Los Angeles Multifamily Affordability

The Los Angeles real estate market has long been known for its high prices and limited availability, making it challenging for many individuals and families to find affordable housing options. Based on a 2021 report by NLIHC, the availability of affordable rental units is limited for households earning at or below 50% of the area’s median income. For every 100 such households, there are only 24 units available. Additionally, the 2022 Affordable Housing Needs Report reported that renters in Los Angeles County need to earn three times the City of Los Angeles minimum wage just to afford their monthly asking rent.

In recent years, market conditions have proliferated affordability issues. A recent report by the Public Policy Institute of California reveals that seven in ten Californians say that housing affordability is a big issue in the state, and one in three say that their housing costs are forcing them to consider moving to another state. Notably, Los Angeles has the highest concentration of individuals facing homelessness in California, according to the Legislative Analyst’s Office.

This article explores the factors contributing to the current state of the Los Angeles housing market, as well as various solutions and initiatives being implemented.

Housing Costs

The current state of the multifamily market for Los Angeles County reflects the trend of increasing housing costs. According to C.A.R.’s resale report for May 2023, the median sold price of existing single-family homes in Los Angeles County was $744,770, showing a slight increase of 0.8% compared to the previous month. Meanwhile, rental rates for multifamily properties in Los Angeles have surged 11.2% higher than their pre-pandemic peak. Average market rents have reached $2,179 per month, which is approximately 35% above national averages.

Factors Contributing to Affordability Challenges

Limited Housing Supply

According to Los Angeles Almanac, from 1850 to 2020, the population of Los Angeles County expanded to be 2,837 times larger. In comparison, over the same span, California’s statewide population increased by a factor of 427. These population surges have amplified the strain on housing availability and affordability, illustrating an escalating demand for housing solutions. According to data from the California Association of Realtors, the Months Supply of Inventory (SFH) for Los Angeles County is now 2.2 months. The SFH represents the number of months it would take to sell all the homes on the market based on the current sales pace if no new listings were added. The current supply falls below the level recommended by economists for a well-balanced market, which is around six months. Cal Matters, a nonprofit newsroom in California, highlights how the “California Housing Partnership estimates it needs to be building closer to 120,000 affordable units a year.” The low inventory level exacerbates the already high demand, creating a highly competitive housing market. Further, the imbalance between supply and demand puts upward pressure on prices.

Income Inequality and High Cost of Living

Income inequality and a high cost of living are other factors contributing to affordability challenges in the Los Angeles multifamily market. Two percent of California’s population resides in the 30 wealthiest zip codes, but astonishingly, these areas hold 20% of the state’s entire net worth. The gap between high and low incomes is significant, with a large portion of the population earning wages that are insufficient to meet the high cost of living.

As highlighted by RentCafe, “the cost of living in the city of Los Angeles is 8% higher than the state average and 51% higher than the national average. Los Angeles, CA housing is 140% more expensive than the U.S. average, while utilities are about 11% pricier.” When it comes to basic necessities such as food and clothing, they cost around 16% more in Los Angeles, CA, than in the rest of the country. The combination of rising housing prices and high cost of living creates a situation where many residents struggle to find affordable multifamily housing options, perpetuating the affordability crisis.

High Material Costs

Developers are facing significant challenges in constructing affordable housing due to the costs of materials. According to Janover, the average construction cost for a multifamily development in Los Angeles is around $500 per square foot, which is significantly higher than the national average of $398 per square foot. The high prices of construction materials have created a substantial gap between the expenses associated with building and maintaining affordable housing units and the rent that most individuals can afford to pay. This affordability gap poses a considerable obstacle for developers striving to create housing options that are accessible to a wide range of income levels. As a result, many developers are compelled to focus on constructing class A multifamily developments that can generate higher rents, as these projects are more financially feasible. Additionally, a recent report by Apartment List reveals that Los Angeles ranks near the bottom among the sunbelt metros regarding apartment permits. The region approves around 2.5 new units per 1,000 residents. The slow rate at which new construction permits are being authorized further exemplifies the housing issue.

Zoning Regulations

In Los Angeles, zoning restrictions have become a significant contributing factor to the affordability challenge in the city. These laws can impose limitations on the use of a property, making it difficult for developers to fully leverage their investments.

Height and density restrictions are another aspect of zoning laws that further compound the issue. These limitations can hinder the development of large, high-rise buildings in certain areas, limiting the development of multifamily apartments. Further, a recent study revealed that a significant 78% of residential land in the greater Los Angeles area is designated exclusively for the development of single-family houses. Such restrictions make it challenging to meet the growing housing demand, exacerbating the affordability crisis in the market.

