Costa Hawkins repeal in November is on everybody’s mind. This potential repeal is the single most important issue in the multifamily business in California. Barry Altshuler and many other developers believe that Costa Hawkins was the main reason for the robust multifamily construction during the past 20 years. Imposing rent control on new product will cost this state a significant amount of development, decreasing housing supply precisely when we should be increasing it. In various cities, officials are seeking vacancy controls as well—the practice of capping rents on renewals and new tenants. These policies threaten to open a Pandora’s Box of issues such as: reduction of property tax revenues; and, creation of slum properties as landlords neglect properties given the lack of return to capital investment.
Bob Hart CEO of TruAmerica said we need to put together a Marshal plan to deal with Homelessness, and we have affordable housing crisis. Bob requests that municipalities participate and help developers increase the supply and give incentives to developers for low income product to build more. The housing costs are causing economic distress among the working and middle classes, and even driving many people homeless. In fact, some studies have shown that almost the entire increase in the homeless population over the past few years is due to increasing housing costs. However, rent control and rent stabilization are not the answer because they produce perverse incentives. They decrease development, and, as such, make the housing problems worse. We need to encourage more development not less. This affordability and supply problem will not be solved fast enough because how long it takes to get development off the ground.
Construction and Development
Notes:
• Steve Anderson from CityView is trying to understand the renter / consumer and better engage and communicate with the them.
• James Bloomingdale from JRK Property Holdings is talking about his IRR. He is shooting for 18% IRRs and investing in lower end markets to achieve this type returns.
• Richard Mayer from GGLO experimenting with materials and parking solutions like mechanical parking to allow for more density and units.
Mark Sanders from Fifteen Group further talks about density and the need for more density in LA. Everything move down the scale because operators are buying B product and present it as A product. This is actually a positive trend, but it feeds into the affordability issue.
As with any market, in real estate, we must consider supply and demand.
The fact remains: we are not building enough apartment buildings in LA! Currently, LA registers only 2% growth and development activity compared to other cities such as Charlotte and Nashville which are growing at 8-9% . Also, looking at case studies like Seattle that managed to stop rent growth through high volume of Development that is a great example to cities in California.
The issue is that people now think that new development doesn’t help since it is concentrated mainly to luxury product and class A product. That is not true! The fact is that the market continues to exhibit pent up demand for such product. People who cannot find it, go down market, causing over demand in those markets. In order to stabilize B and C markets, we need to immediately expand supply in the A market it will trickle down no matter what.
In addition, The affordability crunch created with lack of class B and C development. Rent growth running at 3× for class B and C product that creating even a bigger affordability issue. San Diego market lower end product is also suffering as people move down the supply chain.
1.2mm renters in LA which is 53% of renter make in the market are making under $50K another 18% or 404,000 people are making $50K to $75K of income. The market and apartment developers are missing the opportunity in the lower income and lower end product, and building too much high-end product. It is very hard to build B and C product because of construction costs and land cost; however, we need to ultimately push all type of development to increase affordability.
Sagiv and Stas from idevelop.city