ARTICLE
This week, California's housing scene saw significant developments. The state's appeals court upheld legislation led by Senator Scott Wiener (D-San Francisco), allowing lawmakers to override local voter-approved housing density restrictions. This decision backs Senate Bill 10 (SB 10), facilitating the construction of small apartment buildings. SB 10 enables city and county governments to approve new housing projects of up to 10 units in specific urban areas, near transit hubs, without requiring environmental studies. Co-authored by Senators Toni Atkins (D-San Diego) and Scott Wiener, SB 10, in effect since last year, provides cities with the choice to adopt its measures. Our past discussions have explored SB 10's impact on California's housing policies. Legal decisions, like this recent rule allowing lawmakers to override local housing density restrictions, impact development statewide. The law was challenged by the AIDS Healthcare Foundation, which also supports more housing construction but opposed SB 10 in the state Legislature because it did not include requirements for low-cost housing. The foundation contended the legislation violated the voters’ right, under the California Constitution, to make law by initiative. The suit was joined by the city of Redondo Beach (Los Angeles County), whose voters had passed an initiative requiring their approval for more construction on existing housing parcels. “The housing shortage is a matter of statewide concern,” and SB10 is “reasonably related to addressing that concern,” Justice Brian Hoffstadt said in Thursday’ 3-0 ruling, which upheld a judge’s decision. Hoffstadt cited previous legislation aimed at addressing the shortage of affordable housing, starting with a 1965 law that required local governments to adopt long-term plans to promote adequate housing. Later laws required local governments to seek approval of their housing plans from the state Department of Housing and Community Development, and to approve proposed housing developments unless they found a “specific, adverse, and unavoidable impact on public health or safety.” Across California and the nation, developers moved to start fewer homes in 2023, a decline some experts say could eventually send home prices and rents even higher as supply shortages worsen. Developers cite several reasons for delaying new projects. There are high labor and material costs, as well as new local regulations that together make it harder to turn a profit. Perhaps the biggest factor — and one hitting across the country — is the high cost of borrowing. Rising interest rates not only make it more expensive for people to buy a home, but they add additional costs for developers who must shell out more money to build and manage their projects. As a result, fewer projects make financial sense to build and fewer homes are built. Preliminary data from the US. Census Bureau shows building permits for new homes nationwide fell 12% in 2023 from the prior year and 7% in California. Drops were recorded in both single-family homes — most of which tend to be for sale — as well as multi-family homes — which are mainly rentals. Dan Dunmoyer, president of the California Building Industry Association, said one major reason for the decline is that many for-sale home builders foresaw “a massive downturn” and stopped buying lots to develop when mortgage rates soared in 2022. In Los Angeles, home builders have another issue to deal with. Measure ULA which is a citywide property transfer tax that went into effect in 2023 to help fund affordable housing. It is called the ‘mansion tax’ and in a few exceptions it applies to all properties sold for more than $5 million regardless of if the property is a gas station, a retail mall, an apartment building, or a ‘mansion.’ Under the measure, a seller is charged 4% of the sales price for properties sold above $5 million and below $10 million. If the property is over $10 million that tax is 5.5%. According to various homebuilders and real estate folks, this measure has a dampening effect on homes for sale, which in turn translates to less building. Economic cycles have ebb and flow and construction follows. At a time when there is a statewide push for more housing at all levels, especially lower income affordable units, local measures can have the opposite impact on the housing market. We only need to look at the March 5, 2024 election results for the City of Santa Cruz Measure M which reflects how voters are leery of measures that slow housing production. Despite broader housing production challenges in California, The City of Santa Cruz and the County have seen robust housing permit approval processes - thanks to their adoption of state housing standards and responsive local government actions. Local home builders are also using SB 10 and SB 35 to take advantage of the state housing standards that creates opportunities to seek zoning variances to allow for bonus density and taller buildings. Specifically, the City of Santa Cruz has been responsive to meet state requirements as well as actually put more housing units into the pipeline. A quick review of City’s Planning & Community Development website for Active Planning Application — SC Planning & Community Develop. application pipeline lists dozens and dozens of projects in various stages of the planning permit process. The key is timing and access to capital to cover the permit to build process. According to the Planning and Community Development Department, there are 3,300 citywide housing units in the pipeline with just under 1,400 in the downtown. Of the 3,300 units, 985 are designated as ‘affordable units’ citywide and over 520 affordable units downtown. So it appears while the state and nation are way behind in meeting our housing production needs, Santa Cruz is above the waterline in housing permit approvals. Lee Butler, the City’s Planning and Community Development Director stated, “We are fortunate to have continued development interest and are hopeful that housing construction will continue despite some of the macroeconomic headwinds the industry is facing.” Again timing is key. Home builders focus on many variables in the process: how quickly can a project make it from idea, property purchase, permit application and environment review, the public hearing process, construction cost for materials and labor and the ever challenging capital access for both the initial purchase and loan arrangements while in construction and finally to units on the market for buyers or renters. It’s a long list. Bottom line: as housing needs continue to grow, timely decision-making and access to capital remain critical for developers.
