California’s Affordable Housing Crisis: What This Means for Multifamily

It is not surprising that California is experiencing an affordable housing crisis – from a shortage of suitable low-income homes to an excess of low-income renters and limited land to build, California faces its fair share of challenges. However, the state is well versed in this crisis as it places at the top of the list of the most expensive place to reside in the nation. To illustrate, the average home price is more than $600,000 in California, nearly 88% higher than the national median of $320,000.  Housing affordability has dropped to its lowest point, at 16 percent, in over 15 years. Representatives have been continuously attempting to enact reforms that will benefit landlords and renters, efforts that have proved to be an uphill battle — from the mansion tax, eviction moratoriums, zoning changes, and inadequate housing options. So, what does this mean for apartment owners in California, is the state going to resolve the issue, or is it up to developers? Let’s find out.

State Law Changes

All hope is not lost for the Golden State. At the end of September, California Governor Gavin Newson signed a package of housing bills meant to ease housing development in commercial districts. These bills plan to replace vacant stores, strip malls, and offices with millions of residential units. Essentially, the bills reimagines what California will look like in the future and have the potential to affect thousands of lives positively. These new bills are also joined with other state efforts to build housing and address the high housing rents in the country’s most populous state.

Under these new laws, between 1.6 million and 2.4 million new housing units, including hundreds of thousands of affordable apartments, have the potential to be built on commercial properties. This is exciting news for state residents who have been anticipating reformative actions.

In addition to the September bills, other recent state law changes include Prop 13, Prop 15, Costa-Hawkins Rental Housing Act, Prop 21, and AB-1482. Each is attempting to stabilize the gap between affordable and costly housing. Only time will tell if these laws will promote or discourage the construction of new homes.

Mansion Tax

The Los Angeles Times defines mansion tax as an additional tax on commercial and residential property sales that exceed $5 million. Its main goal is to fund permanent housing for the homeless throughout the Los Angeles area. A city analysis concluded that the mansion tax has the potential to generate an estimated $600 million to $1.1 billion a year. Advocates for the homeless are hopeful because they believe the tax will be essential in creating affordable homeless housing.

So, what does this tax mean for apartment owners? For properties between $5 million to $10 million, the tax rate is four percent; for those worth $10 million or above, it is 5.5 percent. For instance, a homeowner selling a $10 million property would have to pay an extra $550,000 in taxes. This money is intended to raise funds for affordable housing, positively impacting low-income families finding it difficult to afford an apartment in the state.

On the other hand, opponents of the tax believe that it can drive up rents and make Los Angeles a more complicated place to do business, causing firms to leave the city. The United to House L.A. (ULA) detractors claim that a large portion of the funding would be used to construct overpriced housing that takes too long to complete. According to a residential real estate developer, many home builders will find their job to be unprofitable and be forced to stop constructing in the city of Los Angeles as a result of this new tax and the probable downward change in housing prices.

Eviction Moratorium

Like most states, California is still experiencing setbacks from the COVID-19 pandemic. Regarding housing, the state had to enlist several eviction moratoriums and extensions to help people survive the pandemic times. Most of these moratoriums have now been lifted, excluding the city of L.A. The California Apartment Association (CAA) continues to urge its members to postpone eviction even though this protection is no longer in effect. CAA believes the money will arrive soon, and eviction will no longer be necessary.

On one end, tenants are frustrated about the continuous rent expectations and on the other, apartment owners across the state are forced to carry the financial weight. This has led to some apartment owners at risk of losing their properties due to the eviction moratorium.

Zoning Changes

Reversing decades of state laws that have favored single-family housing is a complex task. Along with historical difficulties, representatives must also solve an expected deficit of 3.5 million housing units in the coming years. Increasing density, particularly in regions connected by mass transit, has emerged as the primary strategy for combatting the deficit. In positive news, recent housing laws allow homeowners to divide their single-family properties to create up to four units for the first time in California’s history. The law allows local governments to let developers build up to 10 market-rate multifamily units on specific parcels.

Solving the housing crisis must start with significant zoning restrictions adjustments. Even for affordable homes, multifamily housing development is expensive. Therefore, public leaders must support zoning and land use reforms to lower housing unit costs and improve affordability for Los Angeles renters.

Lack of Housing

The Los Angeles area is the most expensive metro in the nation in terms of scarcity. With this in mind, it makes sense that Greater L.A. is the focal point of the state’s ongoing crisis. The lack of housing can be heavily attributed to high population growth and restrictive building policies. Regulatory laws, such as the environmental law CEQA, also hinder construction. With affordability and density issues, there are fewer properties to invest in and little land space to work with. This land shortage has caused prices to construct new buildings to exceed the national average. The state’s median home price has more than doubled the national average.

The housing shortage and high rent expenses have harmed the state’s economic competitiveness for several years. The COVID-19 pandemic merely exacerbated an ongoing problem with no simple fix. People, who can move, do not want to stay in such an expensive state. This crisis has led many businesses and citizens to leave for cheaper areas like Arizona and Texas.

Future Outlook for California

California’s affordability crisis influences both investors and developers. Governor Newson’s new legislation will boost California’s housing production through increased streamlining, local accountability, affordability, and density. This new legislation signed in September aims to remove barriers that have plagued investors and developers and streamline state laws to maximize housing production.

Affordable housing is something that affects thousands of Americans. California will remain a focal point for the crisis as we await to see the impact of the new laws.