Small is Beautiful … and Expensive: Removing Barriers to “Middle Housing” in California
When Senate Bill 9 passed in 2021, it represented a sea-change in California state housing policy. By allowing up to four units on all single-family zoned parcels statewide, SB 9 represented a significant step toward achieving housing abundance.
But some developers have found it financially infeasible to build three- or four-unit projects, especially in high-cost markets. Considering this, housing experts have been exploring if it would be more financially feasible to build slightly larger projects with five to ten units. Emily Biro seeks to answer this question in a recent report prepared for the San Francisco Planning Department. A former graduate student fellow at UCLA’s Lewis Center for Regional Policy Studies, Biro assesses the market feasibility of building small, multifamily projects on the west sides of San Francisco and Los Angeles, where most parcels are zoned for single-family homes. The report’s findings illustrate just how hard it is to build “missing middle” housing in California’s major cities.
- Biro finds that it would not be financially feasible to build a five-unit building anywhere in west Los Angeles or west San Francisco, even with government subsidies.
- In those same areas, most types of ten-unit buildings would require government subsidies to be financially feasible. In Los Angeles, a ten-unit condo building would pencil without subsidies, but not a ten-unit apartment building.
- To make it easier to build five- to ten-unit buildings, Biro recommends streamlining entitlement and permitting, expanding financing options, and increasing government subsidies and incentives.
Both Los Angeles and San Francisco have high costs of living and experience deep housing shortages. Like most of California, both cities have little “middle housing” – small, multifamily housing projects of various typologies (e.g. duplexes, quadplexes, townhouses, cottage courts) that can provide diverse housing options with only modest increases in neighborhood density.
However, small projects often have high per-unit construction costs that would not be sufficiently offset by rents or unit sales. Given this, there are currently limited financing options available for such housing types.
Biro conducts pro forma analyses of seven variations of 5-unit and 10-unit projects in west San Francisco and west Los Angeles. The different variations modeled include projects comprising for-sale units, others with rental units, some that require the inclusion of one below-market-rate unit, and some projects that receive cost offsets in the form of per-unit subsidies, property tax abatement, or reduced city fees.
Biro estimates residual land values and land acquisition costs to predict financial feasibility. She finds that most of the 28 hypothetical projects she models would not be feasible to build. By her estimates, it would not be feasible to build any five-unit building in west Los Angeles or San Francisco.
However, in both cities, a ten-unit building could be financially feasible with subsidies, property tax abatement, or reduced fees. An 80-percent property tax abatement is predicted to provide the most significant cost offset.
In Los Angeles, a 10-unit condo building would also be financially feasible without government intervention if no affordable units are required. This type of project is also very close to being feasible in San Francisco with a cost-revenue gap of less than $17,000.
To make it more financially feasible to build small multifamily buildings, Biro recommends that the state reform building code standards to allow for single-stair buildings, increase allowable density on single-family zoned lots to 10 units, provide property tax abatement, and create state-supported financing options. Additionally, she recommends that cities streamline entitlement and permitting, cap city fees or offer fee waivers, and incentivize alternative homeownership models.
While five- and ten-unit buildings are not yet allowed on single-family parcels, such a change could open the gates for much more “middle housing” to be built in California. Biro’s analysis shows that better financing options, cheaper construction costs, and changes to building codes and permitting processes will be necessary to make it possible to build more housing that’s accessible and affordable to middle-income families.