Multi-Family Remains Strong; Labor, Construction Costs, and Interest Rates Remain a Concern

Multi-family development continues in California even as construction and labor costs still affect the market. Kitty Wallace, senior executive vice president at Colliers, and Caroline Guibert Chase, partner at the San Francisco office of Allen Matkins, shared insight on what’s happening in the multi-family space and updates on how legislation is helping create an environment to allow for more development.

COVID Put the Rental Market Under Pressure

Throughout the COVID pandemic, multi-family investors “did a lot of pivoting,” shares Wallace, thanks to interest rates, rental rates, and the fact that “everyone was shut down and you couldn’t rent units.” Rising interest rates have directly affected construction costs, which influences the cost of home ownership, making it more difficult for some buyers to enter the market. As a result, California has one of the lowest rates of homeownership in the country.

This increases pressure on the rental market. During the pandemic, many people left the urban markets and went to the suburbs, where they could find more affordable housing and stretch their budgets. Remote work options let them work from anywhere in the country, and with restaurants and entertainment centers closed, they had no reason to stay. As schools, offices, and entertainment centers started to open, many of the workers who left decided to return and had to compete for available rentals with buyers recently priced out of the market.

California multi-family Is Still a Hot Spot

In the last 25 years, Los Angeles and San Francisco consistently have been in the top 10 markets, a trend that reversed during the pandemic. Some investors looked to markets they felt were safer even if they brought in lower returns. However, they still wanted to be in California thanks to the high barrier to entry. Wallace notes that “40 cents of every dollar in the market is coming to multi-family.” Even so, supply is not keeping up with demand.

Remote work gave Californians the flexibility to move to more affordable places and larger homes. According to Wallace, the Inland Empire, San Diego, and Orange County saw “most of the rent increases because those pockets were where you could go to work and go to school.” A closer look at what’s happened in San Francisco underscores some of the current multi-family trends. Rent in the city still lags behind 2019 numbers because workers there are able to stay in the suburbs and commute into the city. Demand increases wherever people decide to go.

The Need for Moderate-Income Housing is Increasing

California is short millions of housing units, and the cost of labor, construction costs, and legislation are slowing down developers. Still, people need homes they can afford. This has been true for affordable housing, but that’s not the only area. Developers already dedicate a percentage of their properties to affordable housing. However, high construction and labor costs make this less profitable. To compensate, developers have to increase the number at the high-end level.

“Any housing is good housing,” says Wallace, but this is leaving a void in the market for moderate-income housing. Capital is here, and rents continue to outpace inflation, but we need to build more. Successful developers know how to navigate the process to get entitled or have staff on hand who can do this for them.

Legislation Is Clearing the Way for More Development

Both Wallace and Chase note that the state government is taking action to reduce legislative barriers to development. For example, they allow people to build accessory dwelling units in their backyards, but there’s no way homeowners will meet the need by installing one or two of these units in their yards. Chase points to the Housing Accountability Act, which has allowed developers to incorporate ground-floor retail — currently a popular amenity in multi-family — into their projects. Developers also can use this law as a tool to “prevent local jurisdictions from applying design or development standards in a manner that is not an objective application of those standards,” she adds.

SB330 specifically addressed the state’s housing crisis, in part, by strengthening the Permit Streamlining Act and the Housing Accountability Act. Developers can use SB330 to streamline the approval process and lock in ordinances and policy standards in place at the time they submitted the application. The bill also created the new Housing Crisis Act of 2019 law, which stops jurisdictions from “imposing design standards after 2020 that are not objective” and caps the number of units it can approve. In order to meet housing needs, local jurisdictions must move residential projects through the pipeline.