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California's Middle Class Could Go Missing If Housing Crisis Continues

Earthquakes, fires, drought and flooding are a part of living in California, but the Golden State may be facing its biggest crisis through a problem of its own making. Population and job growth are outpacing housing. Rents and housing prices are rising, and the middle class is getting squeezed out. 

Exterior construction will soon be completed at Hayden at Playa Vista, a workforce housing development from Harley Ellis Devereaux.

Many individuals and families who make too much to qualify for subsidized housing also make too little to live in urban centers that have high rents. Without the middle class, industries will endure significant shortages in much-needed jobs in education, healthcare, public safety and more. 

Over the last 10 years, the state has produced 80,000 housing units each year, falling far short of the 180,000 homes needed annually to meet demand, according to a report from California Housing and Community Development. The state’s population is expected to reach 50 million by 2050.

The housing built in recent years mostly has been subsidized affordable housing or luxury units, but projects for moderate incomes have not been financially viable for developers and investors. Much of the new housing produced in the last decade also has been single-family homes. Comparatively, 200,000 units of housing were produced annually from 1955 to 1990, much of which was multifamily.

California needs to add 3.5 million housing units by 2025 to meet pent-up demand, according to research from the McKinsey Global Institute. The state is now 49th nationally for housing units per capita.

California's Fragile Housing Stock

Many of the homes destroyed in Santa Rosa's Coffey Park neighborhood during a wildfire storm in October consisted of middle-class housing.

Recent disasters revealed the vulnerability of the state’s housing stock. The state could lose hundreds of thousands of houses during a significant earthquake. During the Northridge Earthquake in 1994, over 87,000 commercial, residential and mobile home units were damaged or destroyed.

More recently, the Wine Country fires led to an estimated loss of over 6,000 homes, many of which were middle-class single-family homes in Santa Rosa. With the housing demand so high in the Bay Area, there is not enough temporary and emergency housing to support these families.

Legislators and local officials are looking for ways to accelerate rebuilding efforts to get people back into the region and to prevent an exodus. One local official suggested modular temporary housing to keep residents in the region while their homes are rebuilt. These efforts may also serve as examples for ways cities and counties could address their long-term housing needs.

Reforms at the state and local level need to be considered to keep down the cost of building housing, according to Bay Area Council Senior Vice President of Public Policy Matt Regan. Many cities in the Bay Area have costs and fees to accommodate union labor, energy efficiencies, community benefit agreements and mandatory inclusionary affordable housing that all add to the cost and are eventually passed down to the renter. By addressing the housing crisis as a state of emergency, projects would be able to bypass many regulatory burdens.

Until something dramatic changes the way housing is built, California residents will continue to experience the downside of a booming economy.

Insufficient Housing Creates Other Problems

The 110 Freeway in Downtown Los Angeles during rush hour

With very little housing being built for the middle class, workers not earning six figures are finding housing outside of urban centers. About 170,000 people a day drive from communities outside the Bay Area into the nine-county region, Regan said. These people get up as early as 2 a.m. and commute in from Stockton, Tracy and Manteca, causing congestion on the roads, freeways and city streets.

“Housing and transportation go hand in hand,” Regan said. “We have to invest to be able to accommodate growth.”

Californians have the worst commutes on the West Coast, spending an average of 28.9 minutes commuting to work each day, according to Overflow. Some are spending 90 minutes or more getting to work. About 8% of Stockton commuters travel over 90 minutes to get to work, often in San Francisco, while 7% of Riverside-San Bernardino commuters and 3% of Los Angeles-Long Beach-Anaheim commuters spend 90 minutes or more on the road, the New York Times reports.

Transit-oriented development is one way to reduce congestion.

“What people fail to understand with new apartment building is it will take cars off the road,” Regan said. “It will allow people to live closer to jobs and reduces traffic. We need to convince people of that.”

