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THE LA PREMIUM: WHY IS IT SO MUCH MORE EXPENSIVE TO BUILD MULTIFAMILY HOUSING IN LOS ANGELES?

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Land Costs Drive Sky High Expense; Calls for Policymakers to ‘Walk the Walk’

By UC Riverside School of Business Center for Economic Forecasting and Development

March 5, 2020 — Using a unique prototype comparison of the different components that go into multifamily housing development, a new analysis illustrates why development in Southern California, and especially Los Angeles, is so expensive. The report, released today by the UC Riverside School of Business Center for Economic Forecasting and Development, finds that building condominiums in Los Angeles costs about $100,000 more per unit than in other nearby Southern California cities.

“The fundamental reason for the difference comes down to the value of the land,” said Hoyu Chong, Lead Researcher at the Center for Forecasting and the report’s author. “Los Angeles is an enormous world-famous city, ten times the size of the other locations studied, and that concentration of economic opportunity, industry, and activity means the land comes with a significant cost premium.” According to the analysis, in Los Angeles, land costs account for nearly one-sixth of a multifamily project’s total development cost compared to less than 2% in other Southern California cities studied (the cities of Anaheim, Oxnard, San Bernardino, and Riverside were used alongside Los Angeles in the prototype analysis).

“What this research tells us is that the high cost of Los Angeles land, which stems from both the huge opportunity the city offers and the difficulty of building here, needs to be addressed with policies that promote more efficient land use, whether that’s prioritizing housing units over parking spaces or allowing more people and more units on a given parcel,” said Adam Fowler, Director of Research at the Center for Forecasting. “Affordable housing by definition is multifamily housing, and where land is expensive, that cost needs to be distributed among more people in order to promote affordability.”

The report also examined countywide data and found that Los Angeles County is the most ‘cost burdened’ in terms of both purchasing condominiums and renting apartments. In all the counties studied, median condo prices and effective rent have increased at much higher rates than median income over the past decade, however, Los Angeles is a clear outlier.

The median condo price-to-household income ratio in Los Angeles County is 7.7, more than double what is considered to be healthy (a ratio of 3 is recommended), and considerably higher than Orange County (5.6), the next most burdened county. Moreover, Los Angeles County is the only county in the study group where the median rent-to-income ratio (39%) is higher than the 30% recommended by the U.S. Department of Housing and Urban Development.

“It’s not surprising that Los Angeles residents are feeling the greatest pinch considering how much of their income has to be spent on housing,” said Chong. “Breaking down actual housing development components gives us a sharper view into exactly what makes development so costly and while public officials can’t control the costs of labor, building materials, or other market variables, they can support changes to zoning and land use that will have a meaningful effect on reducing housing unit costs and increase affordability for Southern California families.”

The complete analysis, Demystifying the High Cost of Multifamily Housing Construction in Southern California, is available here.

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The UC Riverside School of Business Center for Economic Forecasting and Development is the first major university forecasting center in Inland Southern California. The Center produces economic forecasting and policy research focused on the region, state, and nation. Learn more at UCREconomicForecast.org.

The Inland Empire Business Journal (IEBJ) is the official business news publication of Southern California’s Inland Empire region - covering San Bernardino & Riverside Counties.

Eco Friendly

California Does Not Need to Choose Between Post-Pandemic Economic Growth and Reducing Carbon Emissions, New Analysis Finds

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State Has Demonstrated The Ability To Generate Green Jobs…; And If Current Trends Hold, Green Jobs In CA Will Outpace Nation By End Of Decade

Surprisingly, environmental leader California has a smaller ‘green economy’ than the average U.S. state and would need to add many thousands of environmentally friendly jobs to catch up. The good news is it’s on track to do just that, according to a new analysis released today by the UCR School of Business Center for Economic Forecasting and Development.

The study projects that California will outpace the United States as a whole in its concentration of green jobs by 2030. Moreover, the state will be close to attaining a specialty in green jobs by the end of the decade, a workforce condition that is key to attracting investment, innovation, and further job creation.

While a greener economy will require phasing out employment in traditional energy industries such as oil and gas, an analysis of the entire labor force indicates that replacing those jobs with green energy jobs can be a net-positive, adding to California’s total employment and improving average wages.

“The transition to a greener, cleaner economy is not at odds with job creation,” said Dr. Patrick Adler, Research Manager at the Center for Economic Forecasting, and one of the report’s authors. “This is critical to understand because California is facing dual generational challenges right now – ensuring economic resilience following the shocks set in motion by the pandemic and decarbonizing the economy.” The state needs to reduce carbon emissions 40% below 1990 levels in order to meet its own mandated reduction targets by 2030.

