While housing affordability is a complex problem, its root can often be distilled down to an Econ 101 lesson on supply and demand. Despite many measures that governments have tried, lack of affordable housing continues to plague cities throughout the U.S. At its core, the affordability crisis stems from a lack of sufficient supply at all levels, including affordable, workforce and market rate. In many markets, we simply don’t build enough housing to address the demand, which drives up rents for tenants and drives down affordability. Governments and developers need to work together towards their common goal of having a housing landscape that works for all residents. 

Los Angeles, for example, builds less than 1% of its housing stock annually, which is well under the recommended 3% to maintain housing equilibrium to account for job and population growth and obsolescence of existing housing.

Even in 2019, amidst low interest rates and widely available equity, the County of Los Angeles built only 15,000 units, one fourth of what was needed according to its own regional housing needs study. Despite this critical shortage (and the opportunity that should bring), many developers are hesitant to undertake projects in Los Angeles and unfortunately the problem is getting worse. A number of current challenges are causing developers to shy away from the city at a time when more housing is desperately needed.

A lot of developers’ reluctance stems from frequently changing rent regulation policies, the lengthy city approval process for new development and tax regulations like Measure ULA, which has been particularly problematic for encouraging new development in the city.

Measure ULA, which imposes a 5.5% tax on properties exceeding $10 million, was especially problematic not only because the tax has a material impact on the profitability of new development, but also equally as important, it caused developers to wonder what might be next.

In addition, the current rhetoric from a minority of elected officials has many developers fearing the “stroke of the legislative pen” could further erode their ability to successfully build in the city. Instead, many are turning to areas outside the city, county or state, lessening the local housing stock and further adding to the availability and affordability crisis the city is desperately trying to solve.    

Uncertainty creates a hesitancy to invest in these areas, which ultimately drives up housing costs due to a lack of sufficient supply for renters. Markets with more regulation that are subject to frequent change, make it more and more challenging to have the level of certainty necessary to underwrite long-term projects. Developers need to raise capital to fund their projects from investors who have investment choices across the globe and if an area presents too much risk or unpredictability, investors will simply choose to invest their dollars elsewhere. 

That does not mean development cannot exist where there is regulation. In markets with well-established and stable regulations, investors find more predictability and can price these regulations accordingly. Governments can help ease developer and investor concerns about long-term projects by providing more stable and predictable policies that can still meet their reasonable objectives, but also give them certainty they can underwrite.

Governments can work not only in providing more predictability in the regulatory landscape, but also in the approval process. “By right” legislation, which allows certain projects to move quickly through the approval process, is a key legislative factor to get more housing built.

A UCLA Institute of Transportation Studies looking at 350 projects entitled through the City of Los Angeles’s successful Transit Oriented Communities program found that by-right projects were permitted 28% faster than discretionary projects, resulted in a larger average project size, and increased the number of homes reserved for low-income households.

With the current discretionary review process used in many cities, a small number of community members who are against a project can sway local officials to block or limit a project, which contributes to the pervasive NIMBYism, significantly slows down projects and disincentivizes developers, all of which reduce the production of housing and further exacerbate the housing shortage. “By right” legislation helps avoid NIMBYism and projects being unnecessarily delayed while still allowing a city to encourage the types of development it would like to see within its borders.

It is not only governments who have a responsibility in this public-private partnership. Developers need to work with elected officials to understand their concerns and find ways to help meet those needs while still delivering for their investors. 

It is important for developers to recognize the critical role they play and how their support of reasonable legislative policies helps create a steadier landscape in which they can more successfully operate. 

When developers reject common-sense regulations, they can undermine their ability to successfully partner with governments and make it more difficult to ultimately create their desired stability.   

Over the past few years, California’s and Los Angeles’ elected officials have enacted a number of helpful developer-supported regulations focused on housing production. Recent state legislation has allowed for more density, reduced parking requirements and more “by right” housing approvals, all of which have the ability to simultaneously increase new development, generate revenue for governments and bring down housing costs for renters. While still in the early years of these policies, we are already seeing the positive impacts of faster approvals, more density in undersupplied areas, and increased housing production. 

While housing affordability is an extremely complex problem and requires a multi-pronged approach, it is clear that it can only be solved when governments and developers work together. There needs to be a balance between protecting tenants and providing developers the stability and framework necessary to produce new housing, and this requires compromise and vision from both sides. States and municipalities that are able to work with developers to find the right balance will be able to more meaningfully tackle the problem of affordability for their residents.

Sean Burton is the chief executive of Cityview, a vertically integrated real estate investment management and development firm.