There is little question that, in most parts of California today, the idea of “smart growth” is winning the political battle. The land-rich areas of the Inland Empire and the Central Valley remain suburban holdouts, but in most of the ret of the state, the core ideas – higher-density housing, mixed-use development, and even improved transit service – are gaining political acceptance.
Now comes the second battle – the battle for investors. And it’s really a battle to get private investors interested in an underserved market: moderate-income families. Increasingly, conventional real estate investment – for housing and for retailing – is targeting only the top one-third or so of the market wherever that market may be. Private investors have long been interested in building high-density housing or high-end retail in West Los Angeles or coastal Orange County. What is beginning to change is that some investors are digging deeper into the market to go after the middle-income folks.
In a manner reminiscent of the socially responsible investment funds that were all the rage a few years ago, some investment firms have begun using the “smart growth” moniker as a marketing tool to investors. One example is the Southern California Smart Growth Fund, a real estate investment entity with $100 million in equity that was created by Pacific Coast Capital Partners, a major equity investment firm based in the Los Angeles area. Though Pacific Coast Capital has done a wide range of projects, including residential developments, the two projects the Smart Growth Fund is currently promoting are commercial – reuse of a former NASA site in Downey and a renovated shopping center in South L.A.
These projects are familiar in a certain way because they are redevelopment-type projects – taking old industrial and retail land and recycling it for business-related developments. The bigger challenge is the residential part of smart growth. Traditional public subsidies aid people making less than 120% of median income. But 200% to 250% of median income is typically required today to buy a market-rate house in California. So, in L.A. County, for example, a family of four with an income between approximately $50,000 and $110,000 falls into the gap, making too much money for publicly subsidized projects but not enough for market rate housing.
This income range is where many “regular folks” live. But most residential real estate investment goes to market rate projects above that range, while smaller amounts of capital flow to “affordable” projects below that range because of subsidies and other government incentives.
There is nothing inherently “smart growth” about the housing preferences of middle-class families. Indeed, the experience of the last century has been quite the opposite. But the pro-forma realities in today’s California real estate market are pushing the middle-class toward higher densities – and, whether they like it or not, toward smart growth-style development. Simply put, there is no way an $80,000-a-year family can hope to afford a single-family home in most California communities, especially near coastal job centers. Townhomes, condominiums, and more innovative products – such as the four-story buildings with two-story flats in West L.A.’s Playa Vista – are becoming the norm.
There are really two components to the middle-income housing investment question — private and public. The question about private investors is simple: How do you get institutional investors interested in middle-income real estate development projects? As Jay Stark of the Phoenix Group – a major middle-income developer in L.A. – said recently in an interview with The Planning Report: “Companies doing this type of housing, like The Lee Group, the Olsen Company and others, have not traditionally used a lot of institutional capital. They’ve been using it on a one-off basis but primarily have relied on a lot of ‘friends and family money.’”
In other words, even today, middle-income housing that helps create smart growth neighborhoods is mom-and-pop stuff. The big institutional money still goes elsewhere.
On the public side, the question again is simple. Public subsidies and incentives stop at 120% of median income – about $50,000. If public policy is going to close the gap, what policies should be used? The more complex question is whether there is tolerance – even in today’s world – for public subsidies and incentives that help people who make $70,000, $80,000, or maybe $100,000 per year.
There are very few precedents in American history for the middle-income housing problem in California today. One of them, however, is in New York City, where land constraints and high home prices drove both public agencies and private corporations toward high-density development and subsidized middle-income housing decades ago.
More than a half-century ago, when single-family home ownership for middle-class families was by no means assured, Metropolitan Life Insurance Company undertook the creation of several large and well-designed apartment projects as rental housing for the middle class. Met Life not only wanted a long-term investment, it also wanted to create healthier living circumstances for their policyholders. Eventually, Met Life exported the idea to other cities, including San Francisco and Los Angeles, where the company built what is now known as Park La Brea in Los Angeles. Today, with real estate prices sky-high in L.A., Park La Brea has been reborn as an attractive and even hip in-town location for middle-income renters.
The postwar suburban housing boom in the ‘40s and ‘50s blunted the need for middle-income rental housing to some extent. Even so, New York City and New York State began experimenting at that time with middle-income housing programs that still exist. The primary purpose of these programs was anti-suburban – to stem the flow of middle-income families from New York City to the suburbs by creating attractive, but high-density, housing opportunities inside city limits.
The most durable of these programs was the “Mitchell-Lama” program, which led to the construction of more than 100,000 rental and co-op units by private developers. The incentives New York State provided to these developers came from a menu familiar to anyone knowledgeable about today’s affordable housing programs: Low-interest mortgages and tax incentives in exchange for a promise of limited equity return. The two major differences between Mitchell-Lama and California’s affordable housing efforts are one-stop shopping and a focus on what we now call “workforce housing.” The first may be preferable to today’s six or seven layers of financing required for affordable projects, which bump up transaction costs. The second is simply a reflection of the fact that New York was seeking to stem the flow of teachers, police officers, firefighters and others to the suburbs – a goal that resonates in California today.
The public and private efforts to secure workforce housing in New York during the postwar era are not without problems. Park La Brea-type projects, however attractive, were based on New York’s grim reality that most middle-income families could never afford to buy their homes. This state of affairs is becoming increasingly true in California, though we are not quite willing to accept it as a reality. Also, programs such as Mitchell-Lama do operate outside the marketplace with a lot of governmental control. Forty-nine years after the Mitchell-Lama law was passed, each project maintains a state-supervised waiting list of prospective residents, and New York State produces a thick report on the performance of each project every year.
Still, if smart growth is to succeed in California, middle-income housing is the key. And as the average home price drifts toward $500,000, lessons from elsewhere may become increasingly relevant in keeping the American Dream alive — in a smart growth context — here in the Golden State.
