Everyone knows LA is in a housing crisis and everyone is talking about up-zoning as a potential fix.
But, recently, a big part of the problem is that construction costs are skyrocketing… and that’s what I want to discuss today.
What’s going on?
- The wipeout of 2007-9 crushed a lot of subcontractors (plumbers, framers, roofers, etc.). Many of them left the business and have not come back.
- Many subs and GCs are baby-boomers who have reached retirement age… some are leaving the business every day.
- All of the major economies on earth are growing right now, dramatically increasing demand for, and therefore price of, commodities – things like wood, steel, etc. that you need to build
- Our national government has decided that now is the right time to start a trade-war, which is driving up the price of some imports (including Canadian lumber)
- Our our national government has also decided to try to chase undocumented immigrants, many of whom are in the construction trades, out of the country, leading to massive labor shortages
- Our state government continues to add complexity to the building code, increasing the energy efficiency and life-safety of buildings, but also the construction cost
- Our city government has decided to add a $12 / sq ft “linkage fee” to all new apartment construction (this is so painfully stupid, I have no words)
And, most important of all:
8. There is a TON of construction going on in LA, so those GCs and subs who remain have their pick of projects.
Why do increasing construction costs matter? Well, they have a huge impact on affordability.
Imagine I gave you the land for a 4,000 sq ft 4plex apartment building for free. But also imagine that construction costs (including design, permits, fees, etc.) are $300 / sq ft.
That means you need to spend $300 x 4,000 = $1.2MM to build your building, or $300,000 / unit.
Let’s say that, to get a satisfactory return, you’re willing to build into an 11x GRM (in other words, you’re willing to spend 11x the annual rent roll to build the building). $300k / 11 grm / 12 months = $2,272 / month.
In other words, even if I gave you the land FOR FREE, you would still have to charge rents which are unaffordable to most working people in LA.
So, while up-zoning (which is intended to reduce the land costs) is part of the solution, it’s not going to come close to getting us all the way out of the crisis.