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Housing Dilemma: Luxury, Affordable Residents Seek Units

Housing Dilemma: Luxury, Affordable Residents Seek Units By SHELLY GARCIA Senior Reporter Hot Home Sales Fail to Cool Expensive Rentals Even as single family home sales hit record levels, developers are building more luxury apartments than ever, many charging rental rates that exceed the monthly cost of a home mortgage. No firm numbers detailing the amount of luxury apartment construction in the San Fernando Valley are available but estimates are that 2,000 to 3,000 new units have come onto the market in the past two years alone. And while vacancy rates have recently risen somewhat in the sector, developers and other real estate experts say they see no significant letup in demand for these units. “If you look at the existing stock of class A properties, they’re achieving very good rents and at very good occupancies,” said Devang Shah, a senior consultant at Robert Charles Lesser & Co. LLC, an independent real estate advisory firm in Los Angeles. “Occupancy is anywhere from 92 to 96 percent, and they’re commanding $2 a foot. It’s proven in the market. It can be leased, and it can be achieved.” Neither the soaring supply levels nor the softening economy have significantly dampened enthusiasm for these units, which can rent at prices from $1,500 per month for a one-bedroom to $2,500 and more for a two-bedroom apartment. Many rival condominium units with such amenities as lofts, 17-foot ceilings, granite counters and tile floors. Among the newest, Renaissance Villas in Granada Hills now in the planning stages, will have units from 1,500 square feet to 1,700 square feet on three levels with private, underground parking attached to each unit and individual sky gardens, rooftop patios of 350 square feet to 400 square feet that overlook mountain and city views. According to the developer, H. Bruce Hanes of Hanes Properties in Westlake Village, rents for the two-bedroom, 2-and a-half bath units will range from $2,500 to $2,850 a month. “It will have the best views of any and every apartment project in the Valley,” Hanes said. “Some of our windows will be two-and a-half-stories high.” Developers like Hanes say there is a large population of affluent residents who desire such opulence but still cannot afford the cost of a home that would provide similar amenities. “In order for them to get a competing quality of a single family home, it might be $1 million,” said Dean Zander, a partner with Hendricks & Partners, a brokerage specializing in multifamily investments. For most of the 1990s, high-salaried individuals and families working in entertainment and similar high-paying jobs in the San Fernando Valley went over the hill to find luxury rentals and commuted to work. But in 1999, PCS Development Inc. opened one of the first large-scale luxury developments in Sherman Oaks, and the success of The Premier at Sherman Oaks paved the way for other developers to follow. Wanting to rent The trend was fueled in part by a growing awareness that there was a market of affluent consumers who did not want the responsibility of home ownership or, perhaps, could not afford the down payment. But economics also played a large role in the proliferation of these units. As costs of land and construction have risen, it has become virtually impossible to bring in an apartment project at costs under $2 a square foot. The only way to recoup those costs is by building luxury apartments that command higher rents. “I would definitely say that almost every rehab or new construction that’s been done in the last two years has been in the luxury segment,” said Todd Shaw, executive vice president at PCS Development, which has built about 1,250 luxury units in the greater Valley region since completing The Premiere at Sherman Oaks. To be sure, demand for these luxury apartments has cooled somewhat in the past year or so. PCS reports that its occupancy rates at its projects are running in the 92 percent to 93 percent range after several years of nearly full occupancy. Shaw said several things have contributed to the slowdown. The events of Sept. 11 have fostered an interest in the security of home ownership as have record-low interest rates. At the same time, a softening economy has made many pull in their purse strings, even if they’ve seen no changes in their income levels. “It’s no different than the situation with higher-end restaurants, which are hurting now,” Shaw said. Further demand expected But he and others don’t see any long-term change in the demand for these types of apartments. “There are more choices, and so tenants are looking around a little more,” Zander said. “But I think the properties developed are going to be absorbed and we’ll still have a significant shortage of housing.” Zander said many of the new properties are leasing at a rate of seven to 12 units a week. “If they can fill no less than one unit a day and sometimes two, that’s 100 units that can fill up inside two months,” Zander said. “I think that’s terrific.” In Santa Clarita, where about 3,000 luxury apartment units have come on line in the past three years, absorption has continued to be extremely strong,” said Shah, who has researched several Valley markets for clients. The region absorbed about 670 new, class A apartment units last year and 950 units the year before. “In 2001 to 2002 there was still a slowing down of the economic situation, and yet it still did very well,” Shah said. “That’s an indication of the pent-up demand.” City Falls Short in Meeting Lower-Income Needs By SHELLY GARCIA Senior Reporter Despite plans for 339 units of affordable housing in some of the most needy areas of the San Fernando Valley, Los Angeles still falls far short of meeting demand for such types of residences, according to developers and other housing industry officials. The new units were part of an initial round of proposals presented to the Los Angeles City Council on March 14 to alleviate the affordable housing crisis. The projects would bring more new housing than some of those areas have seen in years. But the city’s population growth is far outpacing its housing stock. While the trend is reaching desperate proportions for all types of housing, it is especially dire for low-income families who are often crammed into small apartments or converted garages, sometimes with two or more families sharing the space. “The affordable housing is the most urgent, only in the sense that the people who can afford less are way more vulnerable,” said Jane Blumenfeld, the city’s principal planner. “If you make $100,000, even though there’s a housing shortage, you can find an apartment. If you make $20,000, there’s not many places that you can afford.” Officials point their finger at the scarcity of land and the cost of development, reasoning that lack of supply is driving prices steadily upward, and they have moved to subsidize the cost of building such projects. But some developers say the blame lies squarely with the city. By holding firm on zoning and density rules, it is perpetuating the supply side dilemma. “Cities, starting with the city of Los Angeles, have an aversion to approving new housing on available parcels of land,” said Bruce Karatz, chairman and chief executive of KB Home. “They talk a good