McKinsey & Company

McKinsey & Company

The housing affordability gap in San Diego is among the highest in California, with the average household shelling out 35 percent of their income for housing, and one-quarter of the population spending half of their income on rent. Recently, ULI San Diego/Tijuana brought together multifamily housing experts with local government and community leaders to discuss creative ways to increase workforce-housing stock.

“Stagnant wage growth and rising housing prices have created ‘housing haves’ [homeowners] and ‘housing have-nots’ [renters],” said Jennifer LeSar, president and CEO of LeSar Development Consultants, who moderated the discussion. “We’re getting poorer as a region because people are spending all their money on housing, rather than goods and services. People are facing longer commutes to access cheaper housing and a better quality of life.” The housing crisis is also driving workers to lower-cost cities, she said, making it difficult for employers to attract talent.

Discussion: The Housing Paradox: Why Can’t We Build Enough Housing to Match Job Growth? | More at ULI Spring Meeting

The median rent and housing price in San Diego rose in 2016, while the average household income has declined 4.7 percent, from $70,639 (U.S. Census) in 2007 to just $67,320. Meanwhile, the average rent has hit a record high of $1,743, reports MarketPointe Realty Advisors, and the average home price is now $589,260, which requires $114,000 in income annually to qualify for a mortgage, according to the California Association of Realtors. But a San Diego working family earning the median household income can afford to pay only $1,500 per month in rent or buy a home priced at $225,000.

Workforce housing represents the greatest need, but it is the most difficult to build in most California cities due to the high cost of construction and lack of affordable housing subsidies for projects housing families earning more than 80 percent of area median income (AMI), which in San Diego is $68,000 for a family of four.

The high cost of building housing is a combination of the state’s long, onerous entitlement and environmental review process and high cost of labor and land.

Ethan Vaisman, a senior consultant with research firm CoStar, presented a report on the San Diego region’s existing multifamily housing stock, a product of the building aging process, and affordability, according to a one- to five-star rating system based on age and quality of project.

Workforce housing comprises one- to three-star projects, which provide a 21 or 22 percent rent-to-income ratio, respectively. In San Diego, the average one- or two-star buildings are small, low-rise projects, with few or no amenities, built in the mid-1960s or 1970s and rent for about $1,300 per month. The highest concentration of these buildings is in downtown-adjacent communities, where they represent 70 percent of housing stock. Three-star projects are larger, value-added properties erected in the 1980s and 1990s that have been updated, provide some amenities, and rent for about $1,500 per month.

Rent growth last year was greater for workforce housing units than for newly built four-star and luxury five-star projects, rising 5 percent annually, compared with 4 percent for higher-quality product. Vaisman attributed high rent growth in lower-quality assets to inadequate supply increasing pressure on the lower end. For instance, values for one- and two-star assets in San Diego escalated 70 percent since 2010, to on average $190,000 per unit and capitalization rates dropped below 5.5 percent.

McKinsey & Company

McKinsey & Company

Leveraging Underused Land

McKinsey & Company consultant Daniel Weisfield presented research by the McKinsey Global Institute indicating that California needs to add an estimated 3.5 million housing units by 2025 to meet pent-up demand. He pointed out that the state has not increased housing production to meet the needs of its growing population and is now 49th nationally for housing units per capita. As a result, 48 percent of San Diegans cannot afford housing in the markets where they live.

Weisfield offered three bits of advice for accelerating housing production: change the rules of the game for approving housing; cut the cost and risk of housing production; and attract private investors to affordable housing and prioritize state and local funding for affordable projects.

REVOLUCION 1764, a 24-unit project in downtown Tijuana by Sedona Pacific Corporation, where two-bedroom units rent for $820 per month. (Grupo inmobiliarjo bustamante realty/Sedona Pacific Corporation)

REVOLUCION 1764, a 24-unit project in downtown Tijuana by Sedona Pacific Corporation, where two-bedroom units rent for $820 per month. (Grupo inmobiliarjo bustamante realty/Sedona Pacific Corporation)

Greg Shannon, president and founder of Sedona Pacific Corporation who also chairs ULI San Diego/Tijuana, attributed that the region’s overall housing shortage to overregulation and poor planning. Under current regulations, he said the only way private developers can build workforce housing is with no land cost and using Type 5 (wood-framed) construction.

