How to think about the future of inner-city multifamily

|

Curbed LA had an alarmist piece yesterday re the increasing “un-afordability” of LA apartments that I think draws attention some important long-term trends shaping the apartment business.

First, here’s the money quote: “…[A] person earning median income in LA would have to spend 47 percent of that income on the median rent. That’s higher than any other city in the US.”

What’s going on? Let’s separate supply and demand.

Supply:

  • A large portion of LA’s apartment inventory in “locked up” by rent control (if you’re paying 20% below market, you ain’t leaving… and the more rents around you increase, the less incentive you have to move)
  • No one built anything during 2008-2011 because the market was so bad
  • It’s incredibly hard to build now, because restrictive zoning makes land extremely expensive
  • So, supply is constrained (existing stuff doesn’t turn over, very little new stuff comes into the market, and all the new stuff is high-end to allow the numbers to work with extremely high land prices)

Demand:

  • There is a major population bubble percolating through our national demographics… there were a lot of babyboomers, those boomers all had kids around the same time, and those kids are all in the apartment market now
  • Many of those kids, particularly the ones who graduated after 2008, were initially unable to find jobs, so they stayed in their parents’ homes
  • As the economy has begun to get better, those kids are getting jobs right alongside the kids graduating today… and all of them are looking for their own apartments
  • Plus, a whole bunch of older people in their 30s and 40s were foreclosed out of houses in 2007-10 and aren’t interested or able to get new loans to buy, so they’re clogging up the top end of the rental market (where people usually “graduate” into home-ownership)
  • Finally, and this is really important, there are a whole bunch of relatively well-educated “renters by choice” who could afford to buy homes but either don’t want to (because they saw friends / family get screwed) or, more interestingly, are priced out of owning the kind of homes they want to own in the neighborhoods they want to stay in… unwilling to compromise on either, they remain renters

So, in LA, we have a very slowly growing supply of apartments and surging demand. Hence, the price increases.

There is going to be a temptation to extend rent control to younger buildings to please increasingly strapped tenants. But this would only repeat the mistake we made in 1978- it would shrink supply further and thereby put even more upward pressure on prices in the spot market (rents).

The answer to our problem is to identify areas well-served by mass transit, dramatically increase the density allowable in those areas, and decrease both the required parking and the minimum unit size. We should be pumping out well-designed micro-lofts with 0 or 1 parking space(s) as fast as we possibly can.

Share