Is there such a thing as too much construction in desirable, urban areas?
When a concentration in urban construction means not enough construction immediately outside the city, the answer is yes. In California, the boom in urban construction is countered by a construction shortage in the suburbs — this has caused prices to rise well beyond area incomes.
For instance, in the Los Angeles metro area, residential construction has dropped the most in the area 10-20 miles from the city center. In this close-in suburban zone, residential construction in 2015 was 50% below what it was in 2000, according to a report by BuildZoom. While construction was below what it was in 2000 at all distances from Los Angeles’ urban center, the 10-20 mile range saw the biggest drop:
The dynamic looks a little different to the south, in the San Diego metro area. Here, residential construction is booming in the city center, with more than twice as much new construction in 2015 than 2000. However, once you get even 5-10 miles outside of the city center, construction is much lower:
In San Francisco, construction has also increased the most close to the city center. Further out, construction is lower than in 2000:
More urban construction is a good thing overall. Demand is focused in city centers, especially from the young Generation Y (Gen Y) demographic.
But close-in suburbs — for Los Angeles, think Pasadena or Culver City — boast the benefits of the city, with easy access to transit and a short commute to jobs and all the amenities found in the city center. Demand for homes is high here, too, and new construction is hard to come by.
Not enough suburban construction
In the above metro areas, the zones with the sharpest decrease in new construction are also home to the highest homeownership rates in each metro area.
For example, Los Angeles saw the steepest decrease in construction in the area 10-20 miles from the city center. The homeownership rate 15 miles from Los Angeles’ city center averages a staggering 80%, according to the University of Virginia Demographics Research Group. Compare this with California’s average homeownership rate of just 54%.
As such, few rental or condominium units are being built in these close-in suburbs.
Why? Builders are interested in making a profit. In the far-flung suburbs, land is cheap, thus building here is a no-brainer. But in close-in suburbs, where land is expensive, low-density single family residences (SFRs) push the cost of land-per-unit even higher, reducing the builder’s profit. So why not build high-density residential buildings in the pricey close-in suburbs?
Building dense rental or condominium units only works if high density is permitted by local zoning regulations. These regulations tend to be tighter in close-in suburbs, where wealthy homeowners are vocal advocates against density at city council meetings. Therefore, rentals and condominiums are relegated to the inner cities.
The lack of residential construction in close-in suburbs has become problematic for Californians, especially first-time homebuyers. Fewer low-tier homes for sale and an excess of high-tier inventory have pushed starter home prices higher, beyond reach for many would-be homebuyers. Further, where SFRs are being built in far out suburbs, builders focus on high-tier homes that will bring the highest prices.
More construction is needed — in city centers and the suburbs — to meet the growing demand from first-time homebuyers.