Sedona Pacific is building housing projects in Tijuana, which Shannon noted could provide an affordable alternative for some San Diego families. One such project is REVOLUCION 1764, a 24-unit project in downtown Tijuana, where two-bedroom units rent for $820 per month.

Shannon pointed out that local governments own lots of parking lots that could be replaced with housing; but even when they do, the space isn’t used to its fullest potential. He cited a housing project on a parking lot in Solana Beach that is slated for 35,000 units, but could accommodate 120,000 units.

A conceptual redevelopment plan by the San Diego Department of Planning converting the 166-acre Qualcomm Stadium site to a transit-adjacent, mixed-use community with workforce housing. (San Diego Department of Planning)

A conceptual redevelopment plan by the San Diego Department of Planning converting the 166-acre Qualcomm Stadium site to a transit-adjacent, mixed-use community with workforce housing. (San Diego Department of Planning)

“The Qualcomm site is a major transit center, yet it’s the least well-utilized transit stop in the city, because it serves an empty parking lot—one of the largest parking lots on the planet,” said Colin Parent, an attorney and policy counsel for Circulate San Diego, an advocacy group.

Nancy Graham, a senior planner with the San Diego municipal government, said that the city recognizes the huge opportunity the Qualcomm site presents for creating transit-adjacent, workforce housing. The city’s Climate Action Plan calls for creating new housing within a half-mile (0.8 km) of transit stops, she said, so the planning department is working on a policy for identifying parcels that meet this criterion citywide.

The city is currently looking for opportunities to replace retail parking lots near transit stops with small housing communities, Graham added, pointing out that transit-adjacent development eliminates infrastructure problems and community objections to density.

Jean Diaz, executive director of the San Diego Community Land Trust, explained that the land trust model provides affordability by removing land from the cost of building homes, providing middle-income families homeownership with a mortgage payment similar to rent. The land trust retains ownership of the land, selling homes to qualified buyers subject to a 99-year ground lease and resale restrictions that ensure perpetual affordability.

David Steinwedell, executive director of ULI Austin, presented a model for creating workforce housing without public help. He initiated a private market solution in Austin, using a 501(3c) to fund housing projects for families earning 80 to 120 percent of AMI. Noting that the first fund closed with $50 million, he said this concept is a win/win, offering investors a larger return than they typically earn on investments while providing equity capital for 5,000 workforce housing units.

Aconceptual plan by the San Diego San Diego Department of Planning for replacing parking lots adjacent to transit in the Mission Valley area with mini-workforce housing communities. (San Diego Department of Planning)

A conceptual plan by the San Diego San Diego Department of Planning for replacing parking lots adjacent to transit in the Mission Valley area with mini-workforce housing communities. (San Diego Department of Planning)

Dahvia Lynch, director of development services for the east San Diego County city of San Marcos, noted a cultural shift in the types of proposals that developers are submitting, like putting housing on top of parking structures. “The burden has been on the private sector to respond to market demand and make a profit, while working within our regulations,” she said. “We have to change or find a way within the framework to help them do.”

Eric Crockett, economic development director for Chula Vista in south San Diego County, said that his city views housing as infrastructure, because it is essential to attracting employers and growing jobs. “To add another asset class to the housing market, local governments need to think about creating public/private partnerships,” he advised. To make workforce-housing production more economically feasible, Chula Vista suspends development impact fees for the first ten years and is expediting project approvals by putting sites slated for multifamily density through the environmental review process.

Stephen Haase, vice president for Baldwin and Sons, a developer of master-planned communities, contended that the inflexibility of form-based code exacerbates the inability to produce workforce housing. Cities throughout the San Diego region embrace this regulation code because it fosters predictability and a high-quality public realm with multiple uses.

