Local real estate executives have mixed feelings on the passage of Senate Bill 6, which allows housing to be built on underused shopping centers and other commercial plots.
The bill was signed into law in late September and allows residential construction on commercially zoned properties without the lengthy and at times costly requirement of a rezoning.
The full process of a rezoned entitlement can currently take two years or more according to Andre Soroudi, executive vice president of acquisitions and development at CGI Real Estate Investment Strategies, who views SB 6 as a “mixed bag.”
“It’s a very intensive process to get those types of projects done,” Soroudi said. “So, in that sense, (SB 6) obviously provides a streamlined and definite path to getting a project approved, which is obviously the main benefit of it in trying to (increase) housing production.”
On the other hand, SB 6 requires high labor expenditures, which dampens developers’ enthusiasm.
Matthew May, president of Sherman Oaks-based May Realty Advisors, supports the bill. He said that if it is possible for commercial buildings to be built in the same space as office buildings, then residential projects should be valid replacements, too. He added that creating residential buildings in former commercial spaces can bring added property value to the building, reduce traffic congestion and aid low-income residents.
“It’s a win-win across the board,” May said. “It’s what commercial corridors are designed for. If we’re allowing 10-story office buildings, we should allow 10-story residential, and once you get into residential, it’s less ingress and egress (entry and exit trips). And given that we have more people working from home, that reduces the amount of traffic and pollution.”
AB 2011
SB 6 is closely linked with the successful passage of Assembly Bill 2011, which creates a streamlined approval pathway for qualifying multifamily projects on commercial land and removes developers from being subjected to a conditional use permit if the development satisfies standards. The bill was passed at the same time as SB 6.
The AB 2011 approval pathway is also exempt from the California Environmental Quality Act, which requires developers to report the environmental impacts of potential construction projects and often stymies development.
Both bills also have requirements linked to the pay of construction workers.
In the case of SB 6, developers looking to take advantage of not having to deal with rezoning processes are required to provide workers with prevailing wages and skilled and trained workforce requirements, which typically result in much higher costs for builders.
Like SB 6, AB 2011 includes a requirement that all construction workers be paid at least the general prevailing rate of wages. Additionally, both bills require studies on the outcomes of their respective provisions.
‘Very expensive’
Daniel Yukelson, executive director at the Apartment Association of Greater Los Angeles, said that provisions in SB 6 may discourage the building of more housing.
“While it may have a chance of encouraging some housing development, it would just be very expensive because of all the different provisions and studies that are required (for the development process),” Yukelson said, adding that the bill did not quite meet the goal it set out to reach.
May echoed the concerns of Yukelson, saying that prevailing wages, in addition to fees and higher construction costs, may cause some projects not to pan out, particularly with respect to how much rent can be charged.
“If we’re in West L.A., where you can get $6 rent per square foot, you get a much better shot of (making it work) than if you’re on Ventura Boulevard, where you’re going to get $4 rent per square foot, which we don’t even get today,” May said. “Land costs are maybe a little lower (in the Valley), but construction costs are the same. It doesn’t pencil.”
A statement from the office of Gov. Gavin Newsom said the bills will help create new housing for low- and middle-income Californians by allowing housing to be built on underused commercial sites, generate thousands of jobs with health benefits and good wages and increase the use of public transit by building housing near existing transit.
“The Middle-Class Housing Act or SB 6 can result in the construction of at least 2 million housing units and is one solution to build up and avoid sprawl,” State Sen. Anna M. Caballero said in the statement, adding that the bill can expedite development processes to avoid vacant properties and will provide strong worker protections.
Soroudi said that when it comes to the rezoning eliminator in SB 6, there might not be that much of a splash in the city.
“A lot of cities already have (policies) for commercial zones that allow for residential use, like in Los Angeles. So, in certain cities like that, it won’t have a huge impact,” Soroudi said. “What I found over the years is that smaller cities typically have specific zones just for commercial or residential. So small- and medium-sized cities is where I would see this bill being utilized the most.”
Soroudi added that the requirement of paying workers a prevailing wage could increase costs by 30% and may hurt the feasibility of construction projects.
Still profitable?
Soroudi said that his main question with SB 6 is: What types of properties can be acquired and transformed, but still make up for the money that will be allocated to prevailing wages?
“If a dilapidated, old retail center is worth significantly less than what residential land would be, there’s a possibility that someone could acquire that and pay the prevailing wage and still make the project financially feasible to go vertical,” Soroudi said. “It’ll be interesting to see how many sites that (the bill) can actually be utilized for and be effective in adding the housing supply that we desperately need.”
Soroudi’s firm, CGI, specializes in apartment buildings, building conversions, mixed-use projects and hotels and has more than four property investments in progress in Los Angeles and one in Oxnard according to its website.
Until this summer, the company was based in Woodland Hills but recently moved to Century City.
Despite the cost-related practicality of SB 6, Soroudi said that developers who do not have to navigate the rezoning process reduce the amount of risk they take on, as it is not uncommon for construction projects to sit in rezoning limbo for years at a time.
He similarly lauded AB 2011 for streamlining an approval pathway that can end up costing developers significant capital.
“If you have to buy a piece of land and hold it for two to three years to get your approvals before you can start building, you have to pay interest on loans, property taxes, insurance, and all those add up very quickly,” he said. “So, taking a three-year process and making it a one-year process, that’s saving a lot of money and a lot of risk.”
May said that the only potential negative he sees of AB 2011 is city planners might utilize the streamlined process and fail to take into consideration the nuances and logistics of development processes. However, he believes the positives outweigh the negatives.
“The planners are good, but they’re not designers. They’re not necessarily living it day in day out,” May said. “However, the ability to get things done in six weeks, six months or 12 months instead of three years, is absolutely worth the tradeoff,” May said.
More feasible
Although Yukelson of the Apartment Association is not sold on SB 6, AB 2011 is something he sees as a more favorable solution to California’s housing issues.
He said that in his experience, about one-third of the time of a development project can be taken up by entitlements, particularly due to environmental impact reports, hearing procedures, permits, fees and battles with Not in My Backyard (NIMBY) groups. Therefore, the CEQA exemption could be meaningful.
“AB 2011 is a step in the right direction and has a chance of encouraging more affordable housing development,” Yukelson said.
Both bills arrived as part of a larger plan to alleviate the housing crisis in California.