California Association of Realtors President Geoff McIntosh, Bay Area Council Senior Vice President of Public Policy Matt Regan, Association of Bay Area Governments and City of Clayton council member Julie Pierce, City of Mountain View council member Pat Showalter, San Mateo County Economic Development Association President and CEO Roseanne Foust and Los Angeles Times political reporter Liam Dillon

Not having enough workforce housing also makes employers rethink where they want to set up shop. Companies like Google, Facebook, Apple and other tech companies take up millions of square feet of office and have a huge impact on the Bay Area economy. Tech companies and their skilled workers are starting to view Seattle, Austin and Phoenix as cheaper alternatives.

While there is an abundance of tech skills available in the San Francisco Bay Area, the region is lacking skills that are needed for healthcare management, sales, education and teaching, and retail store operations, according to LinkedIn’s September workforce report. Similar industries in Los Angeles face worker shortages while the area has an abundance of workers in the television, communications and media industries.

“Jobs are still here [in the Bay Area], but are not being filled as quickly,” LinkedIn Director of Community Affairs Katie Ferrick said during a recent housing event in San Francisco. “[The housing crisis has] reached every single sector, and it is in everybody’s interest to really figure out and learn and productively engage so it’s not jobs versus housing. Everyone who has a job deserves housing.”

Housing Prices Are Eating Away At Family Incomes

San Francisco's North Beach

According to the McKinsey Global Institute, up to 30% of households in California metro areas cannot afford housing, and some areas were as high as 60%. About 3.7 million of the nearly 6 million households unable to afford housing live in the inner San Francisco Bay Area and Los Angeles-Long Beach-Anaheim areas.

Many families are paying two-thirds of their incomes toward housing costs, which puts a crimp on their ability to save for college, any emergency expenses or long-term finances, the Bay Area Council’s Regan said. Even when there is an increase in the minimum wage, landlords end up raising rents, leaving working-class families in the same situation.

UC Berkeley Terner Center for Housing Innovation Faculty Director Carol Galante

“All those folks in the middle are aspiring homeowners who will just not have a place in this state and in this region unless we radically change how we look at this housing situation,” UC Berkeley Terner Center for Housing Innovation Faculty Director Carol Galante said. “We’re hollowing out our middle class and our middle-class workforce and that is a problem.”

In places like Santa Clara County, where $84,750 is considered low income, the problem is even more apparent. Average rents for the county's major cities are all over $2K with Palo Alto and Cupertino fetching rents over $3K, according to RentCafé. Three-bedroom apartments, traditionally considered family housing, are over $4,400 in Mountain View.

Many people are living in RVs as an affordable option, and baby boomers are having to live with roommates, SV@Home Executive Director Leslye Corsiglia said. 

As tech giants continue to expand their presence and hire more employees, cities have fallen short of building housing to meet the demands of Silicon Valley. In areas like Palo Alto, Mountain View, Sunnyvale and Cupertino and Los Altos Hills, there is no affordable housing for the middle, Corsiglia said.

While the passage of a package of affordable housing bills will help move toward creating a permanent financial source for affordable housing, the problem will not be fixed overnight.

SV@Home Executive Director Leslye Corsiglia bottling wine at Martin Ranch Winery

“From an overall 30,000-foot standpoint, we have a housing crisis and we have a housing affordability crisis and we need to have a different response to each of those," Corsiglia said.

The passage of Measure A, a $950M bond, will put $50M toward helping first-time homebuyers and $100M toward workforce housing in Santa Clara County.

SV@Home also is partnering with developers, governments, businesses, labor, nonprofit developers and equity groups that have come together to form a task force. The group is working on solutions for the nine-county Bay Area on how to deal with the housing issue, including coming up with ways to address regulations and funding problems.

Why The Housing Issue Is Complicated

Housing construction in San Jose, Calif.

Simply building more houses in urban centers is not as easy as it sounds. Developers, investors and other interested parties face significant financial challenges to build workforce housing, and family housing often receives considerable backlash from existing community members.

Community HousingWorks Vice President of Acquisitions Dave Gatzke said the biggest challenge in developing affordable housing is doing a good job explaining how housing affects things people care most about.

He said opposition is an emotional reaction due to a misunderstanding about the people who live in affordable housing. Community members did not show up to oppose his company’s LGBT senior project in San Diego’s North Park neighborhood, but they show up in droves to oppose affordable family projects.