Housing Affordability Programs and Initiatives

Affordable Housing Programs

In Los Angeles County, there are several affordable housing programs aimed at addressing the housing affordability issue for renters. The City of Los Angeles Housing Department (LAHD) provides two notable programs, namely the Low Income Purchase Assistance (LIPA) and Mortgage Credit Certificate (MCC). The LIPA program is designed to assist first-time, low-income homebuyers in purchasing homes within the City of Los Angeles. It provides loans to cover the down payment, closing costs, and acquisition expenses, making homeownership more attainable. On the other hand, the MCC program offers a valuable benefit by providing a dollar-for-dollar reduction to the potential federal income tax liability of the homebuyer. This reduction effectively increases the household income available to qualify for a home mortgage, making it easier for individuals and families to secure affordable housing options. Additionally, the U.S. Department of Housing and Urban Development provides a COVID-19 Rent Relief Program and subsidized apartments that make it easier for renters to afford their monthly payments.

Local Programs

Local initiatives have played a crucial role in addressing the affordability crisis in Los Angeles. One such initiative is Proposition HHH, which authorized a $1.2 billion Homelessness Reduction and Prevention, Housing, and Facilities Bond. This initiative aims to support the development of 7,000 permanent supportive housing units for individuals at risk of or experiencing homelessness. Additionally, the L.A. County Housing Innovation Fund II is a revolving loan fund of approximately $70 million, administered by the Los Angeles County Development Authority in partnership with community lenders. Since its inception in 2013, LACHIF II has lent nearly $70 million to affordable housing developers, leading to the development or planning of close to 2,100 units of affordable housing in the region.

Rent Control Policies

The Los Angeles County Rent Stabilization and Tenant Protections Ordinance (RSTPO) is a local law that has been enacted to regulate rental properties and provide stability for tenants. As property owners, it is important to understand the implications of the RSTPO on rental income and property management. The ordinance sets limits on annual rent increases, tying them to the Consumer Price Index (CPI) to ensure they are reasonable and in line with economic trends. Additionally, The LA County Rent Stabilization Ordinance (RSO) limits rent increases and provides eviction protections for most residential rental units in unincorporated areas. Rental units under the City of LA RSO have a rent freeze until January 31, 2024. While rent control policies aim to protect tenants, it is essential for property owners to navigate the regulations and explore alternative strategies to maintain a fair return on their investments.

Here are some additional laws that have been implemented in the past: 

• The passage of the California Tenant Protection Act of 2019 (AB 1482) introduced rent control measures and placed limitations on rent increases for certain properties. This legislation aimed to enhance tenant protections and stabilize rental rates in the city.
• In March 2020, Los Angeles passed the Permanent Rent Control Ordinance, which expanded rent control regulations to cover more rental units in the city. This law further strengthened tenant protections and placed limitations on rent increases for a wider range of rental properties.
• Accessory Dwelling Unit (ADU) laws have been revised and relaxed in California to encourage the development of accessory dwelling units, also known as granny flats or in-law units. These laws make it easier for owners to construct and rent out ADUs, providing more affordable housing options and addressing the shortage of available housing.
• SB 9 permits the conversion of existing single-family homes into duplexes, potentially allowing up to four homes on parcels that currently have only one. It also allows single-family parcels to be subdivided into two lots, and a new two-unit building can be constructed on the newly formed lot. This law aims to increase housing density and provide more housing options in California.

Proposed Assembly Bills

The following bills are currently under review by Assembly or Senate committees:

• AB 309: The proposed bill establishes the California Housing Authority, a public entity focused on developing “social housing.” Social housing, which would be funded by the government, aims to provide housing for residents across all income levels.
• SB 4: This bill proposes a $10 billion housing bond with a goal of funding affordable and supportive housing, including $5.25 billion for the Multifamily Housing Program, $1.75 billion for supportive housing, $1.5 billion for rental housing preservation, and more.
• SB 440: The bill allows multiple local governments to form a regional housing authority. Its main objectives include raising and managing funds, as well as providing technical support, to facilitate affordable housing development at a regional level.
• SB 555: This bill would establish The Stable Affordable Housing Act of 2023, which aims to develop social housing using a combination of acquisition and new  production strategies. The bill sets a target of adding 1.2 million units of social housing over the next ten years and 600,000 units within the next five years. Among these, at least 200,000 units are aimed at being affordable for extremely low- and very-low-income households.
• SB 567: This bill, also known as the Homelessness Prevention Act, enhances housing stability for a larger number of renter households. The bill closes loopholes that have led to widespread abuse of no-fault just causes for eviction. It also broadens the scope of protected tenants and sets a more reasonable cap on allowable rent increases.

