Casden Spring 2021 Multifamily Forecast Report

Richard Green: Good morning everyone, and welcome to the spring 2021 Casden Real Estate Economics Forecast for the multi-family market in Southern California. My name is Richard Green and I am director of the USC Lusk Center for Real Estate, and it's my pleasure to share what we've been finding with you, and if you'll give me a minute I will bring up my presentation. Okay. So again, welcome everybody. It's been a strange year. Oh, let me begin with some thanks to Alan Casden first of all, for his founding gift that makes these reports possible, and to Marilyn Ellis from the Lusk staff for a numerous list of contributions to this project, and if I told you everything Marilyn did we would use the entire hour talking about that, which is a worthy thing to do but that's not why we're here today, so Marilyn, thank you as always for your wonderful work. Okay, so what is today about? It's about what's happened in the multi-family market in Southern California, since we have gone underground, why that means we must take all forecasts with caution, and then we will do a forecast for the multifamily market here in Southern California. Now, one of the things that we did differently this year because of COVID was we didn't do our normal fall forecast, and there was a reason for that, which is I thought we were at a time of so much uncertainty that to try to do a forecast would be to engage in malpractice because we were so outside of the world of data, what we call the support of the data from what we'd had before, I just felt very uncomfortable doing anything, and so what we did was a state of the market conference where we studied how people were paying their rent, which I think was a pretty interesting thing to do, and that was work that I did with friends of mine at UCLA, Mike Manville, Mike Lenz, and Paavo Monkkonen. We will be doing a part two of that report. It should be coming out very soon, where we've looked at how people have been paying their rent since last autumn, and we're in the midst of cleaning the data right now. Suffice it to say that there are still a lot of people in fact more people who are well behind on their rent. I'm going to refer to that, using another data source in a little bit, but I decided it was time to do a forecast, but again, I think we have a little more certainty now than we did last fall, but we still have loads and loads and loads of uncertainty, and that's gonna be what I spend a fair amount of time talking about today. So what's happened since our last forecast which we did in the fall of 2019, vacancies rose and rent fell in Los Angeles County, particularly in centrally located markets. But on the other hand, vacancies dropped, and in some places like Inland Empire I would say dove to unprecedentedly low levels, in the rest of the region. Consequently, rent either rose or in some places even soared. California, particularly Los Angeles County, continues to have out migration. The state in 2020 lost population for the first time since it was a state, but this doesn't reflect that California is undesirable. How do we know that? Because the price of California has continued to rise, so unlike places like Detroit and Cleveland and like Buffalo and like Hartford, where we saw a concomitant decline in house prices, along with out migration from these places, here we see this seemingly paradoxical phenomenon of people leaving and house prices rising. According to the California Association of Realtors, median house prices Rose by 20% over the past year. Why did that happen? Well, mortgage rates fell to record low levels. I'm sure everybody in this audience knows that. The graph on the right depicts the really dramatic fall in rates for 30 year fixed rate mortgages from their peak in 1981 of about 18% to about 2.5% for 30 year fixed rate mortgage currently. I think most of us when we refinance, we think, okay this will be the last time. We will never again have an opportunity to refinance, and yet they seem to keep coming along, but on the other hand, according to the census pulse survey 8% of households in LA and orange counties feel housing insecure by which they either are behind on their mortgage, they're behind on their rent or are pretty sure they're going to become behind very soon. 8% in our context is a pretty big number. Eviction moratoria has been imposed at the national level, state level, and the local levels, and these almost certainly depressed vacancies, because if landlords can't kick people out for nonpayment, one of the sources that might've created vacancy basically didn't exist, and so one of the reasons why vacancies have remained pretty low even in the more central areas, although they've certainly risen and fallen to very low levels in other places is in part because there are people who have been able to stay in their homes even if they haven't been paying their rent. And then there's a key question, is we've now had a boatload of federal and state rent relief coming from the American rescue act that was passed a little over a month ago, and now governor Newsome has announced a very large initiative given California's huge budget surplus to provide rent relief. I mean, he says to the point where everybody is going to pay us back rent. I think that was a quote that I heard from him the other day. If that's really true, then I think we can look forward to a very strong market in the year to come and the next couple of years, but if that's not true, then I think people, these eviction moratoria going away and people leaving these houses as a result of that could have a downward impact on prices. Another big thing is if we look at job loss it's been very uneven across the region, and what I'll do is just put it this way, is things were worse in Los Angeles County, which still is down about 10% from peak in terms of the number of jobs it had before COVID. To the Inland Empire, which is down about 4% for peaks, so as you can see, every place in our region has lost jobs, but again, there's variance in how much the job loss has been. Inland empire has had by far the lowest job loss, followed by San Diego County, Ventura, Orange, and Los Angeles, Los Angeles by far the largest job loss. "Will those jobs return to LA" is going to be a very key question to the future of the dynamics of the rental market in the months to come. So there's a broader question here, which is will jobs returned to the office period. If they do, then Los Angeles will come back pretty quickly, I think. Okay, so will they return at all? That's almost, they will, certainly jobs will return. There are jobs where it's pretty clear that while you can maintain productivity with people working from home, you can't grow the company, you can't create new things with people always being at home. They need to be in at least part of the time. There are other jobs, like call center jobs that may have been converted to entirely work from home jobs, because there's evidence that people in call centers actually are more productive working from home than they are in their office. Probably because, you know, if you can get up and get a sandwich and pet your dog, you're still managed, right, people know how often you're on the phone, how many calls you make, how many closings you have, and so on, but most jobs I think need to be in the office, we're going to