This week, California's housing scene saw significant developments. The state's appeals court upheld legislation led by Senator Scott Wiener (D-San Francisco), allowing lawmakers to override local voter-approved housing density restrictions. This decision backs Senate Bill 10 (SB 10), facilitating the construction of small apartment buildings. SB 10 enables city and county governments to approve new housing projects of up to 10 units in specific urban areas, near transit hubs, without requiring environmental studies. Co-authored by Senators Toni Atkins (D-San Diego) and Scott Wiener, SB 10, in effect since last year, provides cities with the choice to adopt its measures. Our past discussions have explored SB 10's impact on California's housing policies.
Legal decisions, like this recent rule allowing lawmakers to override local housing density restrictions, impact development statewide.
The law was challenged by the AIDS Healthcare Foundation, which also supports more housing construction but opposed SB 10 in the state Legislature because it did not include requirements for low-cost housing. The foundation contended the legislation violated the voters’ right, under the California Constitution, to make law by initiative. The suit was joined by the city of Redondo Beach (Los Angeles County), whose voters had passed an initiative requiring their approval for more construction on existing housing parcels.
“The housing shortage is a matter of statewide concern,” and SB10 is “reasonably related to addressing that concern,” Justice Brian Hoffstadt said in Thursday’ 3-0 ruling, which upheld a judge’s decision.
Hoffstadt cited previous legislation aimed at addressing the shortage of affordable housing, starting with a 1965 law that required local governments to adopt long-term plans to promote adequate housing. Later laws required local governments to seek approval of their housing plans from the state Department of Housing and Community Development, and to approve proposed housing developments unless they found a “specific, adverse, and unavoidable impact on public health or safety.”
Across California and the nation, developers moved to start fewer homes in 2023, a decline some experts say could eventually send home prices and rents even higher as supply shortages worsen.
Developers cite several reasons for delaying new projects. There are high labor and material costs, as well as new local regulations that together make it harder to turn a profit.
Perhaps the biggest factor — and one hitting across the country — is the high cost of borrowing. Rising interest rates not only make it more expensive for people to buy a home, but they add additional costs for developers who must shell out more money to build and manage their projects. As a result, fewer projects make financial sense to build and fewer homes are built.
Preliminary data from the US. Census Bureau shows building permits for new homes nationwide fell 12% in 2023 from the prior year and 7% in California. Drops were recorded in both single-family homes — most of which tend to be for sale — as well as multi-family homes — which are mainly rentals.
Dan Dunmoyer, president of the California Building Industry Association, said one major reason for the decline is that many for-sale home builders foresaw “a massive downturn” and stopped buying lots to develop when mortgage rates soared in 2022.
In Los Angeles, home builders have another issue to deal with. Measure ULA which is a citywide property transfer tax that went into effect in 2023 to help fund affordable housing. It is called the ‘mansion tax’ and in a few exceptions it applies to all properties sold for more than $5 million regardless of if the property is a gas station, a retail mall, an apartment building, or a ‘mansion.’ Under the measure, a seller is charged 4% of the sales price for properties sold above $5 million and below $10 million. If the property is over $10 million that tax is 5.5%. According to various homebuilders and real estate folks, this measure has a dampening effect on homes for sale, which in turn translates to less building.
Economic cycles have ebb and flow and construction follows. At a time when there is a statewide push for more housing at all levels, especially lower income affordable units, local measures can have the opposite impact on the housing market. We only need to look at the March 5, 2024 election results for the City of Santa Cruz Measure M which reflects how voters are leery of measures that slow housing production.
Despite broader housing production challenges in California, The City of Santa Cruz and the County have seen robust housing permit approval processes - thanks to their adoption of state housing standards and responsive local government actions.
Local home builders are also using SB 10 and SB 35 to take advantage of the state housing standards that creates opportunities to seek zoning variances to allow for bonus density and taller buildings. Specifically, the City of Santa Cruz has been responsive to meet state requirements as well as actually put more housing units into the pipeline. A quick review of City’s Planning & Community Development website for Active Planning Application — SC Planning & Community Develop. application pipeline lists dozens and dozens of projects in various stages of the planning permit process.
The key is timing and access to capital to cover the permit to build process. According to the Planning and Community Development Department, there are 3,300 citywide housing units in the pipeline with just under 1,400 in the downtown. Of the 3,300 units, 985 are designated as ‘affordable units’ citywide and over 520 affordable units downtown. So it appears while the state and nation are way behind in meeting our housing production needs, Santa Cruz is above the waterline in housing permit approvals.
Lee Butler, the City’s Planning and Community Development Director stated, “We are fortunate to have continued development interest and are hopeful that housing construction will continue despite some of the macroeconomic headwinds the industry is facing.” Again timing is key. Home builders focus on many variables in the process: how quickly can a project make it from idea, property purchase, permit application and environment review, the public hearing process, construction cost for materials and labor and the ever challenging capital access for both the initial purchase and loan arrangements while in construction and finally to units on the market for buyers or renters. It’s a long list.
Bottom line: as housing needs continue to grow, timely decision-making and access to capital remain critical for developers.