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Los Angeles' Path to Apartment Affordability

Los Angeles' Path to Apartment Affordability

May 15th, 2018 by Zach Rocktashel

The Los Angeles multifamily market is at a fork in the road. On the horizon looms a decision that may impact investors, property owners, and renters. According to Richard Green, Director of the Lusk Center for Real Estate at USC, rent growth may be slowing in LA in response to new housing development in the area, yet Los Angeles remains one of the most expensive places for renters in the entire country. With affordable housing as their premise, there is a growing group of supporters that would like to repeal a law which, in conjunction with new development guidelines, has allowed multifamily development to flourish.

The 1995 Costa Hawkins Rental Housing Act is a California State Law which sets limits on the rent control policies that cities are able to enforce. The law’s original purpose was to reign in rent control in five major California cities, namely Santa Monica and West Hollywood. Before its passing, these cities actually enforced a measure referred to as vacancy control, which continued to cap a unit’s rent even after a tenant decided to relocate.

Under the current implementation, vacancy decontrol allows owners of apartment buildings, single family homes, and condominiums to raise the monthly rental rate to market upon an existing tenant’s departure. With the repeal of this measure on the ballot in this November’s election, there is a growing concern among investors and developers that instead of increasing the stock of affordable housing it will deter investment by owners of existing units and development of new supply.

The current expansion of the Los Angeles public transportation system has spurred development of affordable housing largely due to Measure JJJ. Passed in 2017, it incentivizes developers to include affordable units by rewarding them with density bonuses based upon how close a project is to a Metro rail station or bus stop. Ranked in four “Tiers,” there can be up to an 80% bonus in density, which carries a sliding affordability requirement along with it. With the scope of Measure JJJ in mind, along with the impact of these Transit Oriented Communities, there already exists a measure that looks to accomplish, in a more sustainable fashion, the same goals as the repeal of Costa Hawkins.

Not only are market rate developers aiding on the affordability front by including affordable units in their new projects, but these incentives are also being utilized by fully affordable developers. This dramatic increase in supply due to measure JJJ stands to benefit the development pipeline over the coming years. In the six months since the initial rollout of the Transit Oriented Community (TOC) guidelines, there have been 42 apartment plans with units set aside for low-income housing. The 42 projects under review include a total of 1,578 housing units. Of these projects, 17 have confirmed the allotment of affordable set asides. They amount to 981 total units, with 246 of them being affordable.

In addition to ground-up development, the underutilization of zoning in existing properties feeds into the housing shortage. However, there are a number of long term owners currently exploring this redevelopment opportunity due to the new density bonuses afforded to them through the TOC guidelines. Through this work, they create additional new construction, but are also subject to current rent control laws going forward on the number of units from their original asset.

These two measures, while seemingly on opposite ends of a wide spectrum of Los Angeles housing solutions, could not be any more intertwined in their effectiveness moving forward. Without the vacancy decontrol that exists through Costa Hawkins, developers will be less eager to provide additional units at market rates, let alone in the affordable space. Furthermore, a repeal of Costa Hawkins is not the key to affordable apartment units in LA, but rather increased affordability will gradually occur with new supply, as it will induce a softening in rental rates across both new and existing product. There is not a major city in the country that has more single-family housing than Los Angeles. LA is grossly under-zoned, and through the incentives available through the TOC program, the city is well on its way to decreasing the housing shortage. If Costa Hawkins is repealed, however, the incentives present will be superseded by the potential implementation of rent control for new developments, thus decreasing the willingness of developers to continue to build market rate and affordable units.There is no doubt that on a long-term basis, building more housing is the key to solving this issue. In the meantime, however, there should not be a short-term overreaction that could ultimately cause more harm than good to the market.

Contact Zach for more information:

Zachary Rocktashel
Investment Associate
zrocktashel@greysteel.com
O/ 310.651.8483