find need to be in the office sometimes, but the critical question, and this, I think we still don't have the faintest idea what the answer is, is how many days a week will that be, and what would be the difference between people coming in two days a week and four days a week? Well, then they start to rethink the commute-cost trade-off. So if you're driving to work four days a week, you probably want to be back pretty close to work, and so these more central markets, and by central, I really mean think of downtown LA and go west to the Pacific ocean, so Santa Monica I'm actually counting as a central market here. Inglewood is certainly central market. Korea is central market, and so on. If you're driving four days a week, you probably want to be close. If it's two days a week you might say to yourself, you know what, I'm going to put up with that miserable commute two days a week in order to have a bigger place further out. The other key is the return of amenities. So if jobs come back to the office, then you have the sort of support that's necessary to support what makes things, central areas, lively, restaurants, arts, clubs, and one of the things I found hopeful, I was walking in Santa Monica last weekend, enjoying myself now that I am fully vaccinated, going to a restaurant, going to the pier, people were out, it was a pretty lively place, and this is the other element that's key to people being willing to pay higher rent in order to live in downtown markets, and so will jobs come back, will amenities come back, that will be the determining factor for whether people return to these center cities faster or more slowly. Now there are some precedents here, and I want to give two in the American context. The first is New York city, and this is a history of pestilence in New York city, going back to 1800, and what this graph is, is it's sort of a morbid one, it's the death rate in New York city, going back to 1800, and as you can see, with cholera epidemics, the meningitis epidemic, diptheria, influenza, New York has gone through a series of health crises. Now, this graph doesn't take into account COVID. What does it do to this arrow at the end? So New York currently has about eight people die per thousand people in a year. That's just typical. Where was it this year? It was about 11 or 12, so that's a big increase. Way more people died in 2020 in New York, this is according to CDC data, than is normal, but compared to history, it reflects how much healthier we are in general than we used to be. It's meaningful. It's important. I don't want to minimize how important it is, I want people to be careful, so you always have to be careful what you say, but the point is, New York has recovered from worse than this, and recovered pretty quickly from it, and I think that's why, I mean, New York's expensive. New York is crowded. New York is noisy. New York is dirty. It's always been those things, and yet people go back to it over and over again, because this need for people to be together in order to create and in order to consume is really important. Map on the right, different kind of crisis. This is a map of the San Francisco fire. So if you look at this, this is in 1906. All of San Francisco, as you can see it was pretty much laid out then as it is now. It hasn't changed very much. I mean, the buildings have, but the layout itself, but look at what the fire destroyed. That is an enormous swath of San Francisco, and of course here's Market street, so here at north of Market, this is what we all know of. I think when we think of, most of, this is what we're mostly visiting. It was wiped out. It was gone, and it came back very quickly. Cities do, cities are very resilient places. Now, people would say, yeah, but they didn't have Zoom back then, and here we are doing this thing on Zoom. What about Zoom? And so my response to that is, well what about the telephone? Telephone meant people didn't have to meet together. They could get on the phone and talk to each other. You know, what happened after the telephone? Cities became more important. What about email? What about the web? People were writing 30 years ago about the death of distance. You could be anywhere. You could be in a cabin in Montana. You could be at Key West. You could be anywhere and do your job, and what happened since email and the web? Cities became more important, not less so, and our centers of economic power, Seattle, San Francisco, Los Angeles, San Diego, Austin, Texas, Boston, New York, Washington DC, became even more powerful. So that's why I'm skeptical. I think Zoom is an amazing tool. I think we will, just like the telephone, just like email, just like the web, we are Zoomers now and we will continue to use it or whatever your favorite conference software happens to be. However, it will not replace the need for people to be together, and in fact, what it will do is allow us to know more people than we otherwise would've known, which is why we will want to meet these people in person sometimes. We hunger for that. We will be together. Now, the question is, does this return to the importance of central cities happen in a year or three years or five years? I have no idea, and I don't think anybody else does either. I think five years actually is a pretty good number because if you look at past periods when cities have had to be resilient, that seems to be sort of the edge. Five years is the end, but I don't know. All right, so with that context, let's talk about some of the stuff that's going into the forecast. First of all, net migration. From California counties, here's LA county. This is not a new phenomenon. People are just leaving LA County. More are leaving than are staying. Who are the people that are leaving? They're poor people, people, or lower middle class people, working class people. Overwhelmingly it's people making $50,000 a year or less who are moving out of Southern California, and in particular Los Angeles County, to other places. Okay, so that's the first thing. Why is that? Well, I think one of the things, and if they're leaving California, where are they going to? Well, this is not surprising, they're going to Arizona. They're going to Nevada, but compared to 2009, so this is just the change in out migration. That's the way to think about this. So Arizona and Nevada are down here because people have been leaving for those places for a long time now, for 20 years. This is Texas. You really have seen a lot more outflow to Texas now than we had before, about 10% more now than we had before. What makes Texas appealing, this is construction activity in various counties in California, and this is Harris County, Texas. Harris County, Texas last year built about 60,000 houses. Here in Los Angeles County, we built 30,000 houses. Los Angeles County has two and a half times the population of Harris County, so you take the, Harris County builds double the housing of LA County, with 40% of the population. You do that math, basically, they're building five times as many houses per person in Harris County, Texas, as they are in Los Angeles County. And again, if you look at Ventura, you look at the Inland Empire, The Inland Empire is a little better than the rest, but all of these places, relative to their population, this will surprise a lot of people, the Inland Empire, San Bernardino and Riverside counties combined, very similar in size