One impediment to housing affordability? The bureaucratic regulatory process. It takes way too long to get permits in most jurisdictions, and zoning variances can be a nightmare that can drag on for years. It stands to reason, then, that a more onerous bureaucratic process will make it harder to build housing, and less new supply means more upward pressure, so, less affordable housing. That’s not just common sense, but it’s also the conclusion of a new paper written by researchers at UCLA and California State University Northridge (thanks to Jennifer Castenson for posting this!).
Background: It’s The Bureaucracy
I have told the story about how when I started working on business strategy for affordable housing development using modular construction, that I was excited when I connected with a gentleman from southern California who told me he had just finished his first project using modular. “How did it go?” I asked. “It was a disaster!” came the quick reply. But the disaster wasn’t from the modular construction– rather a question of the city approval process. Even in our current construction labor shortage, this seems like a huge elephant in the room.
…we estimate that reductions of 25% in approval time duration and uncertainty would increase the rate of housing production by 11.9%. If we also account for the role of approval times in incentivizing new development, we estimate that the 25% reduction in approval time would increase the rate of housing production by a full 33.0%.
The methodology starts with a variation of a net present value of money calculation that takes into account time uncertainty and the fact that developers are risk averse. But it adds in a clever notion of the idea of deal flow, articulated through some calculus that imagines a “steady state” development process through which more developers are maintaining a number of active projects, as opposed to either not pursuing projects or waiting around to do them. Suffice it to say that the time value of money calculation is a pretty straightforward way to show how time is, quite literally, money– and the modeling of the “incentive effect and pull-forward effect,” as they call it. Some of the methodology is a bit beyond my feeble mind– talking about Poisson distributions and regression panels (I did OK in stats but it was introductory!).
Also interesting are the data that go into the analysis. This is a substantial dataset– the authors looked at 2,677 projects comprising 120,213 dwelling units, almost 15% of which were designated affordable.The researchers find that from 2010-2022, the average project took about 17 months to get approvals. That essentially means that from the time a developer applies to build a project, they need a year and a half before they can actually break ground. While none of this is terribly surprising, the level of granularity is rare. (As an editorial aside, I’m thinking it’s probably because nobody wants to work with municipal building departments because they’re just a perpetual nightmare). Adding jurisdictional overlap– for example, environmental approvals, county approvals, or something like an underground or overhead utility hookup- can add several months to a project on average. Environmental impact reviews, the authors found, required more like a year and a half.
By-right projects were more than six months faster.
Conclusions
That by-right projects are so much faster suggests to me that we need to figure out ways to make by-right projects more common, which involves, of course, zoning reform! In lay terms, this means some basic tweaks to the zoning code, like allowing more types of buildings to be built on the average lot. It’s inevitable that larger projects will require bureaucratic obnoxiousness at this point. But Los Angeles has made moves in the direction of reform, having announced earlier this year that it will essentially guarantee faster approvals for affordable housing projects. Looking forward to seeing the data from that over time.
We reached out to the city of Los Angeles Department of Buildings and Safety and will update if we hear back.