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Sunday, Aug 7, 2022
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How to Kill Apartment Construction

We are in the umpteenth year of a housing shortage. So let’s ask: Why are so few housing units being built? Seriously. Think about neighborhoods you know throughout the Valley area. Now think of where housing units are being built or were recently opened in those neighborhoods. Chances are, you’re still counting on one hand. Let’s see. There’s some good homebuilding activity in Porter Ranch, and a half dozen mixed-use buildings are going up in Warner Center. Of course, there’s that massive community planned for Newhall Ranch up north close to Valencia, but I’m not sure that counts. It’s been delayed for more than 20 years, hasn’t been built at all and now faces fresh challenges. Beyond that, there are one-off projects here and there, such as a plan to build a couple dozen units in a mixed-use complex in Panorama City that was reported on last week. The point: We should see housing units being constructed by the thousands, not dozens. This is an aberration. Just ask anyone who showed up for the first day of class at Econ 101. When demand outstrips supply, the price goes up. When prices go up – as they certainly have here – producers trip over each other dashing to fill the unmet demand. At least, that’s the way it’s supposed to work, but builders hereabouts aren’t exactly rushing to fill demand, and haven’t for years. So why not? Why does this aberration exist? If you ask developers, they often say it’s just too difficult and costly to build here. For example, take the California Environmental Quality Act, commonly called CEQA. It calls on developers of larger complexes to create a lengthy report that examines potential environmental impacts on everything from air quality to traffic to aesthetics and more. After the report is prepared, it is circulated to the public for review and comment. Only after all that is satisfied is a final report written, at more cost, and that faces the approval process by whatever agency is overseeing the project. And even if the agency eventually approves the plan, it doesn’t stop there. Under CEQA, the public then can sue to stop it. Governments are very powerful here, but so are NIMBYs. Although CEQA is typically weaponized to frustrate commercial projects, it can seriously stall sizable residential plans, too. (The aforementioned Newhall Ranch project was first proposed 24 years ago.) It’s one reason why big housing complexes are rarely proposed here. And then there’s Measure JJJ. Passed by voters in the city of Los Angeles two years ago, it calls on builders to set aside a certain number of units for lower-income folks, and it requires the developers to hire higher-wager construction workers. As usual, that measure was well intentioned. Everyone wants well-paid workers and affordable housing. Trouble is, JJJ and others like it make each unit more expensive, which prompts builders to jack up the rents on apartments and sale prices of condos and houses. So that means we’ve created a system that all but forces builders to create smaller projects of high-priced luxury residences, along with some mandated affordable units. That’s why so little is being built. Which brings us to Proposition 10 on the ballot next month. It is a statewide initiative that, if approved, would allow local governments to impose rent control. And those local governments that decide to pass rent control would see apartment construction die in their jurisdictions. After all, why would a builder build if there was little prospect of making enough to see a profit? What lender would lend? What’s interesting is that some groups you’d normally see in favor of Prop 10 have come out opposed. Some labor groups, civil rights organizations and affordable housing proponents reportedly have expressed misgivings about Prop 10. And so have some academics. A recently published piece on Prop 10 by Ken Rosen of the University of California – Berkeley says rent control would reduce the supply of rental housing in California. He said rent control incentivizes property owners to convert rental units to condos or into non-residential buildings. And he pointed out that those who live in rent-controlled units are reluctant to leave, even to downsize, thereby exacerbating the shortage of rental units. But the worst effect, Rosen said, would be to kill multifamily construction. Developers, he said, “are responsible to their investors to make a reasonable profit, and they are responsible to their lenders to repay development loans. Without sufficient potential for rent and income growth from a property, investors will be hesitant to invest, lenders will be unwilling to lend and developers will be unable to finance new construction projects.” Yes, we can look around in our neighborhoods and wonder why we see so little housing construction in the face of a prolonged shortage. But if Prop 10 passes, we may see no apartment construction at all.

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