to Harris County, Texas and yet look at how much less housing they built, so people are leaving California because there's no place for people to live, and think about this dynamic. When rich people come in, which they have been until recently and poor people leave, rich people take up more floor space per person than poor people do, so if you don't have new housing and you have rich people replacing poor people, what do you get? You get fewer people. And to me, housing is the thing that's driving these migration patterns that we are seeing. So this report has two sets of numbers. The ones that I'm going to show you today are the first of these, the average projected rent for the next four quarters relative to the actual rent found in the previous four quarters. When you read the report, which we will be putting online, you'll see projected rent one year from now, which is a bigger number than the number that I'm going to give here, but the key thing is to look at the rankings of these places. Now, the first thing, I just want to show LA quickly, this is the thing. First thing to note, we know that there's a lot of out migration from LA, but where's most of it happening? Well, it's going to San Bernardino County, Orange County, Riverside County, it's our neighboring counties, absorb most of the people who leave, but then Clark County, Las Vegas, this is Nevada, Kern County, Bakersfield, San Diego, Ventura, and then we get to Phoenix, Maricopa, but notice most of the migration is happening from LA County to other parts of California, and one of the hottest housing markets in the country right now is in Sacramento. That's Northern California migration. All right, so what we're saying is, you know, we think that the central areas we will see slightly negative rent growth even, and this is just a mechanical device, is because the vacancy rates rose so much, you could see what happened to vacancy in Los Angeles, what we basically look at is we look at vacancy, we look at historic absorption, we have a formula that we run, and that gives us rent, and when you have vacancies rise this rapidly it's natural to see some decline in rent, and so we're seeing, this is what we expect, again, assuming that we don't see this snap back. Now, if people move quickly back to Koreatown, and I was talking to an owner there who said she's getting lots of calls from people out of state with interest in coming back to Koreatown, then this will be wrong, so I'm just telling you folks now there's a good chance these numbers are completely wrong. This is the best we can do under the circumstances. All right, now we go to Orange County. Again, you note the migration, very similar, LA, Riverside, San Bernardino, San Diego, then Maricopa and Clark, so I find it interesting. Orange County tends to be more Phoenix oriented and LA tends to be more Las Vegas oriented, and that's probably could be the subject of some interesting research, but again, in Orange County what we saw is declining vacancy toward the end of 2020, and that's why we are expecting some red growth in orange County. We look at the Inland Empire now, again and part of these, these are not scaled, so that looks as big as if we look at LA County we see 35,000 people moving from LA to San Bernardino, whereas we see in all of the Inland Empire people moving from, about 27,000 moving to LA. Sorry about that. If we look at the Inland Empire, look at what happened to the vacancy there, it just crashed, and so we're seeing our biggest projected increases, and this turns into about 10% on an annual basis. Biggest projected rent increases are in the Inland Empire. I mean, this is, to go from 5% vacancy to two and a half percent vacancy is just extraordinary, and then we've got a slow down in deliveries, of course, because of COVID, so there's lots of absorption, big drop in vacancy, not a lot of new supply coming online in the next couple of years, so we expect rents to pop, but again, if people say, you know what, we moved out here because we didn't have a job, we had no office to go to in West LA and there was nothing to do in West LA, all the restaurants were shut down, but now we want to go back, so we might as well have more space for less money in the Inland Empire. They now want to go back, then again, this gets undone, and so you might see more modest rent increases, although certainly we will see rent increase in the Inland Empire because that vacancy rate is so low, and because there is so little relatively coming online in the next couple of years. When we look at San Diego, again, particularly in the coastal markets, big drop in vacancy, and so we're seeing, you know, not quite as aggressive in the forecast as San Bernardino, you know, given sort of the how San Diego works, I think these are probably going to be about right, and San Diego was probably, other than the Inland Empire, which benefited if you could say anyone benefited from COVID, but relatively its economy did well. San Diego was the, I would say the place that was least affected overall economically by COVID of all the places in our region. And then finally, we look at Ventura, the key thing in Ventura is vacancy is dropping. A lot of it is on the periphery and there's very little that's built. Again, this is a little deceiving in that it looks like there's going to be a comeback, but this is like six, 700 units built per year in a County with about 900,000 people. That's just, that's not moving the needle at all, And so we expect expected rent growth. So key questions to think about, will people return to the offices? Will center city amenities return? Will rental assistance allow people to remain in their homes? This is really important. So if 8% are in trouble, let's say a quarter of them get kicked out, that basically adds 2% to your vacancy numbers, and that totally turns upside down a lot of what we're looking at here. That would be a real drag on the market, and will jobs continue to grow more rapidly away from the coast? These are things we're going to have to look at in the years to come in evaluating the forecast. Now, one of the things I will say, if you look back at our cast and forecasts over the years, we have done pretty darn well, except for 2020. We didn't do well. We thought, although we didn't do as badly as we might've because we were more conservative than a lot of people on rent growth, this one may turn out to be a total disaster if you're going to compare the numbers to what actually happens, but we did the best we could under the circumstances. I'm giving you all the caveats that I think are appropriate for you to know. And with that, I want to turn it over for commentary to two distinguished people we have. I'm going to start, Tony, with you, and then move on to Paul. Tony Salazar, as many of you know, was one of the leading partners, McCormack Baron Salazar, a leading affordable housing developer throughout the United States. One of the most insightful guys I know. We're very grateful he teaches a course for us at USC on affordable housing, which I, the story I like to tell about Tony is he showed me the most polished first syllabus I have ever seen from anyone who has taught a course for the first time in 30 years of teaching, so clearly a guy that thinks meticulously and carefully about his work. Tony, please, we welcome your commentary and I will stop sharing my screen.

