CCRE EXCLUSIVE: Innovative Paths to Housing Production

Panelists:

Moderator: John Sebree, C.A.R. CEO

Muhammad Alameldin, Policy Associate, the Terner Center for Housing Innovation

Kecia Boulware, Regional Vice President, The Michaels Organization

Dalila Sotelo, President, Residential Division, Primestor Development, and Commissioner, City of Los Angeles Affordable Housing Commission

Jason Ward, Associate Economist at RAND, and Associate Director of the RAND Center for Housing and Homelessness in Los Angeles

Ron Walker, Vice President of Operations, CFC Properties, the Cook Group

Summary:

Panelists explored the potential of adaptive reuse, or repurposing underutilized commercial buildings for residential units, as potentially an effective method to produce a lot more housing units. Economist Jason Ward noted that in studying this approach in Los Angeles, the lessons are transferrable across high-cost metro areas to make these projects more tenable but it’s not a silver bullet to the housing crisis and just one of many solutions that should continue to be prioritized to increase production.

As another method to scale up production, Terner Center Associate Muhammad Alameldin commented on the use of off-site construction to scale up production. Given the urgent demand for housing, he identified as one of the barriers to this approach is the great deal of more factories that are needed to make off-site construction more scalable across the state to reduce costs and bring efficiencies to the market; ultimately, if scaled up sufficiently, this approach could reduce costs by 30% and time by 40%. He added that since it’s a completely controlled environment and entirely repeatable in multiple locations, off-site construction could be used not only for single-family housing but also hotels and large multi-family developments.

Moderator John Sebree asked Kecia Boulware, a developer for the Michaels Organization, about being one of a few developers playing a key role in the revitalization of Jordan Downs, a 1950s-era public housing development and how this major revitalization could be a national model. Boulware commented that the Jordan Downs development is a unique situation because it had a 26-acre site adjacent to the housing authority site that was acquired to make the overall development larger, allowing Michaels Organization to bring in commercial services and double the density. She added that it took boldness and vision on the part of the city to move the project forward and in order for future cross-sector collaboration to be effective, we need to prioritize more bold public infrastructure planning so that developments have the right amenities to make projects thrive.

Dalila Sotelo of Primestor was asked the emergence of new private equity impact funds that are financing affordable and supportive housing as a new approach to produce units faster and cheaper without government subsidies. Sotelo commented that private equity should be applauded for joining the space because we all need to be part of the solution for a collective problem—i.e. our housing crisis; she added that private equity’s higher return metrics mean they can often get better performance and accountability. She cautioned, however, that private equity will not take place of government subsidies but both funding streams can contribute to facilitating housing development and we should further encourage private equity options to help expedite production during a time of such crisis.

Ron Walker of CFC Properties is deploying a private market solution to the housing crisis in his home state of Indiana. As a private company, he is leading the development of housing affordable to the company’s workforce because the private and public markets were failing to deliver supply solutions for his working class employees in a manufacturing environment. He noted that his county hasn’t had a new subdivision since the 1960s and given the intense competition for workers, they approached the problem by selling historic properties, created a fund, and then started developing housing with the fund’s monies so that they housing units could be marketed directly to employees. He concluded, “The private sector needed to step in and we had the resources to do it.”

Panelists also discussed the complications and barriers imposed by inflation and supply chain issues when it comes to producing more housing. Ward commented that these issues are hard to solve with policy solutions and that it’s better to address other costs to counteract the negative effects of the supply chain issues, such as streamlining approval processes and facilitating by-right development with the hope that those steps will split the difference while supply chain issues resolve themselves.

Sotelo added that the cost of land really drives up costs and a key solution is to look to surplus public land and land owned by school districts, which can be a real game changer in reducing costs for development. According to Sotelo, the Surplus Lands Act has been so helpful in making more property available and incentivize the future potential of overlooked parcels. Adding to this point, Alameldin commented on the potential of land owned by religious institutions as well. However, both schools and churches don’t have development experience so they need to form a partnership with a reputable developer and understand that the process could take 5-7 years. California school districts own nearly 151,500 acres (approximately 10 Manhattans) of land. More than half (61 percent) of the potentially developable properties are located where entry-level teachers face housing affordability challenges.

Adding to the commentary on surplus land, Boulware noted that the Michaels Organization is redeveloping two blocks of land in downtown San Diego that were previously owned by the state. It is an emerging strategy of the Newsom Administration and HCD to promote the use of surplus government land and excess state properties for housing. Boulware noted that the state’s sovereignty over the properties was immensely helpful to the developer because it expedited the development process and approvals. Michaels Organization is also using innovative financing tools like recycled bonds rather than the Low Income Housing Tax Credit or other subsidy programs so that the developer can move more quickly without competing in funding competitions. The units will also be targeted at 80-120% AMI, which fills the need for more middle income housing.

Sotelo also brought up the continued potential of ADUs to greatly increase supply and create wealth and investment opportunities for individuals; state and local governments have multiple programs to facilitate and finance ADUs and more Californians should take advantage.

Next, Sebree asked the panelists about the fact that Governor Newsom recently presented a revised state budget proposal to the Legislature and revenue growth over the last two years has been extraordinary and left the state with an enormous surplus. Panelists discussed how the surplus could help address the state’s housing crisis. Boulware noted that it’s imperative we focus on middle-income housing because they are not being served by the private market or subsidized housing; she suggested another approach is to devote the surplus to a tax credit for renters that is similar to the mortgage interest deduction so that they can save up for homeownership opportunities. While Walker’s organization does not operate in California, he noted that as a private company, the cost of infrastructure (sewer, sidewalks, streets) is a major factor that can be addressed by government funding and budgets to help address the production of housing. His state’s housing crisis has been exacerbated by limited government capacity and it’s important to ensure that not all costs are borne by the developer or private entity if more housing is to actually get built.

Ward added that California should consider allocating some of the surplus to more project based vouchers so that we don’t rely on one-time money for affordable housing and instead prioritize operating subsidies to truly help affordability in the long run. Sotelo added that the state’s new Super NOFA is going to better integrate various funding programs so that more funding can be allocated in a streamlined fashion and while it will be oversubscribed, such actions should be encouraged with more funds.

Panelist circled back to adaptive re-use projects, such as the conversion of hotel/motel properties. Ward added that these properties are the most low-hanging fruit in converting rooms to units and has been a rapidly deployed solution for homelessness; Alameldin noted that the HomeKey program costs about $263,000 on average per unit and has been an effective way to expand housing options for those most in need.

In terms of potential innovations, Sotelo commented that she would like to see California explore more of the rent-to-own model, which is more frequently used in other states and it should be explored as a solution for affordability because the state has so many smaller communities that have a strong need for homeownership opportunities for first-time homebuyers. Walker added that at his developments in Indiana, in order to combat investor purchases, they imposed covenants so that the units can only be owner-occupied and to discourage flipping, the property is bought back by his company if it is sold in the first three years.

For additional commentary on innovations, Alameldin said California needs more missing middle housing and it’s possible through gentle density measures like SB 10. He added that there is so much untapped potential of single-family lots, which is 70 percent of the zoned land in California and much can be done to make the most of the developable land we have in the state to provide housing for those at the 50-140 percent AMI levels.

Ward touted the efficiency of pre-approved ADU plans as an innovation that should be expanded; for example, localities could create pre-approved plans for regular multi-family developments for fast approvals and streamlining. Boulware and Sotelo made concluding remarks about the need for more financing options for affordable housing so that working class, low-income people are not left behind and excluded from the California dream.

Watch the panel here: CCRE Presents: Innovative Pathways to Housing Production