Apartment construction upswing

Despite the turbulence of 2022 — including interest rate hikes, supply chain shortages and a still undeclared recession — builders are making significant progress in multi-family residence (MFR) construction this year.

In fact, 420,000 new rental units are expected to be completed this year across the U.S., a 50-year high according to RentCafe.

About 30,000 or 7% of these pending apartment units will be built in California. However, California’s population is 12% of the nation. Thus, 7% additional units is about half the national pace and still below what is needed to catch up with demand.

The number of multi-family units anticipated to be completed in 2022 are:

In the first half of 2022, 2,200 apartment units reached completion in Los Angeles. As a result, Los Angeles secured a spot in RentCafe’s list of top 20 cities by number of apartment units built.

Los Angeles also ranked as one of the top productive metros in the U.S. in the past five years. Between 2018 and the end of 2022, the Los Angeles metro will have produced nearly 64,000 multi-family units.

Los Angeles’ downtown district was a heavy hitter in terms of new apartment construction. Between 2013 and 2022, downtown Los Angeles produced 19,342 apartment units. Only one other U.S. downtown area (Atlanta) constructed more units than downtown Los Angeles, according to StorageCafe.

2019 was the most active year in Los Angeles for new apartment construction with 3,867 downtown apartment units started that year alone.

Related article:

California’s distinctly low vacancy rates signal the need for more construction

Not all housing is created equal

Despite these achievements, Los Angeles still underproduced nearly 400,000 single family and multi-family units from 2012 to 2019. That makes Los Angeles the metro with the most severe housing deficit in the entire U.S.

True, the recent apartment construction uptick helps ease the region’s massive housing shortage. Nevertheless, it will need to sustain and exceed this growth in the coming years to offset 30 years of chronic undersupply of apartment buildings, according to the National Apartment Association.

Single family residences (SFRs) almost completely dwarf Los Angeles’ land use. The SFR sprawl of Los Angeles is brought about by the city’s zoning plans, which lean heavily towards single family residential housing.

In fact, the deepest losses in multi-family construction have been in neighborhoods where zoning remains restrictive for this type of housing, barring taller buildings that facilitate greater density. California’s most restrictive zoning is found in San Francisco, San Jose and Los Angeles.

Cities choked by housing shortages will benefit from implementing zoning which allows for greater height for buildings — build up, not out — coupled with higher urban density. [See RPI e-book Real Estate Economics, Chapter 10.2]

Intelligent zoning allows builders to meet the needs of homeowners and renters looking to work in the city’s core, contributing to jobs in the financial, governmental, educational, medical and other high-end service trades.

Local governments may increase the incentive to build on central city parcels by reducing permit costs since additional infrastructure such as roads, sewers and utilities are not required for this type of development.

Such cost-saving policies discourage builders from sprawling outward from the urban center into remote, unsubdivided land. Instead, they encourage builders to build in urban centers, which in turn, makes cities more cost-efficient for residents.

At the same time, inner-city improvements deliver the convenient apartments and condos the growing cultural flow of urban dwellers most desire. Given the choice, most prefer to live near their place of work. Many will opt out of increasingly long commutes, but only when those inner-city housing options become available.

The obstacle of restrictive zoning regulations will continue to hold builders back, along with building material and labor shortages, rising mortgage interest rates, a still-recovering jobs market and tightened credit for homebuilders.

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Related article:

Change the law: amend zoning laws to promote multi-family construction

Want to learn more about California zoning and construction? Click the image below to download the RPI book cited in this article.