“They think there’s four or five families per household, when in reality tenants often are young couples just starting out,” he said.

If cities want more housing built, they need to make changes to the entitlement process so all types of projects pencil, Gatzke said. Developers wanting to build 30 to 60 units have to go through the same process as those building 200 to 300 units, which runs up the cost per unit.

MG Properties Group CEO Mark Gleiberman said the biggest challenge for multifamily investors in San Diego is the hot competition for available properties. 

“A lot of money is chasing value in the multifamily market, pushing pricing up so significantly that getting the return you want is a challenge,” Gleiberman said.

Amcal CEO Percy Vaz

If multifamily properties in San Diego were priced similar to Phoenix, rents would be about half price, he said. His company, which goes after value-add investments, recently purchased assets in Vista, California, and Phoenix. The Vista property was acquired for $320/unit and a two-bedroom, one-bath unit fetched rents of $1,818 to $1,885/month. A similar-sized unit at the Phoenix property, which was purchased for $150/unit, had rents of $940 to $1,381/month.

Los Angeles-based Amcal has not developed any workforce housing since the 1980s, according to Amcal CEO Percy Vaz. The developer is looking at micro-units, modular units and other cost-saving methods to deliver more workforce housing, but it remains challenging, Vaz said. There are no subsidies or incentives to develop workforce housing and costs are rising faster than incomes in California, especially in Los Angeles County.

“It will take political will at the county to make this happen by providing some incentives and simultaneously reducing regulatory costs, both of which are unlikely since [Los Angeles County] is primarily focused on the homeless, special needs and low-income households,” Vaz said.

What Can Be Done To House The Middle

ULI Los Angeles District Council Chair Clare DeBriere

While the housing crisis for the middle remains dire, local organizations, cities and developers are finding ways to make it work. Investors also are changing their minds about the viability of workforce housing, which is being considered recession-proof.

Some developers are powering through, such as Harley Ellis Devereaux, which is building a 125-unit workforce housing development in Playa Vista. Mayors in San Diego, San Francisco and San Jose have pushed for more housing and ways to expedite the approvals process.

San Francisco is moving forward on a plan to use $44M toward 130 to 150 units of teacher housing. Throughout California, school districts in expensive areas have been adopting the role of landlord to provide below-market-rate housing to teachers. Los Angeles Unified School District created affordable housing for lower-earning district employees, including cafeteria workers and teacher assistants.

ULI Los Angeles District Council Chair Clare DeBriere said ULI’s technical assistance panel has formed a land-use committee to look into best practices that cities around the world have used to increase affordable and workforce housing. ULI also formed a partnership with Los Angeles and a task force to aid the city’s quest for solutions.

“We are exploring real examples of positive changes cities have made [in generating affordable housing] to give city leaders an easier path to follow of proven success and help them make decisions in more impactful ways,” she said.

City of Chula Vista Economic Development Director Eric Crockett and ULI Austin Executive Director David Steinwedell

Many California cities have been pushing forward with ways to increase affordable and workforce housing. Chula Vista views housing as infrastructure because it is essential to attracting employers and growing jobs, according to Chula Vista Economic Development Director Eric Crockett, who spoke during a recent ULI event in Southern California.

“To add another asset class to the housing market, local governments need to think about creating public-private partnerships,” he said.

To make workforce-housing production more economically feasible, Chula Vista suspends development impact fees for the first 10 years and is putting land zoned for multifamily through environmental reviews in advance of development.

Mountain View has been among the Bay Area cities exploring ways to add more housing. The city is considering a plan for up to 10,000 units of housing in North Bayshore because Google and other employers in that area want housing nearby for their employees, according to Mountain View council member Pat Showalter.

This project, much like other major projects in the Bay Area, has met with controversy. In September, Google reportedly said it would block housing if the city did not approve additional office.

Mountain View has built 12,000 affordable housing units, and because they are well-built buildings and add to the neighborhood, community members have been asking for more. But it costs at least $500K/unit of affordable housing to build, according to Showalter.

“We really need help to pay for that [housing],” Showalter said. “Money to come from the federal government has slowed to a trickle and we expect it will be turned off.”