Incentive Programs for Development

The California Department of Housing and Community Development (HCD) has recently announced the allocation of over $33 million to 18 jurisdictions in the first round of funding for the Prohousing Incentive Pilot (PIP) Program. This program aims to address the housing crisis by providing additional community development resources to local governments that have been designated as Prohousing. By offering financial incentives, the PIP Program encourages these designated jurisdictions to expedite the production and preservation of affordable housing. This proactive approach seeks to foster collaboration between state and local entities to combat affordability challenges and increase the availability of housing options for Californians in need. Further, the Los Angeles City Planning website highlights the Executive Directive (ED1), which “expedites the processing of shelters and 100% affordable housing projects in Los Angeles. Eligible projects receive expedited processing, clearances, and approvals through the ED1 Ministerial Approval Process.” Multifamily property owners stand to benefit from the program’s focus on promoting affordable housing, as it can create a more conducive environment for the development and operation of affordable rental properties.

Innovative Solutions and Strategies

Transit-Oriented Development & Mixed-Income Housing

Strategic placement of housing near public transportation hubs benefits multifamily property owners by increasing the demand for housing in these desirable locations. Density Bonus is a local incentive program that encourages on-site affordable housing in multifamily zoning areas. Alongside the City’s Transit Oriented Communities (TOC) Incentive Program, it plays a significant role in producing mixed-income and 100% affordable housing in Los Angeles.

According to Local Housing Solutions, “proposals for mixed-income developments that include an affordable component may draw less resistance than proposals for a development that is 100 percent affordable” due to concerns about the “quality of management or maintenance in affordable developments or negative preconceptions about the tenants.” By integrating mixed-income housing within these developments, property owners can create a diverse community that appeals to a wider range of residents. This promotes inclusivity and provides the opportunity for multifamily property owners to offer housing options at various price points, catering to different income levels.

Public-Private Partnerships

Multifamily property owners can benefit from public-private partnerships in affordable housing initiatives. Collaborating with government entities, private developers, or nonprofits allows for the pooling of resources and expertise. These partnerships can result in the construction of mixed-income developments or the rehabilitation of existing properties to provide affordable housing options. By participating in these partnerships, multifamily property owners can access funding, tax incentives, and support for their projects, facilitating the creation of affordable housing units.

Technology-Driven Solutions

Leveraging technology in the affordable housing sector can be advantageous for multifamily property owners. Digital platforms that streamline the housing search and application processes make it easier for property owners to connect with potential tenants seeking affordable housing. Additionally, technology can optimize efficiency in construction methods, reducing development costs for multifamily properties. The use of AI and data analysis can also assist property owners in identifying individuals with the greatest financial need, allowing for targeted assistance and support.

Adaptive Reuse

Adaptive reuse projects entail repurposing vacant, unused, underutilized, foreclosed, and abandoned buildings to new, sustainable, and better utilization. The increasing effort to re-develop forgotten or neglected areas is transforming neighborhoods where vacancies and developable land are scarce. Recently, Senator Wiener introduced two bills aimed at using adaptive reuse to tackle the affordability crisis head-on. Senate Bill 4 proposes a pathway for nonprofit colleges and faith organizations, including churches, mosques, and synagogues, to repurpose their underutilized spaces into much-needed affordable housing units. Additionally, Senate Bill 423 seeks to solidify the streamlining process for developers, offering a permanent framework for converting and repurposing properties in cities that have fallen short of state-mandated housing targets.

How are Investors Responding?

Despite the affordability issues of renters and the high cost of entry to the market, investors are still highly active and recognize that paying a premium is worthwhile, especially in markets like Los Angeles.

Over the years, cap rates have shown a downward trend, reflecting increased investor demand and higher property valuations. According to MSCI, between 2010 and 2020, the average cap rate for multifamily properties in Los Angeles decreased from approximately 6.5% to 4.5%. The cap rate currently stands at around 4.6%. This overall decline indicates a higher willingness among investors to pay a premium for multifamily assets in the city.

However, the recent rise in interest rates has introduced a new dynamic into the equation. As interest rates increase, the cost of borrowing also rises, leading to higher monthly mortgage payments for multifamily property investors. This, in turn, can impact the cash flow and return on investment for these properties. The higher borrowing costs can l limit the purchasing power of buyers and potentially lower the Loan to Value (LTV) ratio, which plays a crucial role in real estate transactions.

To adapt to this evolving landscape, investors are taking various approaches. Institutional investors like Blackstone are expanding their portfolios, accounting for over one in five multifamily units purchased in LA since 2010. Private equity funds such as Starwood Capital, with substantial capital reserves, are focusing on value-add opportunities in the workforce housing sector.

To navigate this landscape effectively, it becomes crucial for multifamily investors to assess the impact of interest rate hikes on their investment goals and make informed decisions. They may explore alternative financing options, such as fixed-rate mortgages or seeking out lenders with more favorable terms, to mitigate the effects of rising interest rates.

Takeaway

The future of the affordability of multifamily housing in Los Angeles depends on continued collaboration between stakeholders, innovative solutions, and responsive policies. It is crucial to prioritize the development of affordable units and preserve existing affordable housing stock. Additionally, addressing income inequality and promoting incentive development programs will contribute to a more equitable and affordable housing landscape.