Finding a solution to the affordability crisis plaguing California is a top concern for both residents and the development community. At RealShare Southern California last week, experts sat down to talk about the affordability problem, what is driving it and why the current proposed solutions—namely the potential repeal of Costa Hawkins—are not going to bring down the prices. The panel, Overcoming the Affordability Crisis, included speakers Jim Andersen, SVP at Trammell Crow Company; Mike Rovner, president and founder at Mike Rovner Construction; Kitty Wallace, EVP at Colliers International; Janet Neman, senior managing director at Charles Dunn Co.; Eric Sackler, director of Los Angeles at Coldwell Banker Commercial, with moderator Jeffrey Hudson, managing director of capital markets at Walker & Dunlop.
The cost of construction and land prices are the biggest cause of the affordability crisis. Andersen estimates that his hard cost expenses are $300 per square foot to develop an apartment building in Los Angeles, and all in, the cost is closer to $500 per square foot. To recoup those costs, Andersen said, “You either build tiny units or swanky places.” At $500 per square foot, rents need to be approximately $4 a square foot, putting rents for an 800-square-foot apartment around $3,200 per month.
“Jim is charging that because he is being forced to,” added Wallace. She explained that the properties priced higher are sitting on the market for months before they are rented, but apartments with $2.50 per square foot rents have a line out the door. Occupancy rates in Los Angeles are 95%, but for less expensive apartments, it is nearly 100%. Properties with $4 per square foot rents have occupancy rates closer to 90%. “We have low end and high end, but most people want something in the middle,” she said.
In addition to the high development costs, rents are heading up because there is an extreme supply issue, and the panelists were fervently opposed to any solution to the affordability problem that halts supply. “We aren't producing enough housing and we aren't producing the right kind of housing,” said Andersen. “Just when you have a shortage of supply, the price goes up. How can you address this with any issue that stops supply?”
It was a point about the legislation that both California and Los Angeles have seen recently in response to the affordability problem. Costa Hawkins is the latest ballot measure that Californians will decide on in November, and it could mean a widening of rent control throughout the state. “We do have an affordability crisis, but the problem is rent control,” Neman. The panelists agreed that a repeal of Costa Hawkins would make the affordability problem worse, not better. “Cost of housing is going to destroy the city. It isn't good for anyone. There is really a crisis,” added Neman. “At the end of the day, they have to make it easy for the developers.”
Costa Hawkins appeal aside, the cost of development is driving rents to historical highs, and they are going to continue to rise. Rovner says that construction costs will continue to increase this year thanks to a labor shortage. “Now, there are fewer contractors than 10 years ago and way more projects,” he said. “So, contractors are overcharging, and we have seen a rise in pricing.” Those costs will be offset, as they have been, by rising rental rates. Wallace estimates that rent increased 8% last year alone, and most investors believe that rents are going to continue to go up.
This has become the cycle of the affordability crisis, but there is some hope, according to Andersen. State Senator Scott Wiener brought a bill—SB 827—to the State Senate floor that would increase the density allowance throughout the state for projects near transit. Opponents called the bill aggressive, just as opponents of the Affordable Housing Bond Act, otherwise known as the Costa Hawkins repeal, have hailed widespread rent control as too aggressive. Although the bill did not pass, Andersen is taking some sanctity in the fact that there is a politician admitting to a problem and finding a development-based solution.
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Kelsi Maree Borland
