in the 1980s would remember that tipping the waiter was 10 percent of the bill. It was later raised to 12, then 15, and now 18 or 20, with 25 for outstanding. Next time I'm going to a restaurant, I am asking for the option of self-service lest I pay half of my food's worth for my service, which is not changing with time anyway. Those who have been to Europe would know that waiters there work on salaries, not whimsical tips. Tips are called tips because they are supposed to reward outstanding waiters, not pin their livelihoods on tips alone while restaurants profit astronomically.

In the old times, America's companies used to strive for customer loyalty by offering as much quality they could in as low a price possible. This did not generate instant profit, but guaranteed business for longer periods of time. More customers, even with lower profits per customer, will still yield good overall profit. This is called mass market, not monopolizing the market then driving the service down the drain.

Personally, I cannot remember the last time I booked with an American airline when traveling overseas. But with monopolies like domestic flights, mobile and cable services, I have no choice but to choose one of these racing-to-the-bottom companies.

With America going back to manufacturing and to fixing the fundamentals of its economy, revising the business model might not be a bad idea after all.

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