SUPPLY-SIDE SHENANIGANS-The real estate research firm CoStar caused a stir in 2017 when it reported a 12.4% residential vacancy rate in Downtown LA. But Steven Sharp published a piece in the LA Times saying that the rate has subsequently dropped considerably. ("Downtown has a high apartment vacancy rate? The rest of LA should be so lucky." LAT, 2/13/2018) Sharp notes that CoStar's data showed a drop to 10.3% in January 2018. He also states the vacancy rate has since declined further to 8.1%, and 4.7% for buildings that have been open for one year or more.
But what counts as a vacant unit?
In November 2017, the LA Weekly reported that Level Furnished Living (LFL), a high-rise residential building at 9th and Olive, offered units for stays as short as one day. This is strange because the July 30, 2013, City Planning (DCP) determination letter says that the approved project consists of 303 residential condominiums and seven commercial condominiums. A search on ZIMAS, LA's on-line zoning information system, shows no subsequent approvals that alter the building's use.
It gets stranger still. It's uncertain if the LFL were ever offered for sale as condos. According to another Times article, the units debuted as corporate housing and extended-stay hotel rooms back in 2015. (“Developer plans fully furnished apartments in downtown LA,”LA Times, 2/25/2015) The City has argued that the extended stay use was permitted because visitors would reside at LFL for longer than 30 days. But it's clear that since last year, guests stay at LFL for much less than 30 days, and LA's zoning code clearly prohibits this. A spokesman for LFL claims that they've been working with the City to create a transient occupancy permit for the building, but the City has not offered any confirmation.
Back to the question of vacancy rates. Since 303 of the units at LFL were approved as residential condos, and they're not being used for that purpose, are they being counted as vacant units? If so, that seems odd, since they're not available to buyers or renters. If not, then that means 303 residential units have magically been removed from the vacancy rate tally.
What a great way to bring vacancy rates down and justify more real estate speculation!
But is this just a one-of-kind event? Or is this practice widespread? Comparing web sites that list apartments to others that list hotels in Downtown reveals a confusing mix of rentals, short-term rentals, corporate housing, and extended stay locations. It's clear that the practice of turning housing into hotel rooms is widespread across LA, and City Hall is lending a hand. The Metropolitan in Hollywood pulled the same stunt, with the DCP granting a Transit Occupancy Residential Structure (TORS) overlay. The owners of that building are now converting over 50 apartments into hotel rooms.
Many apartment building owners are not waiting for City Hall’s blessing to make the same changes. Since the City Council failed to pass an ordinance regulating short-term rentals, and since the Department of Building and Safety does not enforce existing laws barring this practice, there are numerous reports of local landlords converting their residential units into short-term rentals. This illegal practice simultaneously reduces vacancies and increases profitability.
We need to have accurate vacancy numbers because we need to know whether the City's approach to building new market housing is working. Critics have argued that the DCP approves far too many high-end units in Downtown LA, when the need is for middle-income and low-income households. But in his piece in the Times, Sharp argues that as supply increases, rents will go down.
Sharp wrote, “Downtown's growth has created competition among landlords for residents. Prices have leveled accordingly, and many property owners have resorted to incentives, such as free parking or discounted rent in order to lure tenants.” It is true that some downtown rents have plateaued, but we need to look at the words “discounted rent” carefully. What landlords are doing is offering one or two months of free rent when prospective tenants sign a lease for expensive apartments. While tenants are getting a short-term discount of between 8 to 16 percent for one year, the rental units are hardly affordable because the owners can't afford to make permanent long-term rent reductions.
The reason is straightforward. These luxury apartment projects are financed by global investors enticed to Los Angeles by a high rate of return on their money. For them, these aren’t just residential buildings; they’re financial assets. In order to retain their value, their rents must remain high to assure a handsome and continuous rate of return. Supply-siders like Sharp argue that if City Hall continues to aggressively green-light new, market rate residential construction, housing costs will fall. But will this actually happen, and will these new apartments become affordable?
In 2017 the rental-housing site Zumper reported the median monthly rent for a one-bedroom apartment in Downtown Los Angeles was $2,500. The median household income in Los Angeles is around $55,000 a year. The standard formula dictates a household should spend one-third of its income on housing, which comes out to $1,500 a month. There’s no way the rent for these new Downtown units will permanently fall by 40% or more to meet the housing needs of most Angelinos, including downtown’s large homeless population. As a result, middle-income and low-income households are priced out of Downtown, assuming they could even squeeze anentire family into a cramped one-bedroom apartment.
In the housing debate these days, there are analysts who argue that supply and demand is a fundamental law of nature, like gravity is to physics. But this supply-side view can't explain 21st century urban real estate markets. These markets are now global. Companies we have never heard of pour billions into lucrative real estate projects that are only a prospectus for distant investors. Real Estate Investment Trusts (REITs) buy and sell assets, like high-rise apartment buildings in Downtown LA, based purely on profit projections. Such immediate consequences as pollution, displacement, overcrowding, homelessness, and gentrification are irrelevant to them.
Furthermore, there are new factors distorting real estate markets that skew the orthodox supply-side equation. When apartments are used solely as short-term rentals, that skews the market. When overseas investors buy condos in LA to park their money in a safe haven, that skews the market. When investors choose to make a continued profit from their real estate investments, that fundamentally undermines the supply and demand theory!
We'll never know what the actual vacancy rate is in Downtown as long as City Hall allows developers and property owners to make their own rules. LFL was approved as a residential project. Since the City has repeatedly argued that LA needs more rental housing, why does City Hall allow the owner to turn these units into hotel rooms? And why did DCP actively assist the owners of The Metropolitan to turn their units into hotel rooms? The biggest question, of course, is will the City Council ever clarify the difference between housing and short-term rentals? They keep telling us they're going to finalize the proposed Home Sharing Ordinance, but it still hasn't happened.
What's the vacancy rate in Downtown? How can anyone tell? City Hall can't even clarify the difference between an apartment and a hotel room, while the homeless population continues to grow.
(Casey Maddren and Dick Platkin wrote this article. They are both members of United Neighborhoods for Los Angeles (UN4LA). Email: [email protected]) Prepped for CityWatch by Linda Abrams.