California, long known as one of the most difficult places to build housing, is now among the easiest ones to build “accessory dwelling units,” sometimes known as granny flats, in the backyards of existing homes.
After a decade-long series of policy reforms, permits for such ADUs have soared to the top of the list of all building permits pulled, adding over 100,000 units in the chronically housing-short state.
Permitting relief and financing help for ADUs alone won’t solve the state’s housing challenge, or course. But as with air pollution, immigration and many other issues, California has often faced problems earlier than the rest of the nation, and then worked through them earlier as well.
Could affordable housing be next? The state has been near the top of the list of states with the highest housing costs, the most people experiencing homelessness, and the biggest shortage of affordable homes.
“Neccessity is the mother of invention. California has had the advantage of having such a deep problem,” Carol Galante, founder of the Terner Center for Housing Innovation at UC Berkeley, says on the latest Agents of Impact podcast. With Oregon, the state in recent years has gone from worst to first in permitting reforms, she said. “We had the worst regulatory environment, so maybe that’s not a great example,” she jokes.
The state has also streamlined approvals for projects around transit hubs, increasing density in urban corridors rather than adding to the state’s legendary suburban sprawl.
More broadly, “We have to build more housing, and we need to build it more cost effectively than we do today,” says Galante, a former head of the Federal Housing Administration in the Obama administration. “Those two things together would make a big difference in how many people can affordably own a home or rent a home in California.”
Cutting costs
At the Terner Center, Galante also founded The Housing Lab, an early-stage venture accelerator focused on housing affordability. Researchers found that building more housing components in factories, rather than on-site, can easily cut building costs in half.
“That’s a strong statement, but you can cut 50% of the timeline of building by building it off-site, in a factory, while at the same time you’re doing all the grading and the work that you need to do on-site, and then bringing it together,” she says. “That cuts your interest rates on your construction loan, the amount of time you have on a construction loan, and that saves a ton of money.”
The Housing Lab is also working to reduce the complexity of housing financing. Each layer of financing on an affordable housing development adds 3% to the total costs. “That’s not much, but when you have five sources of financing, all of a sudden that’s a lot of extra cost to carry and complication and time.”
Some developers, at least, are finding ways to build – or rebuild– housing profitably in California. ““We just like to operate and own rent-restricted apartments,” Daryl Carter of Irvine-based Avanath Capital Management told ImpactAlpha earlier this year. “We think it’s a good business.”
Avanath, along with Vistria Group and other developers, is raising permanent capital vehicles to lower its costs and enable it to hold well-performing properties for the long-term. Carter argues keeping properties affordable as opposed to converting them to market rate is better for returns long term because of the high occupancy rates and lower turnover.
Regional engines
California’s most far-reaching innovation may be the regional housing finance agencies that have been created in the Bay Area, Los Angeles and San Diego areas. Under new state laws, the regional hubs are able to raise tax revenues and use that to harness private capital, creating a multiplier effect for public investments in housing.
The Los Angeles County Housing Affordable Housing Solutions Agency, for example, receives sales tax revenue of about $385 million each year. It is using part of those funds to backstop a new social bond that will raise money in the public markets to help finance more than 1,500 new and preserved homes in LA County.
In a guest post on ImpactAlpha, Andrew Fremier, Ryan Johnson and Cody Petterson from, respectively, the Bay Area, Los Angeles and San Diego regional housing finance agencies, suggested that impact investors can co-invest alongside public dollars, helping to scale loan funds and directly invest into housing projects.
The Terner Center has developed models for regional “impact funds for housing” that could pool investments across each metropolitan area’s many cities, creating a pipeline of deals with measurable social returns.
“You can’t focus only on the extremely low income or the homelessness issue, because that’s not going to solve the problem,” Galante says. “You’ve got middle class people who can’t afford to buy a home affordably in places like California.”
“It’s not just about housing, it’s about the economy and it’s about quality of life. So we have to do both, including building more market-rate housing and building more affordably.”
