The Real Signal #118 - Housing Market Effects Of The Los Angeles Fires
Plus articles on Multifamily Supply Drop Timing Matrix and China 10-Year Rate Falling Off The Map
Practical Housing Market Effects Of The Los Angeles Fires
Scott Choppin Note:
I am in several conversations with both brokers and investors about the net effect of the recent fires in Los Angeles.
Notably, some investors are pulling back due to perceived risk. This appears to be overly cautious. They indicate these concerns:
First, perceived risk of decline in housing demand
Second, insurance risk - increased cost or cancellation
Third, actual fire risk, i.e. they worry new projects would be at greater risk of fire now, than they were before.
Fourth, cost impact due to contractor demand in the rebuild process.
Synopsis: the fires removed 12,000 (approximately 9,000 residential) structures from an already deeply constrained housing market. Likely, the most housing constrained market paired with highest population density (LA County) market in the United States. As well, the state is attempting to pass AB246, which ostensibly attempts to reduce anti-gouging in rental markets. However, this new law would implement rent AND vacancy control in Los Angeles County for 1 year after the state of emergency is declared over. Most landlords are indicating they will hold units off market during this time period, similar to New York’s “hold off market” rental control situation. AB246 will further restrict supply, exactly what is not needed.
Bottom line: Supply is further restricted. Indications are the over 50% of homeowners who lost homes will move away permanently. The rebuild process will take years, even with expedited permit process. AB246 will further restrict supply. Overall bullish for housing in Southern California. Fortunately, for our portfolio of UTH townhouse BTR, we have no projects in LA County, focused on the Inland Empire and Orange Counties.
PS: We have family and close colleagues that have lost homes and businesses. Our hearts break for them. My message today does nothing to assuage the impact of these event on their and their families lives. We pray for them daily and help directly in all ways that we can.
Below is some thinking from a colleague at Marcus and Millichap about these fire risks:
“Here is my take on the housing situation in Southern California relative to the recent wildfires.
One thing that we know for certain is that the residential housing market in Southern California has been severely supply-restricted for many, many years. Combine this with the unfortunate fact that we have created a regulatory environment where obtaining entitlements from local municipalities for the construction of new housing units is a ridiculously long and difficult process and we end up with an overall housing market that will be impossible to balance in the short term.
On the demand side of the equation – a great number of people want to live in Southern California and we have historically been unable to provide the necessary supply to keep up with this seemingly insatiable demand.
Now, in regard to the recent wildfires: for many parts of LA city and LA county it will take several years before a substantial portion of these housing units will be able to be rebuilt. Insurance claims process and clean up complexity will add more time. And, all of these residents are going to need somewhere to live now.
Most of the residents of the Palisades have significant net worth and are unlikely to move to temporary rental housing for the next 4 or 5 years. They may end up buying new homes in West LA or Newport Beach or they may end up moving out of state altogether. However, many residents who lost their housing in other parts of Los Angeles will undoubtably be looking to find adequate rental housing for at least some period of time. These new renters entering the market all at the same time will have a ripple effect that will spread throughout the entire residential rental market. Residents of Altadena may end up finding a place to rent in, let’s say El Monte which means one family who would have rented in El Monte will now end up having to rent in Whittier which will necessarily push one family from Whittier to Corona which will necessarily push another family from Corona to Riverside. We lost thousands upon thousands of residential units in the recent wildfire and having such a large group of renters hitting the market all at one time will have consequences that will not be insignificant.
So, to restate this one more time: Limited Housing Supply paired with Overwhelming Demand for Housing paired with Extreme Difficulty in Expanding Housing Supply and then throw in a Devastating Tragedy that Removes a Considerable Amount of Housing Stock from the Supply and what does that leave you with. I believe that it leaves you with a market where it is very good to either be an owner or a builder of residential housing units.
Of Course Caveats Apply:
#1) Insurance is going to be a MAJOR issue moving forward and this will impact everyone and will increase the cost of both construction and home ownership, #2) Cost of Labor will Rise as construction crews will be in abnormally high demand for the foreseeable future as structures are repaired and rebuilt over the coming years, and #3) Cost of Materials will also rise as the demand for building materials sees a substantial boost.”
Multifamily Supply Drop Timing Matrix
“Apartment supply is peaking now, but about to plunge off the cliff. Here's the projected timeline for when apartment supply (completions) will fall back BELOW pre-COVID averages again, among top 50 metro areas.
A few notables:
1) The fact that San Francisco and Oakland are already below pre-COVID supply reflects lack of construction in this cycle. Chicago, Milwaukee, St. Louis too.
2) This chart makes it easy to identify potential earlier rebounds among the higher-supplied markets: Houston, Portland, Minneapolis, Dallas, San Antonio, Denver and maybe even Nashville -- all expected to revert below 2017-19 supply averages by the second half of this year.
3) It'll take a bit longer in Charlotte, Raleigh, Phoenix, Salt Lake City, Jacksonville, Orlando and Tampa etc….
4) A lot of coastal MSAs show up later in the timeline, but the Y axis shows that doesn't mean much. Anything below 2% supply expansion is usually a pretty trivial amount of supply (though there may be neighborhoods in those MSAs that are more impacted).
5) And then there's Austin... it'll rebound, and very possibly before 2027, but it's in a category of its own. Apartment analysts: Never, ever, ever use Austin as proxy for the entire Sun Belt.”
Scott Choppin Note: The bulk of the supply drop below pre-Covid averages will be in 2026, specifically Q3/Q4. Notably, the Bay Area of California is post-drop at this point. Jay Parsons who wrote the text above, indicates that volumes are about to rapidly fall off. Austin continues to be a crazy outlier. We are happy to report that we have correctly timed delivery of the next wave of our UTH rental townhouse projects to be in 2026 and 2027.
China 10-Year Rate Falling Off The Map
“It impacts US markets considerably.
1. A sharp drop in China's 10-year yield suggests weaker economic growth expectations. This could spill over into global markets, impacting U.S. companies reliant on Chinese demand.
2. Lower yields in China may drive global investors to seek safety in U.S. Treasuries, potentially pushing U.S. Treasury yields lower and supporting U.S. stock valuations.
3. China's economic slowdown could lead to reduced demand for commodities. This might hurt U.S. sectors like energy and materials, which are sensitive to commodity price changes.
4. If China's yield drop indicates a debt deflation spiral, it could raise concerns about global deflation, potentially causing risk-off sentiment and weighing on U.S. equities.
5. Weak economic signals from China might influence the Federal Reserve’s decisions, potentially supporting a dovish stance that could provide relief to U.S. markets.”
Do You Know a Land Owner, Business Owner, or Developer Needing Help To Move Their Development Projects Forward?
We Can Help Them Succeed
We have expanded our team for our project management and development services offer, to help us serve more clients in the future.
Our project services clients include:
non-developers
new developers
folks who have gotten stuck in their development and planning process.
Some of our recent work includes helping the San Pedro Fish Market with their Phase 2 project at the LA Harbor in San Pedro, including design management and entitlements. We are also the real estate advisor on their redevelopment of a brand new location on the historic Fisherman's Wharf in Monterey, and we completed a project for them at the former Joe's Crab Shack in Long Beach at Alamitos Bay (see flyer below)
We are working on numerous housing deals as an advisor as well.
Send me an email if we can be of help on your project: choppin@urbanpacific.com
