The Perfect Storm of Housing Affordability

DTLA - As an architect active in mixed-use developments and as Chair of the Planning Committee for the Downtown Los Angeles Neighborhood Council, the question I get asked the most is, “Where are we in the development cycle?” It makes sense: With more than 10,000 housing units under construction in Downtown and another 15,000 units in the pipeline, people want to know if the boom is near an end.

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Answering the question requires looking at what’s driving the demand. According to a study by Harvard’s Joint Center for Housing Studies, renter households in the United State increased from 34 million in 2005 to nearly 43 million in 2015. L.A. has a housing shortage of 82,000 units, which helped prompt Mayor Eric Garcetti’s goal to create 100,000 residential units by 2021, with approximately 46,000 of them priced at levels deemed “affordable” for low- or moderate-income individuals and families.

The projected number of units to be completed by 2021, however, is only about 60,000, according to a 2013 report from the City Planning department.

The current vacancy rate in the city is very low, near 3%. According to Richard Green of the USC Lusk Center for Real Estate, rents will continue to rise until we reach a 5% vacancy rate. This means people will pay more while a supply problem endures. The issue is particularly pronounced in Downtown, where apartment buildings fill up nearly as fast as they open.

So back to the question: Where are we in the cycle?

The demand is there, but I’m starting to see six factors that are converging at once.

  1) Community Opposition: In most parts of Los Angeles, getting a project approved is a drawn-out battle. Today there is a growing uproar over what people in communities such as Hollywood see as out-of-control development. A group called the Coalition to Preserve L.A. is seeking to get the Neighborhood Integrity Initiative on the March 2017 ballot in the effort to, in its backers’ eyes, preserve “neighborhood character.” If approved, it would essentially stop all transit-oriented development and other areas targeted for growth for two years and prohibit city officials from making project-specific changes to the city’s General Plan. There would be an unintended effect: Freezing the supply of housing will increase rents. 

2) City Policy Changes: The city is looking at a couple measures that would increase the cost of building housing. It gets a little arcane, but shifts to the Quimby fees system, which developers pay for park creation, and Garcetti’s proposed “linkage fee,” which would essentially tax market-rate housing projects to raise money for affordable housing creation, have the potential to add about 5% to the overall cost of housing production, which will be passed on to consumers.

3) Union Labor: The Better Build L.A. coalition is pushing a November ballot measure that would require that affordable housing be included in all projects that seek to exceed current land designation restrictions, which often applies to transit-oriented developments and projects in industrial areas such as the Arts District. The measure will include a provision that developers pay prevailing wages and use union construction crews. Today, many market-rate apartment buildings in L.A. are built with non-union labor. The requirement for union workers will increase a building’s construction cost by 20%-30%.

4) Rising Construction Costs: The seven-story Avant project in South Park broke ground in 2012 and cost about $200 per rentable square foot. Similar projects that break ground today will cost about $300 per square foot, as sub-contractors have increased their prices due to more construction jobs and a shortage of qualified workers. The increasing costs are even more pronounced with high-rises: 8th+Hope, a luxury building that broke ground shortly after Avant, cost just under $270 per square foot. In 2016, high-rise developers can expect to pay close to $400 per square foot.

5) Land Value: Here’s another Downtown now-and-then comparison: In 2012, developer Sonny Astani purchased a three-acre parcel at 12th Street and Grand Avenue in South Park for $29 million, or about $221 per square foot. Two parcels across the street on the other side of Grand were purchased by the developer City Century in 2015 for about $585 per square foot. That’s not an outlier in today’s Downtown.

6) Rent Affordability: Five years ago, developers knew they needed to get $2.75 per square foot in rent in a seven-story (or less) building to make a project pencil out, and $3.80 per square foot in a luxury high-rise. Today, the rent needed for the projects to be economically viable is around $3.25 per square foot for seven-story buildings and $4.40 per square foot in a high-rise. In most of Downtown now, land costs are too high for a seven-story project. The majority of the projects being proposed today are high-rise, limiting the pool of consumers who can afford the rents.

All these factors will increase the cost of building housing. Those 10,000 units under construction will come to the market, but we’ll have to see how long they take to fill up and how many consumers are willing and able to afford $3,000 one-bedroom or $5,000 two-bedroom apartments.

If the Neighborhood Integrity Initiative and/or the Better Build L.A. proposal pass, the affordability crisis could be exacerbated. If city fees rise and additional costs are added, rents will increase. If investors and lenders lack confidence that consumers will pay these higher prices, then the housing will not get built.

In other words, we may be facing the end of the cycle. Housing is a product and like it or not, the prices are driving a change.

Simon Ha, AIA, LEED AP is a principal and urban mixed-use practice leader at Steinberg, Chair Elect for National American Institute of Architects Housing Knowledge Community, and a member of Re:Code LA Zoning Advisory Committee for the Los Angeles Department of City Planning.

© Los Angeles Downtown News 2016