Why rents in Highland Park are rising so quickly

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Obviously there is a bunch of controversy around the renovation of apartment buildings in Highland Park (“HLP”) by our company and others.

So far, the reporting on this topic has focused on the human aspect without really getting into the root economic / political issues driving gentrification in HLP.

To understand why rents are rising fast in HLP, you first need to understand that the neighborhood has become attractive to relatively affluent people over the past 5-10 years.

I’m not the right person to give you a comprehensive account of why the neighborhood is so much more attractive to people with money than it was previously… I’m far too uncool to patronize vintage furniture shops or high end fashion boutiques (though I do like a good bar). But any explanation needs to start with three factors:

  • Walkability – Both York and Figueroa, the key commercial streets in HLP, are walkable. People love this.
  • Public transportation – The gold line runs along Figueroa, so you can live in HLP and work downtown without driving. People love this, too.
  • Safety – The people who live in HLP have done a lot of work over the years to drive down the crime that used to make the neighborhood too scary for affluent potential homeowners / renters (oh, the irony).

Whatever the reason(s), HLP has become increasing popular with affluent people. So where are they going to live? Well, many of them have bought homes from flippers. And others have bought new small lot homes developed by both local and national development companies.

But what about affluent people who want to rent? What are the options for them?

To answer this question, we need to look at the neighborhood zoning. Check out this map from zimas.lacity.org:

zoning, Highland Park, HLP

 

 

 

 

 

 

 

 

The areas in yellow are all zoned R1, meaning that they are reserved for single family homes.

The areas in red and orange, mostly along York and Figueroa, are zoned for commercial (red) and various types of multifamily residential (orange).

At first glance, you might think that the solution to the question of where affluent tenants can live would be to build a bunch of new apartment buildings in the red and orange areas, right? That would increase supply at a time of increasing demand, meaning less upward pressure on rents.

But you can’t, and here’s why:

1. Along York Blvd, all of which is zoned commercial and therefore theoretically available for multifamily construction, there is a “Q” condition which says, among other things, “Whatever the zoning is on your lot, it will be treated as RD1.5 for the purposes of developing housing”. RD1.5 only lets you develop one housing unit (apartment) per 1,500 sq ft of lot, which means to build 10 units (for which you would need only 4,000-8,000 sq ft of land in other parts of the city), you need 15,000 sq ft. That amount of land generally costs too much to allow developers to make money from building rentals (for sale homes is, of course, another story).

2. Along Figueroa, all of the commercial and almost all of the multifamily land is included in a Historic Preservation Overlay Zone. The most important implication of this HPOZ is that you can not demolish any structure built before about 1965. So, the ordinary process of in-fill development, in which developers service increasing demand by, say, buying a four unit building, ripping it down, and replacing it with a 12 unit building, is difficult / impossible.

The result of the above is that developers effectively can not build enough new apartment buildings in HLP to provide housing to all of the people who want to move there.

So, if affluent renters move into the neighborhood, they displace current residents. This is where the story gets sadder and more complicated.

In most of LA, the vast majority of the apartment stock is protected by rent control, because it was built prior to 1978. Rent control isn’t perfect, but it does provide existing tenants a large measure of protection against being pushed out of their homes. With some exceptions, the only way tenants with below-market rents move out of rent controlled apartment buildings is via voluntary agreement (eg they get paid, often a very large amount of money).

But HLP is different from most of the city in one, crucial respect: Much of the apartment stock there is not covered by rent control.

Recall the HPOZ described above. The reason it was created in the first place was that, in the 1980s and 1990s, developers were ripping down old craftsmen homes to build big ugly apartment complexes (exactly what you would expect developers to do!). Because those complexes were built after 1978, they are not covered by rent control.

So, here’s the final explanation for what’s going on with rents / renovations HLP:

  • Affluent renters want to live there
  • Developers (like me) and our investors want to make money by serving this demand
  • There is no way to make money from the increased demand by building new apartment buildings because of the zoning and the HPOZ
  • So, developers can only service the demand by displacing tenants from existing buildings and renovating
  • Because the apartment stock in HLP includes a lot of non-rent control units, this displacement / renovation is happening faster and with lower pay-outs to the tenants than would be the case otherwise

What can be done to protect existing tenants?

  • You could change human nature so that investors stop wanting to get a return on their capital and/or people like me stop wanting to make money from helping them do so (this is not a serious proposal)
  • You could extend rent control to cover buildings built after 1978. State law presently makes this very difficult, but it’s possible. I think this would be bad public policy (for other reasons), but it would give existing tenants much more leverage vis-a-vis owners and, therefore, the ability to stay in their units or extract higher-payouts in exchange for leaving;
  • You could change the zoning to allow developers to build more buildings, which would involve, at a minimum, removing the Q condition on York and modifying the HPOZ (perhaps so that it covers only the truly exceptional buildings).

The last proposal is, of course, the one I favor, because it would allow developers to respond to increasing demand by increasing supply and thus stabilize rents.

(A final note: One common objection to the “increase supply” argument is that the new buildings would be built for affluent tenants, meaning that the new supply would not really relieve pressure on poor people. This argument is, in a word, hogwash. New supply is new supply… and, at any constant level of demand, new supply reduces prices.)

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