Rezoning Single-Family Homes in High Cost Markets

Last week, UCLA’s Lewis Center published a report authored by Aaron Barrall and Shane Phillips taking the City of Los Angeles to task for excluding single-family areas from the rezoning the City need to do as part of its housing element compliance. However, rezoning single-family neighborhoods, especially high resource ones, would create considerable political opposition and generate little new housing. Zoning is not the only constraint to building multi-family homes in single-family neighborhoods. To build in these neighborhoods, development costs will need to come down significantly first, so attempting to rezone these neighborhoods now would generate opposition for no real gain.

Los Angeles’ proposed Citywide Housing Incentive Program (CHIP) has been designed to accommodate the 456,543 new homes the City must zone for as part of their Sixth Cycle Housing Element. CHIP largely builds on the City’s existing Transit Oriented Incentive Areas, which concentrate new higher density housing along transit lines and arterial roads with high quality bus services. The result of this is that almost no higher density housing is being proposed in existing single-family neighborhoods.

However, the City of Los Angeles, like all cities in California, has a duty to affirmatively further fair housing, not just accommodate more housing. This means that LA must provide more housing opportunities in high resource areas for households at all income levels. In general, this equates to building multi-family housing in exclusively single-family neighborhoods. As well documented in the Lewis Center report, LA is not fulfilling this obligation.

However, even if the City did permit multi-family housing in these high resource areas, would it get built? Generally, the answer is that it would not. This is the same challenge every place with high land and construction costs faces when it comes to building smaller multi-family buildings in single-family neighborhoods.

To understand why, let’s take my grandmother’s old house in the Fairfax district as an example. My dad and grandmother moved in to 448 N. La Jolla Ave. in 1963 when she remarried. It’s a beautiful Spanish-style home built in 1928 that has three bedrooms and two bathrooms. The defining feature of the home is the large living room with a huge picture window looking out onto the street. My grandmother lived there until 1997, when she sold it for $117,000.

Today, Zillow estimates that the home is worth over $2.6 million.

It is located in a highest resource area, within walking distance of Fairfax High School (where my dad went), The Grove, and Cedars-Sinai (where my grandmother walked every day for work, since she never had a drivers license.) This is the exact type of neighborhood where multi-family housing needs to be built to fulfill the City’s obligation to affirmatively further fair housing.

However, to build apartments on this 6,534 square foot lot is not feasible due to the costs. This is not just a problem with land costs, but of construction costs as well. Today, apartment construction can easily cost $400 per square foot. That means it would cost half a million dollars to build a 1,250 square foot apartment, plus an additional $50k in soft costs, bringing the construction cost of each apartment to $550k without land.

Looking at Zillow again, apartment rents in the area range from $26k/mo. down to $1,295/mo. Given this wide range, it’s difficult to determine how much rent our theoretical apartments could generate. However, there seems to be quite a few comparable units to what we could build on my grandmother’s old property priced right at $5,500/mo. The per-unit net operating income is probably somewhere around $5,000/mo., which would provide about $4,000/mo. for debt service. Given that, each apartment can support approximately $667k in debt.

If each apartment costs $550k to build and can support $667k in debt, each apartment can contribute $117k towards the land costs. That means it requires 23 apartments to pay for the land acquisition. Even at 100% lot coverage, each floor of the building could accommodate four apartments. That means the building would need to be six stories tall. A building that tall cannot be built using traditional wood framed construction and would either need to be built with steel and concrete, or mass timber, which would cost even more to build, resulting in needing more units and an even taller building.

Given market conditions right now, smaller apartment buildings will not be built in Los Angeles’ high resource single-family neighborhoods even if they were permitted. To enable apartments to be built, one of three things would need to happen: 1) construction costs would need to decline by at least a third; 2) interest rates would need to be cut in half; or 3) land costs would need to be cunt in half. Unfortunately, when 1 or 2 happen, land costs tend to increase, offsetting any gains in feasibility. When this isn’t the case, it usually indicates a general decline in the economy as a whole, and then rents fall and again make feasibility more difficult.

Given that apartment won’t be build in LA’s single-family neighborhoods, even if they were allowed by zoning, the exclusion of these neighborhoods from CHIP seems to be a well calculated political strategy. Had single-family neighborhoods been slated for rezoning, there would have been significant political opposition to the entire rezoning program. Excluding these neighborhoods helps ensure there is political support to adopt CHIP. At the same time, excluding these neighborhoods does not meaningfully reduce the housing opportunities future residents will have in the City, since apartments wouldn’t be built in these neighborhoods even if they were allowed.

This illustrates the primary problem with focusing on zoning reform alone for addressing housing scarcity and to affirmatively further fair housing. Zoning only says what can and cannot be built, not what will be built. While zoning reform is necessary, it is not enough to ensure the construction of new homes by itself. In addition to zoning reform, we must find ways to bring down construction costs so that multi-family construction is feasible in more places. This is something that cities have very little power over, and needs to be the focus of the Federal and State governments.

However, one way to reduce land costs in single-family neighborhoods is to build more housing now, where it is feasible. In general, across Southern California, this means building larger developments along transit and arterial corridors that aren’t currently used for housing. As this housing is built, there will be less price pressure put on existing homes, including in single-family neighborhoods. As those prices stabilize and raise a bit slower than inflation, more and more of these existing residential neighborhoods will become feasible places to build multi-family housing.

In the end, while CHIP doesn’t fulfill Los Angeles obligation to affirmatively further fair housing, excluding single-family neighborhoods from the rezoning programs does not meaningfully affect the housing opportunities for future residents in those neighborhoods. It took decades to create the income segregation we see across Southern California today. It will take decades to erase these same patterns of segregation. We should be focused on permitting dense housing where it is feasible today, and take up rezoning to allow for multi-family housing in single-family neighborhoods as it becomes feasible in the future.