As our nation’s most populated state, burdened with an exorbitant cost of living, its hard to comprehend how California will emerge from our current housing crisis. The issue often becomes a sociopolitical tug-of-war, with long-time or native-born residents generally opposing development as they cling to the ideal of the old California. Our state was often romanticized as the “new world” or the “land of plenty” in generations past. Newcomers found space was abundant, and an image of suburban sprawl became the norm. A stark contrast to density-driven cities along the Atlantic, such as New York or Boston. Fast forward to 2019, and this mentality has produced a sea of single-family homes on postage stamp-sized lots, all stacked right up against each other. Congestion, soaring rents and home prices are additional side effects of this antiquated view, which is no longer sustainable. Los Angeles is in desperate need of more housing – and long overdue for a wake-up call.
The development community, and other forward-thinking individuals are eager to solve this problem, but in this land of sardine-packed suburbia, the only way is up. New building initiatives, which tend to incorporate density, are often met with opposition, mandated fees, and sky-high construction costs. In our April panel event, we hosted a group of development professionals and city officials to address the lingering question of whether or not Los Angeles can truly build its way out of the housing crisis. If the only way is up, just how willing are we to put the past aside and go there?
Not Much Left for the Middle
Kevin Keller, executive officer for the Los Angeles Department of City Planning, opened the panel by explaining how the government entity is tasked with reviewing all developments of scale, while also trying to ensure that new homes for all income types are being built. The building of new homes is widely accepted as a crucial component to ending the Los Angeles housing crisis. Moderator Edgar Khalatian, partner at Mayer Brown, a law firm specializing in real estate, added that even Mayor Eric Garcetti is in support of new development. Under Garcetti, the city of Los Angeles has implemented a goal of building 100,000 new units by 2021. Since 2013, when Garcetti first announced this intention, the city has approved permits for 92,000 new units. Khalatian added that while this number is large, it pales in comparison to what is needed to alleviate rent-burdened families across Los Angeles. In addition to the shortage of housing, there is most notably a shortage of affordable housing.
Housing permits are up 49% which is roughly 21,000 units, with affordable units increasing by almost 63%, but in terms of hard numbers, affordable housing units have increased by only 1,600 units. Approximately 1,100 of which are reserved for very low-income households. The propensity for city governments to reserve affordable housing permits to very low-income households is a noble act; however, it creates even more of a shortage and less of a solution for the majority of residents who fall somewhere in the middle of the affordability spectrum. Panelists all agreed that there is a mismatch between the housing supply and the jobs in our region, and the simple fact that affordable housing costs roughly the same amount to build as luxury housing, doesn’t seem to be helping anyone.
“Without subsidies, it is very difficult to build affordable housing,” said Khalatian. “Land costs are the same, entitlement process is the same, consultant costs are the same, the only difference is the revenue source.”
With much of the new developments being geared toward both extreme ends of the spectrum, many are asking themselves why the current development boom is not catered more toward middle-income households. Panelists agreed the incentivization of middle-income housing development needs to be prioritized in order to reach real solutions.
The Only Way is Up
The rate of return is also a major factor that either helps, or hurts development efforts – of all asset classes. Clifford P. Goldstein, founder of GPI Companies, pointed out that construction costs often have an overwhelmingly harsh effect on development.
“We are down to building on about a 5% to a 5.5% return on residential projects,” said Goldstein. “And there are some investors who simply won’t even take on a project with such a low return on cost.”
This is especially problematic for Southern California because the low rate of return threatens the flow of capital, which is essential to a healthy economy. As construction costs continue to rise, the rate of return is unlikely to increase. If this trend persists, Los Angeles is likely to see the capital necessary for development, move to other parts of the country with more promising rates of return.
“Development is inherently risky, and when looking at opportunities, we have to look at many different metrics,” said Patrick Rhodes III of Brookfield Properties. “We need to be able to develop to a percentage of yield that coincides with our cap rate, this is becoming harder and harder.”
This would only further compound the housing crisis as it would deter development even further, leaving Los Angeles with older and increasingly deteriorating units. Reducing the cost of development is a necessary step in the right direction, but accomplishing this is not an easy task. This would require the dismantling of multiple sets of systems across state and local jurisdictions which have often opposed large scale vertical developments, especially those which favor density.
“70% of people in Los Angeles agree we have a housing crisis, but around the same percentage (70%) don’t want to see more housing in their neighborhoods,” said Khalatian. “Large changes in policy will immediately spur more development, but people need to become open to it.”
A solution to the housing crisis in Los Angeles has many forces stacked against it. Cheaper development costs are a solution, although not the most feasible. What really needs to happen is Angelenos need to get out of their own way. Communities need to come together and find mutually beneficial solutions. Our 88-city nation-state needs to realize we are all in this together, and what is good for one neighborhood, is good for all. The dream of a big house with a white-picket fence, is a dream which ended decades ago – and we have run out of times to hit the snooze button. Solving this problem will take a great change, to both our urban landscape and our mentality. The solution to the housing crisis is in fact, more development. Los Angeles can build its way out of this crisis, and the only way is up.
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