Does Single-Family Fit Into A Dense L.A.?

LOS ANGELES—Density is coming to Los Angeles, but in a city known for its sprawl, how will single-family homes survive the shift toward density? The small lot ordinance—which was recently revised by a group of architects assembled by the city—has helped provide both density and single-family for-sale housing. Projects in this development niche have also been attractive to lenders, especially as consumer demand has grown for these assets. To find out more about the small-lot ordinance and its impact on single-family development, and why lenders are attracted to small-lot projects, we sat down with Chris Gomez Ortigoza, VP in the California Division at Land Advisors, and Adam Deermount, managing director at Landmark Capital Advisors, for an interview. How has the small-lot ordinance helped to create more single-family home development in Los Angeles?

Chris Gomez Ortigoza: The small-lot ordinance allows builders and developers to create detached homes at densities that were previously only approved for attached townhome and condominium product. The small-lot homes have decreased building setbacks, yet can still offer small private yards for each home. Typically, revenues for small-lot detached homes are much higher than those for attached product types, and tend to drive higher land residuals. The increased land residuals have prompted previously uninterested landowners to sell their properties, and effectively add to the supply of detached housing in Los Angeles. Are there other ways that the city could help encourage single-family home development?

Gomez Ortigoza: The small-lot ordinance has created a drastic increase in the single-family home supply since the market began recovering in 2010, but we are starting to run into some political headwinds. Outcry from many existing residents about problems created by higher density small-lot developments is causing the City to make changes to the small-lot code. The changes include increasing the required setbacks, which will reduce some of the density. In smaller projects, this may decrease developable densities by 20-30%, reducing land values and making many projects financially infeasible.

Also, in late 2016, voters approved Measure JJJ, which requires affordable housing and prevailing wage if certain entitlements are requested. This measure drastically reduces residual land values, and many previously interested land sellers will not consider selling their property at a decreased value. In time, sellers will likely begin to come to grips with the “real” redevelopment value, but JJJ has already led to a decreased number of new case submittals over the past six months for detached projects. Is Los Angeles moving to a more dense market where we won’t have single-family homes?

Gomez Ortigoza: Los Angeles is certainly moving toward a more dense market. Although, in certain neighborhoods, single-family homes will remain for the foreseeable future. A great indicator of increased densities is the number of projects in the San Fernando Valley that are three-story attached and detached product. The Valley has typically been a model of urban sprawl, but in the past ten years, historically low-density neighborhoods such as Van Nuys, Northridge and Sylmar have seen several successful high density, three-story projects. As home prices in Los Angeles continue to increase, the demand for affordably priced homes is also going to increase. This will leave developers with vertical as the only direction to build, leading to a more dense overall landscape. What recent deals have you done for single-family development lots?

Gomez Ortigoza: Since the start of 2017, we have sold four detached housing projects, including 124 lots in Pomona, 24 lots in San Pedro, 58 lots in Van Nuys and 28 lots in San Dimas. The estimated price points on these projects range from $500,000 to over $1,000,000 and illustrate the tremendous range of demand for new product throughout the Los Angeles Basin. What is interest like in raising capital for these projects?

Adam Deermount: For the most part, raising capital for small-lot ordinance projects isn’t much different from raising capital for traditional single-family detached housing. Well-located projects with strong builders and good economics tend to attract a lot of attention. Banks and equity partners have seen enough of these projects in LA over the past few years that they are now familiar with the ordinance and the demand for the product type.