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Housing-Starved Napa OZ Adds New Projects, With Very Few Affordable Options

As remote work and the recession draw some residents out of metropolises like New York and San Francisco, some investors have plans to ramp up development in wine country.

38 Degrees North, Kennedy Wilson's multiphase Santa Rosa, California project.

Zapolski Real Estate, the latest developer to move forward with big North Bay plans, said last month it will include a rare, 100-plus-unit batch of rental housing to downtown Napa in the second phase of its $500M development plans for the city.

Neither Zapolski nor Kennedy Wilson, another developer active in the North Bay rental market, have plans for market-rate units that would be affordable for the North Bay's thousands of vineyard workers, and demand on that front is about as high as ever, according to Jen Klose, executive director of Generation Housing, a Sonoma County housing advocacy organization.

"The growth of Sonoma County's labor force has significantly outpaced housing development for several years, and the wildfires exacerbated the already deep housing need," Klose said. "Several cities, like Santa Rosa and Petaluma, have taken proactive approaches to encourage infill development in their downtown core, and we’re starting to see some of those come to fruition."

Klose declined to comment on either project but said Gen H is "generally supportive of mixed-income inclusionary housing." City housing and economic development officials with Santa Rosa did not respond to requests for comment.

The area has faced hurdles for building such housing, however. A combination of rising construction costs and relatively slow wage growth has made most multifamily development difficult, despite a clear need for rental housing, Zapolski Real Estate Director Andrew Mazotti said.

“If you’re looking at small pieces of land for 20, 30 units, we all in the business know that this stuff doesn’t pencil," Mazotti said.

Like much of the rest of the North Bay and Bay Area, Napa County hasn't seen much new rental housing in the last decade, and rents have climbed steadily as a result. The Napa metro area has seen just four multifamily buildings deliver, combining for 723 units, since 2012, and average rents in the Napa area come in at over $2K across unit types, according to CoStar.

"We still have a significant need to build more housing at all levels of affordability, especially affordable housing for workers who are employed in Sonoma County’s popular industries, to ensure that people are able to live and work locally," Klose said.

The effects of low housing output are especially stark when it comes to housing supply for the Napa Valley's 6,000 to 9,000 farmworkers. The county provides three farmworker housing centers comprising just 180 beds, where close quarters have contributed to a spike in coronavirus cases. Two of the centers closed for two weeks as a result but have since reopened following quarantine and cleaning, Napa County Deputy County Executive Officer Molly Rattigan told Bisnow.

To date, Zapolski's extensive development efforts in Napa have been largely focused on the commercial side. It is over 70% leased at its $200M First Street Napa project, which includes over 100K SF of retail, a 183-room hotel and office space. 

“We know everybody needs housing, but downtown Napa has nobody living in the core," Mazotti said. "We have the work, we’ve got offices down here, and we’ve got a lot of play, but we don’t have a lot of live. We need to get the live, so that has really been leading our project, our thoughts and our design.”

The mixed-use nature of Zapolski's second phase, the overall project scale and downtown Napa's perhaps-surprising-to-some designation as an opportunity zone all make the developer's multifamily plans work in this case, though still not exceptionally well, according to Mazotti.

“I don’t think the returns in the short term on multifamily will knock it out of the park because developing that is just challenging right now," he said.

With Napa and Sonoma counties, other glaring issues include anti-growth attitudes slowing or blocking multifamily development and a lack of land developable for housing and not reserved for the wind industry, according to Allan Montonen, a broker working out of the Napa office of North Bay brokerage Keegan & Coppin Co.

Zapolski Real Estate principal Todd Zapolski and Zapolski Real Estate Director Andrew Mazotti

“It’s a matter of finding land that you can get entitled to [build multifamily housing], both the areas are really anti-growth," Montonen, who specializes in industrial, multifamily, retail and office investment sales, told Bisnow. “When you do get something developed, or you get all the entitlement work done, then it really becomes worth something."

Kennedy Wilson has found something similar, according to Kurt Zech, the company's multifamily president. The West Coast developer just began move-ins at 38 Degrees North, a 120-unit community in Santa Rosa, and it expects to be fully entitled on a 172-unit second phase by as early as the end of the year, Zech said.

Zech said that Kennedy Wilson has historically opted for more suburban multifamily properties, seeing them as more defensible while having less competition from larger institutional groups and that its focus on site selection and entitlements make up for the challenge of building in the North Bay.

“We’re able to keep our land basis low enough where we can build in places like Santa Rosa where rents are still relatively affordable — relatively is the key term there," he said. 

Rents at 38 Degrees North, which includes 18 units affordable for incomes of up to 50% to 60% of area median income (AMI in Sonoma County is $71.9K for a one-person household), start at about $2,300 for market-rate one-bedrooms and $2,600 for market-rate two-bedrooms, Zech said.

Kennedy Wilson's project meets Sonoma County's 15% inclusionary requirement, whereas Zapolski's multifamily development will include an affordable component to be worked out between it and the city of Napa in a development agreement, according to Mazotti. The city has explored restoring an inclusionary requirement it eliminated in 2012, but it hasn't done so. 

The city is looking for Zapolski to budge a little on the level of affordability in its multifamily project, according to Napa Community Development Director Vincent Smith.

“They have proposed 15% of the units to be below market-rate. Right now, they’ve only committed to 120% of area median income," he said.

"We’re still in the beginning process of the negotiation of a development agreement, so that will probably change. We’ll probably ask for a split so that we get a little bit better affordability.”

Napa County AMI came out to about $70K for a one-person household in 2019. 

Overall, the city is in full support of residential units coming to the downtown, according to Smith. He said Register Square, a 51-unit townhome project, is the only new residential project to come to downtown Napa in maybe 25 years. 

Both Zapolski's Mazotti and Kennedy Wilson's Zech said they anticipate some level of increased demand for their projects thanks to some residents leaving S.F. and other cities.

“Now that things are changing and more people are working remotely, this opens up an opportunity for these people to work remotely and live in Napa," Mazotti said. “As people leave cities, they’re going to want to go to places where there are things still happening.”

Zech pointed to reports of plummeting rents in S.F. and some other Bay Area submarkets as a sign of wine country's positive position for at least stable rental growth in the years ahead.

Like other hospitality-reliant markets, Sonoma and Napa counties have seen unemployment skyrocket as a result of the pandemic. Both counties saw nearly unprecedented unemployment rates of over 14% in April that had improved in June (but possibly worsened with the pandemic in July). But rents in the Santa Rosa and Napa areas are still down just 0.7% and up 1.4% year-over-year, respectively, according to CoStar.

“Even if, once this thing is all over, people have the flexibility to work from home a couple of days a week, I think a lot of people would prefer to do that in the beauty of Napa or Sonoma County versus living in the city," Zech said. 

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