Tony Salazar: Thank you, Richard, for letting me share COVID's impact on our development and property management operations in Los Angeles. I have some prepared remarks to make sure that I stay within a decent time period, but for those of you who don't know, McCormack Baron Salazar is 50 year old company, specializing in developing and managing affordable housing and some ancillary retail. We have offices throughout the country and every region of the United States. In comparing similar product types, in 2013 in Los Angeles we were developing low income housing tax credit units at about 350,000 a unit. That increased to 410,000 in 2016, but in 2020 it jumped pretty significantly up to 650,000 per unit. Well, while in San Francisco was about 950,000 a unit and in Texas, the same kind of unit is about 375, this past year. Currently in the city of Los Angeles, the cost for homeless housing is coming in at about 650,000 a unit. That's just for single room occupancies. The most recent cost increases can be attributable to COVID, a shortage of labor and chaotic scheduling of site workers is causing significant time delays. Breaks in the supply chain has caused both delays and price increases in lumber, cement, appliances, and windows, just to name a few. Lumber has nearly tripled over these past years, and right now we're actually at the closing table for a development in Texas where lumber is increased $1.5 million in the last 45 days. The problem was compounded by the fact that the contractor is only holding this pricing for two days at a time, so we'll probably end up developing this property just to get our costs back with no profit, but the thing about affordable housing is we're also in the subsidy business. These developments could not occur without government assistance, both subordinated debt and and grants of some form. These projects just don't underwrite, but today in Los Angeles, there is a need for over 500,000 affordable units just to meet the demand, and yet the competition for low-income housing tax credits, tax exempt bonds and government assistance is at an all time high, and so affordable housing, development of affordable housing, is totally contingent upon the amount of government subsidies that are available. Many of them are going to be coming down, and we'll have an increase in supply, so a few years down the road, but then it'll probably fall off again, but COVID, on the management side, on our operation side, has also exposed the fragile state of our low-income working tenants, as Richard was talking about. They typically work multiple jobs, live paycheck to paycheck, and even though they pay only 30% of their disposable income on rent, they have not been able to make ends meet. These low income families have had to decide whether to buy food or medicine or pay the rent, and many have been forced to work at jobs under hazardous health conditions, so one of the things that we found with our residents, we have about 2000 units here in Los Angeles, is the food insecurity. They have just not been able to get enough to eat, and our management staff has been forced to create free food deliveries to make sure that we address that food insecurity, but prior to COVID, we had on these 2000 units no vacancies and we had no delinquencies. Currently, we still don't have vacancies due to the moratorium on evictions, but we're carrying about $280,000 in delinquencies, and under the current rent relief program guidelines, we're only eligible for about $80,000 of rent relief out of that amount, because to be eligible right now, and I'm sure these programs are going to have to change in order to accommodate people, it's only serving people that earn less than 80% of the area median income, even though affordable housing tax rate units house people up to 60% of area median income, so there's a gap there, and also people with section eight certificates are not eligible for rental assistance, so many households will not be receiving that rental assistance and will soon be facing a reckoning. Going forward, as Richard's been and the Casden Forecast has been showing for quite a while now, the young suburbanites have been moving back to the city. The lower income families have been moving out and driving until they find affordability. This would not have occurred if the housing production had kept up with the demand and the need here in Los Angeles, but you can't have filtering without a significant number of new units. You can only have gentrification, but as a company, we were anticipating the future demand of affordable housing occurring in the suburbs, and we were preparing to establish operations in those areas where these lower income families were moving, anticipating more of a need there. However, with COVID, we stopped and we are now waiting to see what shifts in population occur before moving forward. In conclusion it's a good time to sell product if you haven't. There's still investors out there looking to buy product, but it's a lousy time and a difficult time and a horrible time to be an affordable housing developer. Thank you, Richard. I'll turn it back over to you.

