Multifamily housing in California continues to see increasing rental rates, with estimates showing rates across the state are anticipated to grow by 3.6 percent in the next year. According to Alliant Strategic Development, the rise in rental rates has created an increased need for affordable housing, especially as more Californians rent their homes.
“We started Alliant Strategic Development recently to react to the death of affordable and workforce housing here in California. We currently have about 1,700 units in entitlement and/or about to break ground, and they are a combination of low income, housing tax credit and workforce housing, which serves the missing middle,” Eddie Lorin, CEO of Alliant Strategic Development.
According to the affordable housing development company, more housing for middle class and low income populations is needed as the gap between wages and rental rates grows wider. In fact, Alliant Strategic Development reports most Californian households have $500 remaining after paying rent.
Currently, rental rates across the state average $1,566 per month, according to RentCafe. At the same time, the U.S. Census Bureau reported a median household income of $75,235 per year. Despite high rates, many residents turn to multifamily properties due to similar housing costs for single family homes. According to Zillow, the average price for a home in the state is $734,612.
However, when looking at urban core markets of the state, rental rates on average are higher. In Los Angeles, rental rates average $2,563. In San Francisco, rates are even higher at $3,244 per month, according to Rentcafe.
Across the state, rental rates are expected to continue increasing, with a recent Multifamily Outlook report from Freddie Mac showing an eight percent growth in rents in urban markets by the end of 2022.
This growth is in part due to the unprecedented demand that has been observed in the sector in recent years. The same report showed that in 2021, multifamily sales totaled $213 billion, which is approximately 10 percent higher than sales recorded in 2019. Multifamily sales are expected to grow an additional 10 percent to $234 billion by the end of 2022. As sales increase, the value of apartment properties also went up 16.8 percent in 2021. This competition driven by increased demand is likely to continue to push rental rates even higher.
Because of the increased demand, multifamily supply continues to be scarce. According to the National Multifamily Housing Council, the United States needs to build an average of 328,000 new multifamily units each year through 2030 in order to meet current demand.
However, Alliant Strategic Development offered several solutions that could aid in offsetting costs for renters. Rental rates could be offset through making rental assistance, including vouchers for rent payments, more available. Improving zoning laws could also allow for more affordable housing to be built on underutilized spaces. According to the development company, this would offset the cost of construction, make more product available, which in turn, would lower the overall cost of rent.
Further, low income housing tax credits can help developers to create affordable housing at lower costs. The low income housing tax credit program gives governing bodies approximately $8 billion per year to authorize tax credits for the acquisition, rehabilitation or construction of affordable housing properties.
“We need more vouchers to solve this problem, and we need more cheap capital from foundations and wealthy individuals, because it’s the safest investment, you’re going to find,” Lorin said. “If rents are low, you’ll never be vacant. It’s a capital preservation model, and we need to emphasize that and sell tax-free bonds at low interest rates.”
Alliant Strategic Development is looking to utilize these solutions in several upcoming workforce and affordable housing development projects. Some current projects by the development company include the 177-unit Topanga at Woodland Hills, 220-unit Sync on Canoga in Los Angeles’ Canoga Park neighborhood. According to Lorin, the workforce housing projects will include rental rates averaging $2,000 per month compared to luxury units, which average about $3,000 per month.
“I just want to highlight that we need to create structures for people to invest at a lower cost of capital to build more affordable housing. That is the number one message I have, because many hundreds of thousands of units are not being built because of a lack of cheaper capital and cheaper doesn’t mean riskier. Cheaper just means safer with lower rents. You can’t get a high return and that’s what we have to accomplish as an individual, Lorin said.