This article contains excerpts from Monday Morning Quarterback, May 8, 2023
L.A. City Council Approves Aggressive Plans for More Housing
The Los Angeles City Council voted 13-0 [in May] to approve new development plans allowing up to 135,000 new homes in Hollywood and downtown L.A. over the next two decades. Lawmakers cheered the passage of the two community plan updates, which were decades in the making (Hollywood’s hasn’t been successfully updated since 1988).
The Hollywood and downtown L.A. community plans provide ground rules for future development. These new rules could transform two of the city’s densest urban areas by allowing housing where it was previously prohibited and by incentivizing developers to build affordable homes in exchange for permission to construct larger buildings. Downtown’s community plan outlines an aggressive vision for housing growth, with 20% of L.A.’s new housing planned in an area making up just 1% of the city’s total land.
Under state law, the city must plan for almost half a million new homes by 2029 and city planners project that downtown L.A. alone will be responsible for 100,000 new apartments and condos. These ambitious plans have worried some downtown groups, such as Skid Row homeless service providers, that don’t want to see unhoused residents displaced by new luxury housing. Some downtown property owners and business groups said the city put too many restrictions on the Fashion District, kneecapping new housing in an area that could have produced thousands more homes in a city suffering from a severe housing crisis. “These requirements are infeasible due to real estate market, design and logistical considerations,” Central City Association President Nella McOsker wrote in a letter before the vote. “These requirements do not protect garment worker jobs but they do impede housing development.” What’s next? The plans need Mayor Karen Bass’ signature to take effect. They must be enacted before a May 12th deadline; failure to do so would force the city’s planning department to start the process over from scratch.
Sanity Finally Returning to SoCal’s Brutal Apartment Market
Apartment hunting in southern California is notoriously difficult. In the last two years, the search turned particularly nightmarish. In part, for pandemic-related reasons, the number of units available to lease fell to historical lows. Rent soared. Simply put, there are more apartments for people to move into.
Across the region, vacancy rates are rising after falling to decades-long lows in 2022 and 2021. In Los Angeles County, early last year, only 3.7% of apartments were vacant and available, the lowest level since 2001, according to real estate data firm CoStar. Now, that measure is up to 4.4%.
It was even worse in both the Inland Empire and Orange County, where the vacancy level fell to about 2% in 2021.
In Riverside and San Bernardino counties, that set a record in a data set that goes back to 1982; in Orange County it was essentially equal to a record set in 1984. Vacancies have now doubled in both areas, up to 5.4% in the Inland Empire and 4.1% in Orange County.
In Ventura and San Diego counties, vacancy similarly fell below 3% in 2021 and is now 3.8% in San Diego and 5.4% in Ventura.
A rebounding economy, stimulus payments and a desire to no longer be cooped up with others, like early in the pandemic, probably helped drive the surge. Now, the switch is flipped. As consumers worry about inflation and the direction of the overall economy, they’re forming fewer households as new apartments continue to open up. To be clear, vacancies are still far lower here than many markets around the country, which economists attribute to the difficulty of building housing in California.
Fed Hikes Interest Rates for 10th Time in a Row, but Signals Pause
To no one’s surprise, [in May], the Federal Reserve raised a key interest rate again. But this time the Fed also signaled it was ready to “pause” and said further monetary tightening would depend on how inflation and our economy respond to sharply higher borrowing costs. The quarter percentage point increase in the Fed’s benchmark interest rate put it in a range of 5%-5.25%, up from near zero just a little over a year ago. (That’s the highest level since the Great Recession of 2008.)
The Fed said its actions would be dictated by “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, economic and financial developments.” The dovish tone of the new language suggests the Fed will take a more finely tuned approach at future meetings. Talk about “cumulative monetary tightening” and “policy lags” have mainly been the talking points of officials who are more worried about the growth of our economy than the level of inflation. The Fed’s softer language still left open the possibility it could raise rates again if inflation remained high. Chairman Jerome Powell, in a press conference after the rate hike, repeated that the Fed is determined to tame high inflation. The Fed is aiming to reduce inflation, now running at 4.2% rate, based on its preferred PCE index, to its 2% target within the next few years. The Fed’s own projections signal that the range of 5%-5.25% would be a good place to pause.
While some officials advocate more hikes, only a minority of Fed watchers are forecasting more tightening. The fast pace of tightening (the quickest in 40 years), has shaken the banking system and led to the collapse of three of the country’s major banks. Economists and Fed officials think the bank sector troubles will slow lending and hurt U.S. growth, adding to the pressure on our economy from the Fed rate hikes. Many investors think our economy will slow so much, or even tip into recession, that the Fed will cut rates by the end of the year. Powell and other senior Fed officials, on the other hand, have repeatedly said they expect to keep rates high through the end of the year.
After practicing law for 35 years (specializing in real estate litigation), Lloyd Segal
assumed the leadership of the Los Angeles County Real Estate Investors Association in
2017 from the late Phyllis Rockower. Lloyd is an author, real estate investor, mentor,
public speaker and LANDLORD. He is the also the author of four real estate reference
books, including “Stop Foreclosure in California” (Nolo Press), “Stop Foreclosure Now”
(American Management Association), “Foreclosure Investing” (Regency Books) and
“Flipping Houses” (Regency Books). The Los Angeles County Real Estate Investors
Association is the oldest (1996) and largest investor group in California. In his role as
president, Lloyd is busy expanding LAC-REIA’s events and programs for members and
real estate investors. For more information, visit www.LARealEstateInvestors.com.