Executive Strategy

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Housing Crisis or Sign of the Times

Housing Crisis or Sign of the Times?

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As I am about to start a new real estate development, I am contemplating the affordability factor and how this word has changed in Los Angeles. I have been in real estate for a little over 15 years. I decided to get involved so I could own my own home after I thought LA was too expensive. I have seen the Westside boom and the rise of the East. LA has what very few major cities around the world have: jobs, weather and the beach.

The term “crisis” is definitely a buzz word, but it is not what is going on in Los Angeles. There is a problem, yes, but not a crisis. It is an ongoing issue that has been aggravated by the scarcity of land and space. 

Local Housing Market Example:

Mr. and Mrs. Rodriguez have owned the same 4-unit apartment building in Hollywood for 23 years. It was built in 1981 and they bought it for a little under a million dollars, leveraging almost everything they had to make an investment in a neighborhood they believed in. They are good people and have treated their tenants very well. The rent is $1,200 a month and although the building needs a fresh coat of paint and the pipes are rusty, everyone is happy.

The Rodríguezes decide to sell the building. They have long considered this building to be their retirement, nest egg, their kids’ college tuition and their parents’ long term care. The sale price is set per the market rate. The new owner loves the area and hopes to move in when a unit becomes available. During escrow, the new owner is notified that she will be required to bring the building up to code. She would also like to paint it, improve the plumbing and the electrical wiring for safety.

With the purchase cost and all the improvements, the new owner will need to increase the rent to $1,800. Some tenants are thinking about moving. Crisis or sign of the times?

For years, Downtown Los Angeles has had more parking spaces than people. Back in 2005, developers were walking around with blue prints in hand ready to create and bring people to the central city. Then, the Great Recession happened. Some of these developers went bankrupt while others were forced to take smaller, less risky ventures. The result: established but risk-averse developers were constructing buildings and apartments with high price tags, which meant high apartment costs and decreased home ownership. Crisis or sign of the times?

In the early 2000s, people began to move out of LA to the Inland Empire; Rancho Cucamonga — where is that? For others, including myself, Los Feliz, Silverlake and Echo Park became home. They were considered “alternative neighborhoods” where the word “gentrification”—outsiders moving in— was a huge negative.

As LA grows and affordability shifts, lower-income areas become more appealing for the price. The store fronts, bars, restaurants, barber shops, grocery stores all have new faces. Gentrification creates jobs and increases home values not only for the people coming in, but also for families that live there. However, it also displaces people who cannot afford the rise in the rental rates.

We need to start looking for solutions. Perhaps, we can establish new 1031 exchange programs to mix business and real estate in “unlike” properties. Tax incentive programs for investors who sell and reinvest in in-need areas. We should not give tax breaks to speculators who hold on to dilapidated properties as a means of 'waiting the neighborhood out.' Maybe we can establish neighborhood programs to help with gentrification, teaching communities how to start redeveloping their own areas. 

What would be your solution? 

By Dane Flanigan