Richard Green: So Tony, thank you for that. That was very helpful, and I, you raised a couple of things I want to underscore, is for the work I did with Mike, Mike, and Paavo last fall, was consistent with what you were saying, is people will do anything to keep their house first over anything else, and one of the things we found disturbing is many of the people who were current on their rent were using credit cards in order to pay for their rent. Well, that's clearly not a sustainable way to pay rent, with the kind of interest that you would have on a credit card, and we've found very little what I'll call strategic behavior, which is to say there was this view that if people knew that they couldn't get kicked out they would stop paying the rent, and we saw a little of that, but we saw very very little of that, because overwhelmingly the people who were behind on their rent were people who'd lost their jobs or people who had gotten sick from COVID, so not people who by choice were not paying the rent but people who had life circumstances change so they made it hard to pay the rent. I found your comment really interesting about the limits of rent relief, and we have some questions about this so I'm going to come back to that and ask you for help with that in a little bit, but thank you for those great comments. Now I want to turn it over to Paul Keller. Paul has run, it's now called Mack Development at the, I knew it as Mack Urban for a long time, a very well-known developer for all over the country. You will know some of his work from the South Park area here in Los Angeles, so very much sits in the central part of LA although has done work in more suburban markets as well. Paul, thank you for being with us today.

Paul Keller: Thank you, Richard, and good morning, everyone. You know, I think that so much of what's already been discussed is completely consistent with sort of our house view. We have three businesses, a fairly large private credit business that has about a $14 billion book nationally. Our common equity or investment business, which has about a four and a half billion dollar book in selected MSAs across the country, and then our management and surveillance business that supports those two platforms, and I don't want to repeat or I'm going to try to avoid repeating lot of what's already been said, but our general view is we're at a very very unique convergence of really three things nationally, and then there's a fourth that really occurs in some selected MSAs, and I'm going to recite these but not in any particular order, and again, this is all under the context of the comment you made, Richard, at the beginning of today's conversation around uncertainty, and these numbers possibly being materially wrong. You said completely. I disagree with you. I don't think they're going to be completely wrong, but clearly, if there was ever a time that there could be material differences in trying to look forward over the next 12 to 18 months, this is it, so we've got the issue, as we wind out of COVID and we watched the impacts of herd immunity and we immediately think of this whole dilemma, if you will, around work from home, recruiting, people getting back to work, what that's going to do to urban versus suburban investing in commercial real estate in general, that's number one, number two, clearly there's an enormous amount of conversation right now around inflation. You just heard about lumber specifically, but just today, if you look at where oil is, you look at copper, you look at aluminum, there's some interesting dynamics going around that we're just going to have to see how they play out 12 to 18 months from now around inflation, and simultaneous to that, we've got the fed and the intervention, if you will, that the fed is committed to continue doing, simultaneous to trying to hit its inflation target, but also prevent us from going off a cliff as we work our way out of COVID. Third, and Richard touched on this, is putting aside what the state is going to receive from Washington, but just to reflect on the fact that I think it was Tuesday of last week, the governor announces this 50 plus billion dollar surplus that the state is going to have in its up and coming budget beginning in July, and you know, this is a mind boggling number, and again, it causes you to really wonder, well if the number truly is of that magnitude, where is this capital going to be deployed? Who's going to deploy it? What are the decisions that are going to look like around deploying that capital, and it's just a fascinating dynamic that literally didn't exist 10 days ago but surfaced the beginning of last week, and then lastly, the fourth issue, which really, really we see, and we've all seen this who are in the Los Angeles County area for many, many years now is the continued impact homelessness is having on all of us, and we think of that really in the context of four subtopics, which is the lack of affordable housing, which we heard about, the mental health crisis that's affecting so many of these people, addiction that's impacting so many of these people, and then the fourth is the lack of vocational training that's in a lot of cases combined with the other two to really cause this absolute catastrophe that all of us have to witness every day around homelessness, and it's really, really prevalent here that I'm sure everyone on this call realizes here in the CBD of downtown Los Angeles, so I think with all of that, we really would agree, Richard, with your commentary as to just the level of uncertainty because of the convergence of these dynamics that I just spoke of.