The study’s authors estimate that California’s current green labor force includes an impressive 372,984 workers but the state would need to add over 58,000 more green jobs by decade’s end to reach the U.S. state average in terms of concentration. However, if current trends, which show employment curving upwards in key green industries such as Motor Vehicles, hold, the state will realistically achieve that and more. The Zero Emission Vehicles (ZEVs) industry in particular could bring more than 63,000 jobs to California.

Additional Key Findings:

  • California already has the advantage of being a leader in green jobs, allowing it to build from a position of strength. The state has added a full 44,000 green jobs since 2010.
  • While other states seek to attract high-tech green firms, more of these companies are already headquartered in California than anywhere else in the world. The analysis recommends that the state focus on growing the labor force of innovative firms already based here, but with an important caveat: average employment at these firms is low because they tend to focus on research more than prototyping and small-run manufacturing. California leaders should work to scale-up those operations.
  • Due to technological and efficiency advances, solar and wind generation will increasingly downshift into a less reliable source of green employment even as these industries expand. To grow its Green Economy, California needs to create green jobs outside of energy. Sectors showing strong future job growth include Transmission, Distribution, and Storage; Fuels; Energy Efficient Manufacturing; and Motor Vehicles.
  • The state has a burgeoning ZEV cluster in Southern California that could potentially employ hundreds of thousands of blue-collar workers.
  • The state’s ‘Circular Economy’, a sector that attempts to shrink reliance on global supply chains through waste diversion, could add tens of thousands of jobs over the decade.
  • The analysis introduces the idea that California will have to forge its own unique green jobs strategy given the state’s unusually high cost of living. For one, operations that are viable elsewhere, may not be here, and secondly, many traditional engines of the Green Economy, such as solar energy, have already reached a level of maturity in California, significantly diminishing returns. But according to Adler and his co-authors, this presents an opportunity to expand the scope of the state’s green labor force into new areas.

“The green jobs agenda has captured the imagination of many California policymakers because, in theory, it allows workers to benefit from a green energy transition,” says Adler. “This analysis suggests that mission is anything but naive.”

The full report, Greening the Golden Workforce: Progress and Pathways Toward Green Jobs Leadership, is available here.

This research was generously supported by Next 10. The analysis was authored by Adler, Research Associate Andrew Yu and Senior Research Associate Brady Allardice.

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Economy

Storm Clouds Forming: Chance of Recession High… It’s Coming, But Not Quite Yet

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Federal Reserve Moves Are Too Little Too Late And Unlikely To Avert A Hard Landing; Labor Force Squeeze Acute In California

The overheated U.S. economy is edging ever closer to a serious contraction, which would bring to an end the over decade-long expansionary period that began after the 2008-09 Great Recession, according to Beacon Economics‘ latest outlook for the United States and California. The $12 trillion injected into the U.S. economy over a two-year period during the pandemic caused wealth in the nation to surge, which drove spending and investment to unsustainable levels. That over stimulus is coming home to roost, we just don’t know when.

“The trillion-dollar questions are when will a recession likely begin and how bad will it be; timing wise, certainly not yet,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Near-term, the economy’s expansion still has momentum, driven by historically high household savings, low private sector debt levels, and the fact that policymakers have yet to truly withdraw stimulus funding.”

The new forecast argues that although U.S. output contracted in the first quarter of the year, it was not driven by weak spending—in fact, final demand in the nation grew at its fastest clip in three quarters. Rather, the contraction was driven by the recent and enormous surge in imports that replaced domestic production—another sign of an overheated economy, not a contracting one.

To date, the tightening actions taken by the Federal Reserve have been tantamount to baby steps and will have minimal impact on demand, and therefore inflation, according to the outlook. “The Fed must do far more, and quickly, before inflation becomes an even more endemic problem,” says Thornberg. “They need to get serious about shrinking their balance sheet, and Congress needs to focus on balancing the U.S. budget. Unfortunately, this is unlikely on both fronts because public sentiment suggests we are on the edge of a cliff—and no policymaker wants to be the pusher.”

Indeed, the surge in public panic over the economy is liable to prevent the Fed and Congress from doing what they need to do to cool things off, meaning the problems associated with an overheating economy will grow worse, and when a recession does arrive it will be more severe than if the issue had been tackled quickly and assertively, according to the forecast.

Key Findings:

