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New McKinsey Global Institute Report: Innovation Key to Unlocking Affordable Housing in Los Angeles

November 21, 2019

LOS ANGELES--(BUSINESS WIRE)--Nov 21, 2019--

LA’s housing market has grown distorted. The most visible and urgent symptom is the rising number of homeless people on the streets. But the invisible burden is growing, too, including household stress, lost economic output, and increased costs of doing business. High housing costs have been holding the region and its residents back.

Consensus is growing that LA’s approach to housing needs rapid and radical change. A new report from the McKinsey Global Institute (MGI), Affordable housing in Los Angeles: Delivering more—and doing it faster, provides a fact base and a set of options. Produced in collaboration with the Los Angeles Business Council Institute, the Los Angeles Coalition for the Economy & Jobs, and the United Way of Greater Los Angeles , the report represents the start of what will be an ongoing MGI initiative to turn ideas into action.

The City of Los Angeles is leading the state in housing production and has added more housing to accommodate population growth than many peer cities across the country, in addition to spending on permanent supportive housing. But most new housing is out of reach for the income brackets with the greatest need. Only 9 percent of the new units added in the city over the past five years have been affordable to households earning less than the area median income. The comparable figure for the entire county is only slightly better, at 12 percent. As a result, one million households, or 70 percent of all households citywide could not afford standard-size market-rate units in their current neighborhoods without a financial stretch. This number rises to a little over 1.9 million households across LA County. High housing costs lead households to forgo other types of consumption, which depresses GDP across the LA County by $32 billion to $36 billion every year.

While production is rising year over year, both the city and the county are likely to be far short of meeting the 2021 Regional Housing Needs Assessment (RHNA) goals. Southern California is currently undergoing the RHNA process for the eight-year cycle that will run from 2021 to 2029—and facing much higher targets. LA County has overall housing production goal for 818,943 units, of which 475,694 units should be affordable to households earning less than 120 percent of the area median income. These goals are highly ambitious in the context of historical affordable housing production in the region. At the current pace of production, it would take more than 36 years for the county to hit the housing production goal it is meant to achieve in an eight-year period.

“It’s time to turn the region’s affordable housing crunch into an opportunity to reimagine Los Angeles,” says Jonathan Woetzel, a director of the McKinsey Global Institute and one of the report’s authors. “The region is already undertaking the biggest package of public works in the country. LA has to take advantage of the opportunity to build housing near transit as the system is expanded. The combination of transit-oriented development incentives, nontraditional housing formats, and prefab construction is a powerful one. Streamlining financing, entitlement, and approvals would also improve the economics of building in LA. Making it more viable for private developers to build affordable housing will help the region meet its affordable housing goals with fewer taxpayer dollars.”

Under current market conditions, the economics do not work for developers to build standard units that are affordable for households earning less than 120 percent of the area median income. But the report outlines a way past that for many income segments. Los Angeles has already successfully experimented with “density bonuses” that allow developers to build bigger projects near transit in exchange for defined affordable housing commitments, or “set-asides.” This approach could be scaled up even further if combined with new housing formats, innovative construction techniques, and the opportunity to capitalize on public transit expansion.

With appropriate enablers in place, micro-units, co-living developments, single-family home conversions, bungalow style housing can be cheaper to build per unit than traditional multi-family housing. These types of homes are not for everyone, but they have enough appeal and utility to account for a sizable subset of the housing the region needs to add. Their reduced construction costs can allow market-driven development of housing that is affordable for moderate-income households without the need for additional subsidies or incentives. Modular and prefab construction can further bring down costs without sacrificing good design and quality, although they need to be adopted on a large scale to realize the full potential savings and efficiencies. MGI finds that projects utilizing both nontraditional housing formats and prefab construction could reduce per-unit costs by some 50 percent. Set-aside requirements could be gradually increased over time to reflect these savings as nontraditional housing types and lower-cost production methods are more widely adopted.

MGI identifies thousands of parcels all over the city not utilizing the full density they are allowed under current zoning. In theory, the city has the potential to add at least 1.5 million housing units under current zoning in residential areas, and not including opportunities to rebuild on underutilized commercial land. While that is clearly far more than what will actually be built, it shows that Los Angeles has many options that could be pursued—and many choices to make. Importantly, Los Angeles will need to strengthen the safety net for the most vulnerable tenants, including those who could be affected by redevelopment and those with expiring affordability covenants.

“This well-researched report by the McKinsey Global Institute provides clear evidence that there is an urgent need for bold but thoughtful action to address the region’s enormous need for affordable housing. We agree strongly that LA’s greatest opportunity is increasing density around public transit corridors, which are being transformed by $120 billion in taxpayer dollars. We can provide access to affordable housing for hundreds of thousands of Angelenos—while reducing traffic and pollution and enhancing the quality of life at the same time. We look forward to working with communities across the region to implement the ideas contained in this outstanding new report,” said Russell Goldsmith, Chair, Los Angeles Coalition for the Economy & Jobs

A lot will depend on whether LA can continue to boost its build rate. Encouraging high density housing formats near transit can bring more affordable units online through set-asides in private development, reducing the need for public- or social-sector subsidies. The report provides an in-depth assessment of what it will take to make faster progress. These measures include more integrated planning with shared accountability for all of Los Angeles; streamlined approval and permitting processes; and consolidated and simplified public financing for affordable developments.

Delivering more affordable housing faster cannot be solely the responsibility of any one actor. A public-private delivery coalition could debate and advance solutions more effectively. This is first and foremost about meeting the basic needs of the majority of Angelenos today, but it is also an opportunity to reimagine a more inclusive and functional future.

“This report paints a stark picture about how little housing we have that working people can afford, but it also offers a way forward. We are committed to working with a diverse coalition to end our housing and homelessness crisis because we know homes end homelessness. The future of Los Angeles depends on our immediate attention to this crisis and a united front to building our housing pipeline.” Elise Buik- President and CEO, United Way of Greater L.A.

The report will be available at mck.co/affordablehousingla

MGI director Jonathan Woetzel will present the findings of the new report at the LA Business Council Mayoral Housing, Transportation, and Jobs Summit on November 22. For more information about the event, including livestream, visit https://labusinesscouncil.org/events/mayoral-housing-transportation-jobs-summit/

The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. The partners of McKinsey & Company fund MGI’s research; it is never commissioned by any business, government, or other institution.

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CONTACT: Maria Gutierrez

(415) 318-5260

KEYWORD: CALIFORNIA UNITED STATES NORTH AMERICA

INDUSTRY KEYWORD: OTHER CONSUMER CONSUMER WOMEN RESIDENTIAL BUILDING & REAL ESTATE CONSTRUCTION & PROPERTY MEN URBAN PLANNING

SOURCE: McKinsey Global Institute

Copyright Business Wire 2019.

PUB: 11/21/2019 10:00 AM/DISC: 11/21/2019 10:01 AM

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