REAL ESTATE DEVELOPMENT:
Lusk Center’s Casden Multifamily Forecast predicts little relief in housing stock deficit
By Matthew Kredell
The USC Lusk Center for Real Estate, a research center jointly operated by the USC Price School of Public Policy and the USC Marshall School of Business, hosted a conference in downtown Los Angeles on Oct. 17, where it presented a forecast of Southern California market trends in the multifamily housing sector.
The report was authored by Richard K. Green, director of the USC Lusk Center, along with a team from Beacon Economics.
The Rent Affordability Problem
Green began the discussion with a current view of the economy as it relates to real estate. He explained that, while new construction is up considerably from recent lows, it is still running below the post-1960 average, despite population growth in the country over that time. As a whole, the country would need about three million more housing units for prices and rents to stop rising.
“People are upset because, in nearly every place in the country, rents are rising faster than incomes,” Green said. “There is no doubt this is a national phenomenon, not just a Southern California phenomenon. Renters feel worse off than they used to be because, in general, they are worse off than they used to be.”
The burden of housing affordability is determined by the amount of people who pay more than 30 and 50 percent of their household income on rent. To account for people who choose to pay a higher percentage of their income for luxury housing, the report puts people in specific categories by comparing the 25th, 50th and 75th percentile renters with the corresponding rental unit. The report finds that every group in Southern California — no matter the category, age or level of education — has an affordability problem.
The Casden Multifamily Forecast projects modest rent increases over the next year in most Southern California regions. In Los Angeles County, the report projects a 1.7 percent increase in average rent in 2019, to an average of $2,305 per month. The countywide vacancy rate is projected to increase from 4 percent to 4.3 percent. Green noted that a 5 percent vacancy rate is considered the break-even point for rents to stay level.
Orange County has similar projections, with rents increasing 1.8 percent and the vacancy rate moving from 4.1 percent to 4.3 percent. San Diego rents will maintain an upward trajectory of 2 percent per year, while the vacancy rate dips slightly, from 3.9 percent to 3.8 percent. The Inland Empire has been the fastest growing economy in Southern California in recent years. Its vacancy rate is expected to hold steady at 3.8 percent, while rents jump sharply from a 0.6 percent increase this year to 3.1 percent in 2019.
The report is available for download at https://lusk.usc.edu/casden/multifamily/report.
“I think there’s this view of housing that it is a problem for poor people, but it’s a problem for very much middle class people,” Green said. “Housing costs here are really quite extraordinary. Being able to escape them is very difficult, and it’s changing the nature of what California is as a place.”
Accepting Taller Cities
Green participated in a panel discussion on affordability moderated by Kathleen Pender, business columnist at the San Francisco Chronicle. Panelists included Stephen K. Anderson of CityView and Svenja Gudell of Zillow Group.
Green contended that, in order to build enough housing, Southern California has to change to accept seven-story buildings.
“That’s the level of construction at which you don’t jump to the next level in terms of cost per square foot, and you can get an enormous amount of density,” Green said. “Reimagining Los Angeles and Orange counties with that kind of housing could go a long way. The model we’ve been using since we’ve started growing as a big city around 1890 is not sustainable anymore. It does not provide enough housing.”
Changing Views About Renting
Gudell said companies must be mindful of housing affordability issues for their employees.
Jenny Schuetz from the Brookings Institution provided a keynote speech on deconstructing home ownership and the case for tenure-neutral policies. She talked about existing policies that bias the housing market toward home ownership, and ways to keep the favorable aspects of home ownership with different mechanisms that might be better for people on the bottom half of the income distribution.
Her three key points were to encourage a diverse housing supply by changing land-use policy, to establish a stable living situation and predictable housing expense over a somewhat longer range than renters currently have, and to create more liquid opportunities for savings and wealth building.
“We have this relentless push that everyone needs to become a homeowner,” Schuetz said. “I think renting shouldn’t be viewed as a measure of last resort. In other countries, middle-income families are renters for long stages of their life and that’s not viewed with social stigma.”
Proposition 10: Hopes and Criticisms
The event concluded with a discussion of Proposition 10, moderated by Los Angeles Times reporter Andrew Khouri. The panelists were Robert Kleinhenz of Beacon Economics, Jessie Kornberg of Bet Tzedek, William A. Witte of Related California, and Molly Rysman, housing and homelessness deputy for Los Angeles County Supervisor Sheila Kuehl.
Rysman talked about what would happen in Los Angeles County if Prop 10 passed (the measure was defeated on Nov. 6), repealing the Costa-Hawkins Rental Housing Act of 1995, which limits the kind of rent-control policies that cities can impose.
“For local jurisdictions like Los Angeles County, the most egregious part of Costa-Hawkins is not being able to cover units built after 1994, which means we constantly have a shrinking number of units we can protect or provide any rent regulation or protection,” Rysman said. “We have no interest in providing rent regulation to new construction, and we understand concerns of economists about this. We do not want to stymie new construction in any way. But once a development has recouped its profit, in 20 or maybe 30 years, we would want some sort of rolling deadline.”
Rysman said that vacancy control, which limits a landlord’s ability to bring a rent-controlled unit to market rate when the unit is vacated, is not politically feasible. However, Witte said that his company is very concerned about vacancy control and that if Prop 10 passed, investors would wait and see what localities would do, and development would slow down.
Kleinhenz presented research from Beacon Economics on rent control showing that rent-controlled units often are occupied by middle- and high-income households, not fulfilling the intended goal of making housing more affordable for lower-income households. Moreover, markets with rent control tend to undersupply.
“I think the fundamental thing is rent control discourages future production of rental units and, as you’ve heard already in today’s program, the shortage of housing in California is a chronic problem,” Kleinhenz said. “One thing that comes out of the literature is there’s a huge undersupply of rental housing in these markets where rent control is put into place.”
Although Prop 10 was trailing in the polls at the time of the conference, Witte indicated that the strength of the attempt to overturn Costa-Hawkins could open political avenues to address rent control reform legislatively.
“I think it could happen, because this time shook people,” Witte said. “I think there are some rational middle grounds that the Terner Center for Housing Innovation at UC Berkeley proposed in statewide anti-gouging limits and more affordable housing incentives. The apartment industry wouldn’t love it, but I think it’s politically feasible. I just think these blunt instruments always have unintended consequences and don’t address the root problems.”
Director and Chair of the USC Lusk Center for Real Estate
Chair, Department of Real Estate Development