  • Despite some headlines, the pandemic-driven recession is undoubtedly over. With a 3.6% unemployment rate, record low inventories, and the highest pace of industrial production ever it’s clearly evident that the U.S economy is currently operating at full capacity.
  • The nation’s unit money supply (M2 relative to the size of the nominal economy) has never been higher, which suggests the United States will see even more inflation unless something is done to shrink the money supply back to size.
  • Net worth among the bottom 50% of earners increased 90% in the last two years, although wealth inequality in the nation remains far too high. At the same time, Americans paid off a great deal of debt or refinanced mortgages at ultra-low rates. The debt burden on U.S. households is much lower than it’s ever been – a good thing when a recession hits.
  • Supply chain problems are showing in the form of labor shortages. The great retirement that occurred over the course of the pandemic saw almost 3 million U.S. workers drop out of the labor force. Now there are a record 11 million job openings and demand for workers is causing wages to rise at their fastest pace in 30 years.
  • One of the most worrisome trends is the U.S. trade deficit, which, as of the first quarter of this year, is running at 5% of GDP, another way of saying the nation is consuming 5% more than it is producing. The United States “borrowed” a net $300 billion from the rest of the world in the first quarter alone to fuel this excess consumption.
  • Many of California’s regions now have lower unemployment rates than they did pre-pandemic. This includes all of the state’s major employment centers across southern, northern, and inland California.
  • California’s labor market recovery has been stronger in the inland parts of the state, due in large part to the heavy presence of the Logistics sector. Employment in this sector is now 18% higher than pre-pandemic, fueled by the continued and accelerated transition to online consumption.
  • California’s labor force – defined as the number of people either employed or seeking employment – is still 1.5% below pre-pandemic levels. But the squeeze is tighter in some regions: The Inland Empire, Sacramento, San Diego, and San Jose have completely recovered, while Ventura, Los Angeles, and San Francisco have the largest workforce deficits. “As is clear to anyone who visits a restaurant or retail store in many parts of California, where “now hiring” signs are abundant, the state is currently experiencing an acute labor shortage,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors.
  • In the first quarter of 2022, home prices in California averaged $685,000, an increase of 13% on a year-over-year basis. That price is close to double the median price in the nation (note that price growth is cooling).

View the new The Beacon Outlook here. This press release is available digitally here.

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Opinion

Supply Chain Delays and Strains to Continue through 2022

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OPINION

By Hema Dey, IEBJ Content Contributor

Managing Price Increases

From the start of the pandemic in 2020, businesses have been absorbing ongoing shocks that impacted operations and the bottom line. The supply chain delays and strains everybody hoped would resolve in 2021 seem set to continue through 2022; while the backlog of ships waiting for berths at the ports of Los Angeles and Long Beach fell to a low of 43 mid-March, experts expect a new surge of goods shipped from Asia after the Lunar New Year to drive those numbers up again. After that, the situation is unclear—the latest lockdowns in Shenzhen threaten to cut off supplies of parts and products when U.S. businesses are already starved from ongoing shortages.

At the same time, the war in Ukraine and sanctions on Russian oil are driving already-high fuel prices even higher around the world. While experts disagree on whether we can expect gas prices to keep climbing or that they’re near their peak, it’s clear significant relief is unlikely soon. That additional expense is unwelcome news for businesses of all kinds.

Knowing the current difficulties will be part of the landscape for the foreseeable future has brought many companies to the unavoidable conclusion that they have to raise their prices to stay in business. If you’ve delayed making changes in the hope that things would pass, you’re certainly not alone—but if you’re coming to the realization that you can’t wait to adjust your prices to reality anymore, then you’re not alone there either.

The Right Way to Handle Raising Prices

When raising your prices is a necessity, how you approach it can make a significant impact on minimizing any negative fallout. Your customers are naturally not going to be happy about seeing their costs go up. Anticipating such dissatisfaction is one reason why businesses put off making price adjustments much longer than they should. However, postponing the inevitable can harm your business and won’t change the factors that make an increase necessary. Here’s what you should be doing to manage price increases wisely.

The first thing to remember is that price increases don’t happen in a vacuum. Beyond simply considering the pressures on your business in terms of your growing costs, you need to know what your competitors are doing, and you need to find out fast. If your proposed price increases are wildly out of line with what the rest of your competition is doing, you could easily lose market share. We can assist in getting an up-to-date view on the moves your competitors are making to help you factor in this critical angle.

Next, you shouldn’t delay price increases, but you should also keep them realistic. Deferring the inevitable will weaken your business’s financial position and increase the pressure to put even higher prices in place when you finally do act. At the same time, you must keep in mind that your customers are almost certainly experiencing the effects of increased fuel costs and higher shipping rates just like you are. When clients feel like a business is taking advantage of a general atmosphere of inflation to boost their own profits at the expense of their customer base, they’re rarely quiet about it. Stick to doing what you have to do to keep your business healthy, and don’t be tempted to pad it.

Finally, this is absolutely the time to revisit your marketing strategy. When prices go up, buyer behavior changes. Review all your keyword searches to understand how these fluctuations may be affecting traffic to your website. Repositioning your business accordingly can help avoid unexpected hits to your sales and leads, and may even lead to new opportunities. 

Seeking Guidance

Trying to adjust to the current economic challenges can feel overwhelming for business owners. You don’t have to go it alone when you’re contemplating significant changes like raising your prices—calling in an expert consultant can give you confidence that you’re taking the right steps for the long-term good of your company and your customers. If you need benchmarking assistance, contact Iffel International here. We can help you take the right steps down a difficult road.

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