Richard Green: I wanna emphasize two points you made. So first of all, one of the things about the fed, something I just discovered this week by part of writing a book chapter is if you look at the impact of the federal funds rate on housing construction, it used to be enormous. So the fed would move the federal funds rate, housing construction would respond. If they moved it up, it would fall. They moved it down, would rise. That relationship has gone. If you, if you do that, if you do what I do, which is the regression going back to 2003, there is no relationship between the federal funds rate and housing construction, and I wonder if part of that is because with our regulatory environment for building, housing basically just can't move in response to much of anything in terms of new construction. The second thing on homeless, I'm doing work with a postdoc at Lusk named Una Joan who I think is on this call and we're trying to look at what are the determinants of homeless by just comparing what's happening about 360 continuum of areas over the last 13 years, and the work is not really for sharing yet, but two things just keep popping up over and over and over again, and one is if you don't think homelessness is a housing issue, you're just wrong, because housing affordability is an incredibly powerful predictor of homelessness. The share of people spending more than you can pick your favorite measure of lack of homelessness, 30% or 50% of their income on housing predict homelessness and particularly predicts unsheltered homelessness, consistently no matter how we model it. The other thing, and this I find fascinating, the other strong predictor of homelessness is absence of health insurance. So if you look at the share of people who don't have health insurance, that is a strong predictor, and again, we're careful not to talk about causing, but predictor of whether people are homeless or not, and so we need to deal with these, they seem auxiliary, well, housing doesn't seem auxiliary to me, but some people seem to think it is, issues if we want to at least ameliorate the problem, and it also gets back to Tony's point about if we don't build, Tony, the way you said it was so right. I wish I'd, I want to copyright this, is if you don't build you don't get filtering, you get gentrification, and it's simple as that. Oh, and the other thing, Paul, and again, this is not a criticism of the California state department of revenue at all, but if you looked at their, this tells you how hard forecasting is, they're very good. They're really good at their job. If I recall correctly, they were forecasting a $25 billion deficit for the state.

Paul Keller: That's exactly correct.

Richard Green: And now it's a $50 billion surplus.

Paul Keller: Yeah, or if you take, you know, again, if you add the other 17, it's damn near a hundred billion dollar swing. You talk about being completely wrong, There's a great case study in being completely wrong.