“Standard rules don’t work for all projects,” he said, emphasizing that design is what adds to community appeal. He cited parking requirements as an example of a city standard that discourages workforce-housing production, costing $40,000 to $60,000 per stall.

He stressed that affordability depends on density. To reduce building costs enough to deliver projects for middle-income families, Haase said that cities would need to double housing density, allowing infrastructure costs like parking to be spread across twice as many units.

Achieving Community Consensus

The biggest obstacle to housing development in California, however, is community opposition to density, or NIMBYism, which a California Legislative Analyst’s Office report blames for the housing affordability crisis. Joe LaCava of LaCava Consulting, which advocates for communities, said that officials in California’s state government are potentially targeting Encinitas, as voters recently rejected a ballot initiative that would have put the city in compliance with the state’s Housing Element Law, which requires cities to provide housing for all income groups.

Encinitas, an affluent north county coastal community, has also been sued by developers twice for mishandling of the state’s density-bonus program, rounding down calculations to limit the number of units allowed. Encinitas Mayor Catherine Blakespear explained that the proposition had asked for a minimum of 1,100 affordable units to bring the city into compliance with the law, but only about 14,000 of 32,000 votes cast favored the initiative.

“The city wants more housing that’s affordable, not more expensive condos,” Blakespear said, “but the people in Encinitas don’t care about California’s housing crisis, they care about what affects them—‘traffic-ism.’ We hired a high-priced legal adviser to educate people about this issue, but it was double-edged sword. The mention of density bonus makes people in Encinitas blow up,” she added. “We will have to find a solution hand-in-hand with people it affects.”

Community HousingWorks’s mixed-income housing project in North Park is provides 76 affordable apartments for LGBT seniors, along with 118 market-rate apartments by Alliance Residential. (Community HousingWorks)

Community HousingWorks’s mixed-income housing project in North Park is provides 76 affordable apartments for LGBT seniors, along with 118 market-rate apartments by Alliance Residential. (Community HousingWorks)

Community HousingWorks vice president of acquisitions Dave Gatzke, whose company is developing an affordable housing project that targets LGBT seniors in San Diego’s North Park neighborhood, said that the biggest challenge in developing affordable housing is doing a good job explaining how housing affects things people care most about.

He pointed out that opposition is an emotional reaction due to a misunderstanding about the people who live in affordable housing. “They think there’s four or five families per household, when in reality tenants often are young couples just starting out,” he said, noting that no one showed up to oppose the gay senior project, but people show up in droves to oppose affordable family projects.

Gatzke also suggested that if cities want more housing built, they need to make changes to the entitlement process so that all types of projects pencil out. For instance, developers who want to build 30 to 60 units have to go through the same expensive process as someone building 200 to 300 units, which runs up the cost per unit.”

Southwest Strategies senior vice president Elizabeth Hansen works with developers to educate the community about proposed projects. She noted that the biggest challenge is balancing the needs of communities with the need to create more housing. “We encourage project applicants to engage the community from the get-go, because that’s when projects begin to take form, so there’s still time to incorporate input from community members.”

Hansen stressed the importance of social media in creating a rapid dialogue with the community around a development. “It also is our greatest tool for engaging millennials in the community planning process,” she said. She also suggested holding meetings during hours when most people aren’t working and tailoring presentations to specific groups.

Vicki Granowitz, a community organizer, serves on the North Park Planning Committee and was instrumental in completing the North Park Community Plan Update recently approved by the city council. In selling higher density to the community to provide greater housing affordability, she said, “The two areas that gave me the most heartburn were parking and traffic and community character. We had an opportunity to do something new and exciting, but boomers want to park next door to where they’re going, and millennials have an opposite view.”

Neighborhoods with historical character were excluded from higher density, so everyone tried to convince the committee that their neighborhood has historical character, Granowitz said, noting that to get consensus the committee had to balance the opposition with support from key community organizations.

Takeaways for achieving community consensus include the following: focus on the “movable middle” to overcome opposition; build relationships that facilitate acceptance; engage the community in negotiating solutions; tailor engagement strategies to various community groups; and reversing the housing shortage will involve incremental solutions.