For at least the past year, well-meaning public officials, developers, and activists have bemoaned the housing crisis every which way. The moaning is rightful and well intentioned given the severity of our crisis. But surprises are scarce in these discussions. It’s like the proverbial journalistic nonstory “Dog Bites Man” over and over again.

Last week at the UCLA Ziman / Fannie Mae Affordable Housing Symposium, the man bit back. 

Despite the citywide and statewide housing shortage, downtown Los Angeles has added units and buildings at a torrid pace. So much so that Kevin Ratner, president of developer Forest City West, revealed that his latest project, Axis DTLA, is struggling to find renters. Ratner sounded surprised at his own data: whereas new developments have attracted, according to him, an average of 20 new residents per month en route to nearly full occupancy, Axis is getting only about eight per month. Many applicants, he said, are under-qualified, with felony records and lousy credit scores. At the same time, he admitted to a possible flaw in his business model: there just aren’t enough wealthy renters to go around. 


Naturally, Ratner is distressed. But he’s also bullish. He has another development opening soon and just announced yet another. Meanwhile, competing developments are forging ahead. 

Ratner’s situation is an early test of whether there’s such thing as a free market in rental real estate — and whether constraints on the market will cause it to implode before developers like Forest City can make a real dent in the city’s housing shortage. 

A few months ago, the vacancy rate among newly opened downtown developments was measured at 12 percent as thousands of new units, mostly in high rise buildings of over 10 stories, have come on-line. This is an astronomical number in the context of recent Los Angeles real estate history. Remember, L.A. is reportedly the most rent-burdened and one of the most supply-constrained cities in the country. Even at 12 percent, rents have “stabilized” at at average if around $2500 per month. Metro-wide, the rental vacancy rate is less than 3 percent

Many opponents of so-called luxury market-rate development have seized on the 12 percent figure as proof of a conspiracy to inflate rental rates in L.A. They claim that developers like Forest City are artificially inflating prices such that units go wanting (or get turned into short-term rentals). Of course, this analysis is nonsense in the short term. Every building is 100 percent vacant the moment is opens, so making a fuss about a 12 percent vacancy rate is like saying a roast is undercooked after being in the oven for two minutes. 

In the longer term, one of two things will happen: Ratner will be patient and eventually find the well qualified renters he’s looking for, or he’ll lower his prices. 

Critics of luxury housing aren’t holding their breath — according to them, the fix is already in. But many in the burgeoning YIMBY and “market urbanism” movements are arguing that the vacancy rate, and possibly lowering of prices, represents the proper functioning of the market and the triumph of intensive, dense development, just as we learn in Economics 101. 

Lest we get too excited about a beautiful equilibrium, we still have to worry about Ratner. The trouble is, a rental rate that would lead to (nearly) full occupancy might not lead to a full return on investment for Forest City. That’s because, regardless of how bad the housing crisis is, it must still contend with immutable costs such as construction costs, entitlement costs, and, of course, the cost of land. All of this leads to relatively thin margins in the first place -- which, as Ratner noted, makes publicly traded real estate developers pretty unattractive to investors who demand handsome quarterly profits. In other words, a big developer can try to be “greedy,” but he may have to settle for single-digit returns. 

Of course, this could be the plight of just one developer in one submarket. But there’s no reason not to believe that similar scenarios, with similar combinations of costs, economic pressures, and regulatory burdens, are playing out in plenty of other California cities. 

So, now we’re faced with a paradox: California needs housing, and it needs dense housing. And unless Jerry Brown is going to surprise us with $30 billion he’s been hiding in Colusa’s doggie bed when he leaves office, we’re going to need the private sector to develop most of it. So, I’m not sure whether to cheer for higher vacancy rates and (possibly) lower prices or boo at the notion of a slowdown in infill development. 

Or, to put it another way, I’m not sure whether we’re at halftime in California’s housing crisis — or the two-minute warning.