Richard Green: Yeah, and yet I want the audience to know I'm not being critical of anyone here. What that just demonstrates is how hard it is to figure out what's going to come next. So with that, let me turn it over to audience Q&A, so from Patricia Mendoza, are you accounting for LA emergency rental assistance program? Okay, so great question. Ms. Mendoza, the point I'm trying to make here is first of all it's not clear to me who all qualifies to get the relief, and that's why governor Newsom's statement the other day was kind of striking to me and there's a question from Jeff Collins about this, and I really want to, I may be misinterpreting what the governor says, so I want to be really careful about that, and if I did, I'm sorry, but you know one reads a story in the paper, I know in your paper, Jeff, it's always right, but one draws inferences that may not be entirely correct, but the inference I drew was he was planning on having at least pretty widespread rent relief so that people could pay their back rent, but who qualifies? I mean, we heard from Tony about the issue of that, and then the other thing, our governments are not great at doing because they haven't been equipped doing it is getting programmatic money out to people quickly. This is why checks worked so well. When all government is doing is just sending checks to everybody and that's why, yeah, it would be better if things were targeted, but when you have an emergency, you just want money in people's hands, that's worked really well, but when you go to programs like say Section 8, which have regulatory compliance requirements around them, how quickly and how effectively you're getting money to people becomes a question. I don't know the answer to that question. Maybe it will happen seamlessly and all will be well, but I'm not in a position to think that that's true, and the history we have with this is the expansion of unemployment insurance, while a very good thing and a very important thing in my view, the roll out of that was pretty rocky, if you remember, from roughly a year ago, figuring out who was eligible, figuring out just having the computer systems in place in order to identify people and getting money to them, and so that's why, to me, it's very much one of these things of uncertainty. In principle, the amount of money, and I agree we should include at the local level, and I'm sorry, I just said state and federal, available will help a lot, and I'm very pleased about that, but how the rubber meets the road, we're just going to have to see that, and so that's an issue of uncertainty. I don't know, Tony, if you have any further comment on that?

Tony Salazar: Well, your comment about government not being well equipped is pretty good, and what is happening mechanically is that the city has its program, the state has its program, the feds are coming down with some additional money, and so all of the requirements that are layered on top of each other consistent, not yet, but they will be, and it's going to take time, but, you know, currently, you know, if I have, I'm carrying deficits, and I submit to and I prepare a request for a rental assistance on behalf of the entire development, I'm only eligible for 80% of that amount, but individual tenants have the right to submit for their own rental assistance, and they're only eligible for 20% of the delinquency, so it's kinda all over the place right now, and yet once you submit it, the state's kinda scoured through it and then can select randomly what it is that they want to pay, or provide rental assistance to, but it's going to be a little bit before all of that is totally coordinated. At the end of the day, I don't expect all of my delinquencies to be covered.

Richard Green: So, Paul, do you have any thoughts on that? I don't know what your delinquency situation is, but I mean, are you looking to government programs to help with people's backgrounds?

Paul Keller: Well, not directly, no, and I mean, on an, you know, if you were to just look at a national snapshot, at one point in the second half of last year, we were carrying a collections receivable that was low eight figures.

Richard Green: Let me, so there are a number of, I've got to try to combine questions so we can get to everybody. There's a question about hotels and project home key, by the way, I'm a big fan of this program personally, because what it says is here you have a sector that has problems, which is the hotel sector, and the idea is that you buy these units and it's much cheaper to acquire these units that exist, particularly when they're in distress, than it is to build something new, and in fact, and this is not snarky. One of the things I've suggested to people is when you have hotels and default on their mortgages that you buy the mortgage, because that's a way to acquire the property very cheaply, and it's a way to help people who are upside down on their commercial mortgages at least recover part of what they've lost and the lenders to recover part of what they've lost but at the same time acquire units that are scattered throughout the region. This is the important thing. They're near job, you tend to have hotels near job centers, hotels and motels, so you're not putting homeless people in places where they can't get to work. I think the idea is great. The issue is one is it I think has made a dent but it's still us, to this point, a fairly small number of units compared to the number of homeless. I mean, particularly in Los Angeles. We are particularly bad at the number of unsheltered homeless that we have, and then the second thing is about execution. We'll just have to see how well executed it is, but I do think it's promising as a possibility. There are a number of questions about workforce housing and modular construction, and I'm going to now turn it back over to Paul and Tony, either. What can we do in order to use cheaper technology in order to build housing, and let's not just limit it to Southern California, throughout our urban centers around the country? I mean, what are the impediments and what has to happen to get rid of those impediments? 

