No, Developers Are Not Tearing Down Los Angeles to Build Half-Empty Luxury Apartment Buildings

The AVA apartments under construction in Little Tokyo.

I have a lot of social media discussions (read: arguments) about housing policy and development, and recently I've been hearing some pretty crazy claims. Here's one from just yesterday, referring to the new, mostly luxury-oriented housing springing up across Los Angeles:

Have you ever walked into one of these newly built boxes and walked around or inquired about vacancies? Because several of us have. We have yet to find ONE BUILDING WITH AT LEAST 50% OCCUPANCY ...  I can show you more than 3 dozen buildings that have been open for 2-3 years sitting half empty. 

This statement was made by someone who opposes new construction if it means the demolition of rent-controlled homes. It's a perspective I understand, but if it were applied across the city we'd never build anything, and that would mean even lower vacancies and higher rents across the board. In a built-out city like LA, growing up will inevitably mean some tearing down. That doesn't mean we ignore the impacts on displaced households, but it does mean that we need to accept that every building can't be preserved if we're going to increase the supply of housing.

And I think it's important to note that rent control is not a long-term solution for the vast majority of households, or for the city itself. Rent control (or rent stabilization) only helps keep your rents stable for you as long as you stay in your unit—if you move to another neighborhood, or you're an empty-nester who wants to downsize, or part of a newlywed couple who wants to upgrade so you can start a family, rent control doesn't do you much good, because when you vacate your unit the landlord can charge whatever they like from the next tenant. If you've lived there a few years and the housing shortage has only gotten worse, whoever moves into your unit is going to be paying considerably more, and wherever you move you'll be paying more as well.

Are New Buildings Half-Empty?

But lets get back to the statement about new luxury buildings sitting half-empty for years at a time. Does this hold up under scrutiny? I think the place to start is to think about this from the perspective of a profit-motivated developer or landlord. If I were a developer, what would it cost me to operate a building that's only half full?

If I have a new building with 100 units, average rents of $2,500 per unit, and 50 percent occupancy, my building is earning $125,000 per month. I have a lot of costs that I need to pay with that money, including the loan I took out to build or buy the place, and all the various maintenance, repairs, and upkeep that go along with any building.

Fifty percent occupancy, essentially by definition, means that I'm charging too much for my units. So let's say I lower my average rent to $2,000 a month. Maybe that gets me to 100 percent occupancy, at which point my building is earning $200,000 a month in revenues. Even 80 percent occupancy would get me up to $160,000 a month.

With that in mind, why, whywhy would I keep charging $2,500 a month for my units? Why would I let my building remain half empty for years at a time when I could lower my prices and earn something on them? Remember that new buildings aren't subject to rent control, so if I, the building owner, decide I've undercut myself and leased my units too cheaply, I can always just raise rents next year. It's not a very painful mistake to have made, so making sure that every single unit leases for the maximum possible amount is not essential.

Sunset Gordon Tower, one of the few new buildings in LA that truly is vacant, after a court ordered all tenants to vacate. Photo by Jesse Lingenfelter.

So The Buildings Aren't 50% Vacant. How About 12 Percent?

Another number I've heard bandied about recently is this: 12 percent of apartment units built in the last decade are vacant. The number actually comes from a City report, citing an internal City of LA data-set as its source. As a result, there's really no way to confirm or deny it other than performing a census of every building built in the past 10 years. So while I strongly suspect that the city's 12 percent number was erroneous—skewed by a few building openings that added thousands of "vacant" units to the mix, even though it's normal practice for new apartments to take 6-12 months to fill up—I can't prove it wrong.

So I won't. Let's just take the 12 percent number as a given: 12 percent of apartment units built in the last 10 years are vacant, 88 percent are occupied. What's that look like?

First we'll start with some data on how many homes are being demolished in the city. Data from the Department of City Planning's 2014 Growth and Infrastructure Report, below, tells the story on demolitions and new units.

The Department of City Planning's 2014 Growth and Infrastructure Report shows that there were 1,868 multifamily homes demolished between 2010 and mid-2014, and 19,255 new multifamily units constructed. Source: Department of City Planning.

Since most of those single-family demolitions were probably replacements/mansions, and therefore not really relevant to a discussion about what lower- and moderate-income families can afford, we'll ignore those and focus on the multifamily numbers. There we see 1,868 multifamily units demolished between 2010 and mid-2014. Over that same time period, 19,255 new multifamily homes were built, so for every unit demolished, a little more than 10 were built in its place. 

For the sake of using round numbers, lets say we demolished 1,000 rent-controlled homes and built 10,000 new apartments. Even with 12 percent vacancy in those new units, that leaves us with 8,800 occupied homes where just 1,000 once stood—a 780% increase. Most of the people occupying those new units were already in LA, or they were on their way here. If they didn't end up in one of those 10,000 new units, they'd be competing with you for whatever's already here, including all of the rent-controlled units on the market.

Looking for Solutions that are actually Solutions

Rent control works for some people, but for most of us it's not a long-term solution, and the city can't rely on pure preservation to keep housing affordable. That's pretty much what we've done for the past 30 years, to disastrous effect. Neither can it rely solely on building market-rate homes—but if the supply of housing can't keep up with demand, we're already sunk.

There are many policies available to protect existing residents that also can support an abundant supply of housing. My top priority would be to adopt a private construction, non-profit ownership model for multifamily housing throughout the city. This would be cheaper than building new affordable housing, would mix low- and moderate-income housing evenly throughout the city, and would be financially sustainable so that affordability was not dependent on permanent subsidies. It would also take from the best parts of rent control, keeping rents low but allowing for the freedom of movement that rent control does not.

I've also written at length about how the density bonus needs to be used more effectively. If every building took advantage of this law, each 1,000 units built in Los Angeles would include between 8 and 14 percent for low-income residents, all at no cost to the city. Unfortunately, the same people who oppose any and all demolition of rent-controlled buildings, whatever the circumstances, also tend to oppose the density bonus. We need to reframe the density bonus in a way that reveals how their opposition is directly contradictory to an affordable city.

We should adopt policies that tie zone changes and general plan amendments to mandatory affordability targets, when they request increases in density—similar to what's proposed by the Build Better LA initiative, but without all the extra baggage.

Proposition U should be repealed and the upzoned commercial space should include mandatory affordability targets. Parking minimums should be repealed or reduced, decreasing the cost of new housing and the incentive to drive everywhere (people who oppose development usually oppose it because they're worried about traffic. Accessory dwelling units ("granny flats") should be permitted on every single parcel 5,000 square feet or larger, by right.

Partial map of zoning areas in LA. Salmon/pink-colored zones were affected by Proposition U, and could produce a massive supply of affordable housing at no cost to the public. Map from Property Shark.

And although I haven't written about it yet, I also think there's some promise for a "rolling" rent control law. Currently rent control is limited only to multifamily buildings built before 1979, which necessarily means that the stock of rent-controlled housing can only decline over time. Paired with other pro-housing rules, it might be time to consider changing the law so that any building over 30 or 40 years old is automatically subjected to rent control. In this way, every new home built today is a rent-controlled unit in the future, and so we can better align the interests of today's residents with those of tomorrow. Implementation would be tricky, but I believe it's a conversation worth having.

There are a lot of options available to us if long-term affordability and a strong, anti-displacement safety net is our goal. Stopping all development that requires the demolition of existing units, with no other consideration for broader impacts on the housing market—which even rent-controlled units are ultimately subjected to—is not a solution.