There’s a project in Sherman Oaks, a neighborhood in Los Angeles, that started in 2004. After two decades of lawsuits, they just broke ground, Artem Tepler, an L.A.-based real estate developer, told Fortune, because “it is so hard to do a big project in L.A.”
The city’s supply, or lack thereof, is pushing local house prices up. New construction is heavily restricted, but people still want to live in Los Angeles, it’s as simple as that. So with an average home value of $901,291, and a median household income of $69,778, it’s a “drive until you qualify market,” as Tepler put it, who’s also the cofounder and managing partner of Schon Tepler.
“You almost have to be a statistical anomaly to own a house anywhere in prime Los Angeles,” Tepler said. “You have to kind of drive far away and buy a home for like $600,000 to $700,000. There’s no starter homes under $700,000 and $800,000.”
In New Jersey, where Tepler is from, he says $700,000 buys you a 4,000 square-foot home that’s basically a mansion. It’s not a far-fetched statement, as the average home value in New Jersey is $451,559, although there are areas like Ridgewood, where that number is much higher. In Tepler’s view, L.A.’s housing problem comes down to an inability to build. That’s largely because of zoning, the California Environmental Quality Act (CEQA), and the state’s 10-year liability defect on new construction, Tepler said.
In the 1970s and 1980s, Los Angeles was downzoned, as measures passed that cut floor-to-area ratios, limiting development, particularly for multifamily housing. As for the California Environmental Quality Act, some suggest it’s being used to block housing. Earlier this year, the University of California Berkeley’s plan to build student housing was blocked by a state appellate court. The court cited the state’s Environmental Quality Act and ruled that students could potentially have an environmental impact. The ruling garnered a response from none other than California Governor Gavin Newsom, who said: “Our CEQA process is clearly broken when a few wealthy Berkeley homeowners can block desperately needed student housing…California cannot afford to be held hostage by NIMBYs.” Additionally, California’s construction defect law allows homeowners to file a claim against builders, if their building standards are violated, for up to 10 years (although there are some caveats.)
“That’s the reason why we don’t go bigger here…we don’t want to get caught up in lawsuits,” Tepler said—and it’s crippling the city’s supply and pushing home prices, which are already detached from local incomes, further up.
So the further you drive from, let’s say, Downtown Los Angeles, the cheaper housing gets. That can mean driving all the way to Riverside County (where the average home value is $568,515), until housing gets cheaper and more affordable, and commuting to work, Tepler said. That’s why he says you’ve got to be a statistical anomaly, in terms of how much money you make, to afford to buy a home in parts of Los Angeles, like Studio City that’s average home value is $1,490,859—or have family money. If it’s not a successful business owner or an executive at a big company, the buyer has family money for the down payment, Tepler said.
“Average people can’t live in the city,” Tepler said. “And it’s not an issue that developers can’t provide the housing because if the developers were let loose they would build bigger condos, two and three bedroom condos, go higher up, build six, seven story buildings. But L.A. has been downzoned to the point where there was an anti-growth sentiment.”
Look no further than Stan Oklobdzija and his partner, Sarah Boyd, a couple making around $225,000 annually that said the thought of ever owning a home in Los Angeles is “hilarious.” As a professor of public policy, whose research tends to focus on housing policy, Oklobdzija’s reasoning wasn’t far-off from Tepler’s. Oklobdzija previously told Fortune it’s the “refusal to build” that’s creating a housing crisis, one by choice, and he and his partner have left Los Angeles.
“It doesn’t have to be like that,” Tepler said. “It’s just this artificially created problem because we’ve been too downzoned. You need to upzone and make everything by-right, [and] reform CEQA…And then let developers build.”
When Tepler says by-right, he’s referring to a zoning code, which is considered to be “by-right” if the approval process is streamlined to comply with zoning requirements, without undergoing a discretionary review process. Tepler also mentioned measure ULA, dubbed the “mansion tax,” which he said “is going to destroy new supply,” if it doesn’t get repealed. As Fortune’s previously reported, L.A.’s high-end realtors and brokers were almost apocalyptic when referring to the tax and its implications on the city’s real estate market. Clearly, Tepler shared the same sentiment.
“Every major developer, institutional developer is basically shelving their projects…They don’t want to touch L.A. now,” Tepler said, adding later that despite it being well-meaning, the measure will make the city’s housing crisis worse because almost no one wants to build.
It’s the restrictions on zoning, on permitting, on development and construction of new housing that’s created a “manufactured crisis,” Tepler said, adding that he says the housing crisis is manufactured because it’s just policy, in his view.
“We’ve run out of land. When you run out of land, the way to solve it is to go vertical, to go up,” Tepler said. “You don't have to make this into Manhattan, but you should make it into six, seven story buildings… but L.A. is still zoned for a lot of single family homes. It needs to get upzoned for the population.”
It so happens that a lot of voters are homeowners, so politicians that want those votes are less inclined to upzone and allow for greater density housing, Tepler suggested. Cue NIMBY-ism, which economics writer Noah Smith, previously argued worsens already restricted developing and permitting rules in the country.
“Everyone wants it, they just don't want it in their own backyard,” Tepler said. “So everyone wants housing for the homeless, they just don’t want it near them. Everyone wants more apartments, they just don’t want it near them. And no politician wants to upset their constituency.”
