Palms Power

As I’ve said before, the affordability of Los Angeles for people and businesses is one of the greatest challenges facing the city. If we don’t want LA to become a boutique town like San Francisco or Boston, we need to make it easy to produce cheap apartments and workspaces. By definition, affordable development does not include any space that is produced by giving developers subsidies or forcing developers to sell or rent at below market rates. Those strategies are not scalable in a meaningful way.

To that end, I’ve defended and promoted the LA pattern of low-rise and mid-rise development, contrasting it with some architects’ and planners’ preference for high-rise towers near transit hubs, surrounded by single-family neighborhoods with restrictive zoning. In previous posts, I’ve called this “Vancouverism”, since this is the strategy pursued by Vancouver. This strategy is often more politically palatable because it aligns the preferences of architects and planners with the belief of NIMBYs in single-family neighborhoods that the city should protect them from change.

However, Vancouverism can never produce affordable development at the same scale that the LA pattern can, because the construction costs are so much higher. As the LA Downtown News reported, high-rise construction costs 1.5 times to 2.5 times as much per square foot as low-rise and mid-rise construction – about $200/SF for low-rise and mid-rise buildings, and $400/SF for high-rise buildings.

Example: at a 10% rate of return and a 30 year term, you need to collect about $1,250/month in rent to cover the cost of building a 700 SF low-rise apartment. High-rise, you need to collect at least $2,500/month. This doesn’t include the cost of maintenance and management, but $1,250/month is down into the realm of affordability. And anyway, the point of new construction is often not to build new cheap apartments, but new upscale apartments for people with more money.

The key thing to realize here is that the cost of new construction sets a reference price for existing apartments that have already had their capital costs paid off and just need to cover maintenance. If new apartments are going for $2,500/month, then you can charge up to $2,499/month for an old apartment. But if new apartments are only $1,250/month, you can never charge more than $1,249/month for an old apartment. So, the less costly the new construction, the larger the market segment that can be targeted with new construction, and the less price pressure on existing apartments.

In other words, if we really care about affordability, we need the traditional LA pattern of development. And since I live in Palms, I’m going to frequently use Palms as a good case study. I’m planning to do some more detailed research, but for now let’s trust Wikipedia and assume Palms was upzoned in the 1960s. At a glance, Palms might look like it’s all apartment buildings of the same size and vintage, but that’s not the case – there’s a variety of building types, sizes, and ages. This includes a considerable number of remaining single-family houses. In a few upcoming posts, I’m going to take a closer look at selected streets in Palms, including the types and ages of buildings, with an eye on the fact that none of the single-family houses have been ruined by the nasties that are supposed to come with apartment buildings.

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6 thoughts on “Palms Power

    1. letsgola Post author

      Thanks for the link; I need to learn more about Vancouver’s development process! I also need to get a better handle on how fees in the LA area vary among cities, but they can be pretty high (Prop 13, which capped property taxes, encouraged cities to raise fees).

      High fees act in the same way as high construction costs. Theoretically they cannot directly impact the market price, i.e. developers cannot simply “pass along” these costs. The simplified analysis would be Sale Price – Construction Costs – Fees = Profit. So higher construction costs & fees means less profit. Since luxury development has the highest profit, it remains viable, but more affordable projects become money losers. This decreases the amount of new housing produced, and that’s what drives up the overall price of housing. This means that affordability could be improved by reducing fees, reducing construction costs, or both.

      Reply
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