game, but when it comes down to it, they prefer development of commercial uses that will generate sales tax revenues rather than trying to solve the shortage of housing. And that’s the fundamental problem.” Two years ago the city of Los Angeles established an Affordable Housing Trust Fund to help finance construction. Expected to reach $100 million over the next three years, the fund will be used to provide subsidies for developers and matching funds to access federal and state financing, including a share of the $2.1 billion established for affordable housing by the state’s bond issue, Proposition 46. But the money is a pittance compared to the amount of housing that’s needed, and only one stumbling block to getting the job done. Land is scarce. Neighborhoods often wage bitter campaigns against the development of multifamily dwellings. Priorities for allocating state and federal subsidies change with the political winds and only a small percentage of subsidy requests are granted. And even when a developer snags the available subsidies, the cost of development compared with the potential returns in rental income that meets affordable housing standards precludes all but not-for-profit developers from building such dwellings. “Once you lower rents to 30 percent of income, what happens is that you barely get enough money to pay for the maintenance of the building,” said Neelura Bell, program director for the L.A. office of Local Initiatives Support Corp., a group that helps builders of affordable housing secure financing. “If you figure maintenance between $3,000 and $3,600 per year per unit, just to have a manager and pay common area upkeep and utilities, there’s not much left in terms of cash flow for any for-profit entity to be disbursing as a return on somebody’s investment.” The federal standard for affordable housing is set at a cost that amounts to 30 percent of income. In 1999, the year studied by a housing task force to examine the crisis, the fair market rent for a two-bedroom apartment in Los Angeles was $766 per month. Skyrocketing rents Rents have risen an average of about 5 percent a year since then, and in the greater Valley last year, the average rent had climbed to more than $1,000. But even before those recent increases are factored in, it is estimated that at least 25 percent of households in the city spend more than half their income on rent. Home ownership is equally out of reach for many. As of 1999, before median home prices in the Valley began climbing at about 15 percent a year and more, a family needed a yearly income of $101,624 to afford the median-priced home in Northridge, $61,953 to own a home in Reseda and $52,598 to own the median priced home in Canoga Park, according to the task force report. As a result, home ownership in L.A. trails the rest of the nation only 39 percent of the city’s households own their own homes, compared to 66 percent of households nationwide. The problem, at its most basic, is supply and demand. Housing production through the 1990s in California was lower than at any time since World War 11. Between 1990 and 1999, the population of Los Angeles increased by 300,000, but the number of housing units rose by a meager 30,600. Even before new migration is factored in, the city needs to generate 60,000 new units of housing between 1998 and 2005, or about 8,000 units a year to accommodate the growth in its population, according to Southern California Association of Governments calculations. In 2001, a total of 6,836 permits were issued for new home construction throughout L.A., 5,173 of those were for single family dwellings. Last year, another 6,294 permits were issued in the city, with about 5,000 of those for single family dwellings. In the San Fernando Valley, where much of the new population growth is occurring, about 2,500 permits were issued for new home construction in 2001, with somewhat more than half of those for single family homes. In 2002, 2,228 permits were issued, with 1,382 of those for single family dwellings. In that same year, no permits were issued for multifamily dwellings in many parts of the Northeast Valley including Arleta, Pacoima and Sunland-Tujunga, where much of the immigrant population growth is taking place. Only nine permits for new single family construction were issued at all in the Arleta-Pacoima area in 2002. Permit levels weren’t much better in 2001 the total number of housing construction permits issued in those areas totaled 113. The city’s answer is The Housing Trust, which so far has a balance of about $52 million. The fund is designed to grow to $100 million over the next few years and to be self-sustaining by providing funding to access matching funds from a number of different sources. On a national level, cities have leveraged about $7 for every $1 in their funds. “That’s just an average,” said Sara Dusseault, assistant deputy mayor for economic development. “There are times when we get $1 to $5 and we’re thrilled because the product we’re getting is a large number of family units. At the other end of the deal, we’ve done $1 to $10.” Focus on renting About 60 percent of the housing trust fund will be used for rental housing projects geared to households at or below the median income. Another 20 percent is targeted to create home ownership opportunities for moderate and low income families. Some will be used for emergency housing assistance and some will be kept on hand for use when other opportunities to create housing emerge. The first round of developments to receive matching Prop. 46 encompasses 13 projects that will generate 694 new apartment units citywide. Over 330 of those will be built in the Valley, including 212 units in Pacoima and Van Nuys and another 127 in Council District 7, which also includes Pacoima. But that doesn’t mean the projects will come on line anytime soon, said Bell at LISC. Typically, the income these projects generate for the developer pays for about 10 percent or 15 percent of a conventional mortgage. Another 50 percent comes from tax credits and the balance must come from federal, state and other subsidies, according to LISC. “Only about 25 percent of projects were getting an allocation of tax credits in 2002,” said Bell. “So what happens is you have another 75 percent where people are sitting with pipelines and they can’t move their projects.” Those like Karatz believe the subsidies don’t really address the supply and demand issue that is creating the shortage. The bigger issue, developers say, is freeing up land now zoned for commercial use and changing density codes to allow more building of all types of housing. With greater supply, the pricing of the units will take care of themselves, these developers say. But political leaders don’t want to wage the necessary battles with communities, and they don’t want to give up the tax revenues that commercial developments generate. Karatz supported Prop. 46 but doesn’t think the effort goes far enough. He doesn’t see much hope for the larger problem. “We’re not building enough housing, and that means very unacceptable standards of living are going to be more and more evident throughout the county,” Karatz said. “People will have to double up and do things that we thought are only done in the Third World.”

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