Paul Keller: Tony, go ahead.

Tony Salazar: Thank you, Paul. You know, similar product type, we had bids come in for a development in San Francisco that came in over a million dollars a unit for an affordable housing unit this year. In Texas, that same unit is about 395,000 per unit that came in, this counting the lumber price that just came in within the last two weeks. That is, I mean, for a similar product type, that's why people are moving to Texas, Richard. They can get housing there cheaper because you can build it cheaper

Richard Green: You can see, you know, Harris County Texas builds twice as much housing as Los Angeles County does, and it's 40% of the size.

Tony Salazar: Yeah, and their subsidy goes a longer way. The government subsidies that they have, which these developments require, are going further. Land is cheaper. Labor, I mean in San Francisco you have to have union labor on every train that you build. 30% of your labor costs also has to be from San Francisco based companies, and the earthquake requirements, the social service requirements, all these things that get layered on these developments in California just increase the costs almost exponentially at times, and in Texas, you don't have that. I mean, you have right to work, you have, you don't have the transportation costs sometimes 'cause things are just manufactured there. So these things impact the price of housing, and I have this discussion all the time with people in California, is can't we just come up with a new technology? Well, technology isn't my problem right now. My problem are these labor costs, my problem are these material costs, my problem, that are different here versus somewhere else.

Paul Keller: And Tony, and Tony, how 'bout the time it takes you get your approval in San Francisco versus Texas?

Tony Salazar: Yes, and that's a very good point. I forgot that one, Paul. It'll take me six or seven years from start to finish to build something here.

Paul Keller: Crazy.

Richard Green: And if I may, in a shameless act of self promotion, I made a YouTube video about a month ago on what the actual cost of time is when you're doing real estate development, the dollars and cents of it, so if you want a vivid demonstration, there it is. So I, I guess I, you know, this prompts sort of a big picture question for the both of you, so try to look out five years from now. Are we building less housing in California than we are now? The same amount? Are we doubling the amount of housing, so one other thing that occurs to me, we lost a congressional seat as a state because we aren't growing, and I really think the evidence is there. The reason we're not growing, it's not because people don't want to live here. The reason we're not growing is we don't have houses. Will that prompts officials to say, you know what, losing congressional seats is losing power. Maybe we have to do something about this. So what would your forecast be say five years from now about whether, I'll just make it simple, we're building less, we're building the same, we're building more?

Tony Salazar: After you, Paul?

Paul Keller: I'm not optimistic. I would say it's just going to be more of the same.

Tony Salazar I agree. More of the same.

Paul Keller: And it's really, it's really sad. You look at what's going on in Sacramento right now as it relates to the special election, you look at all of the conversation and discussion we're reading about as it relates to our mayor going to India, and you think about how tough these problems are and how demanding solving these problems are from a leadership perspective, and how can we end up in a situation where we can somehow convince folks to truly lead us out of a lot of these very, very, very serious problems, and I'm talking specifically about the state right now.

Richard Green: Well, I think, here's my optimistic response to that, is as I showed in the, our great cities have faced great problems before, and they figure it out, and I still think cities are the things that generate wealth for the rest of the country, and so I don't know how, it's sort of like one of the mysteries to me in life is if you go back to the turn of the last century, 50% of Americans were working on farms. Now it's 0.5% work on farms. How did we come up with jobs for all those people?

Paul Keller: And how long did it take though? 

Richard Green: Yeah, it was, well, we do, I mean, it's not like it's painless, but it happens. At the end of World War II, 40% of Americans worked in manufacturing. Now it's 10%. There have been problems as a result, and I don't want to dismiss that, but it's not like then suddenly 30% of the people had nothing to do. Last thing I'm going to say, there's a question from Gerson Munios. Are there any numbers available for the total amount of, and I'm assuming this is rent and arrears in LA county, I'm gonna again shameless plug, Mike, Mike, and Pablo and I will have a second paper out based on a second survey we've done of renters in LA count. This should be out soon, and when that comes out you will have a number, Mr. Muniez, so please, please keep an eye out for that. I'd like to thank my guests, Paul Keller, Tony Salazar, always great to see both of you guys. Thank you for your very thoughtful commentary. Thanks to this wonderful audience. I try to get us out of here on time and it's noon. Thank you again all for coming everybody, and we'll see you at our next Lusk event.

Paul Keller: Thank you, Richard.