Over the last few years, the State of California has mandated a massive upzoning of cities to create capacity for a mirage of 2.5 million new housing units over the next eight years (2021 to 2029). That number was selected without any real validity of how much new housing was actually needed. It only had to be sufficiently large to force cities to upzone. To help you understand how fake 2.5 million new proposed housing units are just for California, which is about 12% of the US, Freddie Mac just issued a new report claiming that the whole country today needs only 1.5 million new units.
Virtually all cities had enough capacity in their previous zoning for any real anticipated growth. But to force upzoning, an artificially high growth had to be invented and rolled out as gospel. We are now starting to see how that build-out is occurring. In addition to upzoning, the State also required cities to actually ISSUE PERMITS for the construction of those fake 2.5 million units in the same eight-year period. For Santa Monica, we were given, and the pre-2021 City Council foolishly accepted, the illusionary goal of 8895 new units, of which 6168 supposedly had to be affordable (available at a low price for people earning fractions of the median income).
The Big Scam
But why would the State create a fake target and sell it to drive public codes and policy? The reason is the big three industries (finance, real estate and construction) want free rein to develop anything, anytime, anywhere to maximize profits. It’s that simple. State legislators (Toni Atkins, Scott Wiener, etc.) who depend on those industries’ contributions (along with the high-tech industries) are willing to demolish local planning codes and controls to satisfy their insatiable donors. Of course, the locals would never accept such a visible power grab, so elaborate camouflage had to be developed to hide the neutering of local citizens, City Councils, County Boards, etc. And the power grab had to be executed slowly so as not to rouse a citizen’s rebellion. So since 2016, a continuous avalanche of almost 100 new interactive State laws were rolled out (and are still rolling out), each one seemingly innocuous, but resulting in a complete destruction of local neighborhood control and thereby the probable destruction of the quality of life of every city at the receiving end of this scam. Of course, the business groups sponsoring and actually writing this legislation have not been and are not being identified and held to account.
All this new construction was sold as lowering the cost of housing, ending homelessness (you can already see how well that’s working), fighting racism, ending traffic gridlock, employing lots of people, and I’m sure apple pie was somewhere in there, too. Of course, the two biggest intractable myths used to sell the scam is that: first cities must always grow in population. This is not always true, and in a world of limited resources, stability with continual internal transformation will be best for many cities. And the second myth is that the “law” of supply and demand always governs: if we increase housing supply, it will always be cheaper? This is never true in a segmented housing market. If we build more Ferraris, your Volkswagens will not be cheaper. And virtually all units built in Santa Monica, for a variety of reasons, are effectively Ferraris. Such narrative myths are essential to greasing the power grab down the throats of the desperate citizenry.
Willful ignorance
The scam also required the conscious ignoring of the fact that we have don’t have the water for such a huge population increase, we don’t have sufficient infrastructure (power, transit, sewers, schools, etc.) that to build such a huge number of affordable units would require massive (unavailable) subsidies and that the concentration of all this urban housing would result in skyscrapers that would be forever millstones around our necks. None of those skyscrapers will be, nor are required to be, net zero buildings (unlike our current new single-family homes) thus locking out forever our statewide goal to be fossil fuel-free by 2045. To hide the true costs of such a scam necessitated new State laws prohibiting Environmental Impact Reports for any of these massive buildings, which would expose their real impacts and thus cause the natives to revolt. Finally, the scam naturally involved demonizing, via trolls and astroturf organizations, anyone resisting the power grab by labeling them racists, NIMBYs, elitists, etc.
Just a few Headwinds
Of course, this completely made-up 2.5M target ran into just a few real headwinds. First, the population of the State has now essentially flatlined at just below 40 million people. Whether through people leaving, high cost of living and taxes, declining birth rates, raising rents or property values, crime, Covid deaths, declining household formation, decreasing immigration, increasing homelessness, etc., etc. (chose your favorite disincentive), the State population is simply not going to grow by 5 million people (at a typical 2 persons/unit) by 2029! Before the State’s fantasy 8895 Santa Monican units (with their nominal 18% population increase) were imposed, Santa Monica’s natural 8-year growth rate was predicted to be about 1100 units (about a 2% increase.) In reality, Santa Monica’s actual population, like the State’s, has also flatlined, fluctuating between 91,000 and 93,000 since the last census.
Perhaps you say that the population isn’t or can’t grow because there’s not enough housing? But again, reality rears its ugly head, and our City has about a 10% residential vacancy rate (commercial vacancy rates are much higher). You would think such a high vacancy rate would put significant downward pressure on rents (increasing affordability) in a City where 3/4s of the people are renters? Rents are, in fact, fluctuating marginally but not enough to make a difference and certainly not enough to create an 18% population boom. The problem is not the number of units but that too many of them are too expensive for the average renter. Naturally, the 100 new States’ laws were never about mandating affordability: they were created just to increase profits and helping rent-strapped residents is never a source of profits.
The third headwind is the cost of money. Those imaginary new 8895 units are going to cost between $4.5 and $9 billion, which no developer has lying around the house. So they would have to be built with borrowed money, which, unfortunately, is currently very expensive. The City, of course, is broke fighting pedophilia/harassment cases, so will be of no funding help except to give away its precious public land for free to housing developers.
The fourth headwind is construction costs. These new units are always very expensive to build. Even with all the State-mandated giveaways (often built on City land, shrunken unit sizes, no parking required, effectively no zoning code requirements on open space, heights, and setbacks, etc.), they will still be very expensive to build and subjected to massive inflationary price pressures. The cost of construction is essentially the same for market rate and for affordable units. But, the market rate units’ rents will have to cover the substandard rents from the typically 10% affordable units. In the race to “pencil out” these projects and with all the up zoning combined with the State incentivizing giveaways, the preferred developer solution in Santa Monica has now become skyscrapers of various heights (8 to 24 floors). Skyscrapers, in turn, are more expensive per square foot to build than equivalent low-rise projects, so they rely even more on increased rent levels, creating an even pricier, gentrified City.
Finally, the last headwind and probably a most significant determinant for a variety of reasons is the cost of land. When the whole City was upzoned to meet the unrealistic State demands, current landowners made an incredible windfall. Essentially, all their land became twice or three times as valuable without them lifting a finger since now you could build twice or three times as much on that same piece of land. Every land owner who intended to sell is now madly increasing their sales cost to profit from the added value of their land, making the eventual units built there even more pricey. However, landowners who do not intend to sell their increasingly valuable properties can just sit tight (keeping their property taxes at the low previous zoning value), or they may elect to become developers and not pay the added land value taxes until many years down the road when the new building is actually completed. Upzoning always increases land costs, and this makes all projects less affordable.
So Santa Monica developers and the City are facing serious obstacles to meeting the dubious 8895 unit target in this 8-year time frame. Next week’s article will describe what is happening and likely to happen in the pursuit of this mirage.
By Mario Fonda-Bonardi AIA
S.M.a.r.t Santa Monica Architects for a Responsible Tomorrow
Thane Roberts, Architect, Mario Fonda-Bonardi AIA, Robert H. Taylor AIA, Architect, Dan Jansenson, Architect & Building and Fire-Life Safety Commission, Samuel Tolkin Architect & Planning Commissioner, Michael Jolly, AIR-CRE Marie Standing. Jack Hillbrand AIA
For previous articles, see www.santamonicaarch.wordpress.com/writing
