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San Diego May Lose Half of Affordable Rental Units by 2040

Expiring Deed Restrictions, Replacement of Older Properties Could Worsen Statewide Housing Shortage

By Lou Hirsh CoStar News

June 5, 2020 | 03:31 P.M.

Half of San Diego's affordable rental units could be eliminated over the next two decades because of tear-downs of older apartments and expiring rent restrictions on subsidized housing, boosting pressure on the city to ramp up supply during California's housing crisis.

San Diego for decades has struggled to keep up with demand for housing as the population has grown along with development costs and rents. Job losses and rent payment issues created by the coronavirus pandemic could worsen the climate for new apartment construction in the region and across the state.

A new analysis from the San Diego Housing Commission, a city-appointed agency that works with developers to build apartments deemed affordable based on regional income standards, projected that more than half of the city's current 70,000 affordable rental units could disappear by 2040 and would be difficult to replace based on current slow rates of new construction.

“If we’re losing our existing affordable homes as we work hard to create new affordable housing, we’re just spinning our wheels,” said San Diego City Council President Georgette Gómez, responding to a report released this month by the city.

“We must preserve the low-cost homes we have, so that San Diego families and individuals have access to affordable housing options and aren’t displaced from their homes," Gómez said.

Before the pandemic, San Diego already had a deficit of 140,000 housing units affordable to working families and California was about 4 million units short of projected housing requirements, according to city and state officials.

The loss of any affordable housing units is expected to only make a difficult situation worse. According to federal figures, California has the largest population of homeless people in the nation, largely a result of housing construction falling behind and real estate prices skyrocketing.

The San Diego report said two trends are at work in the city that could reduce its affordable housing further: the pending expiration of rent restrictions on government-subsidized housing; and the steady displacement of older buildings throughout the city by newer apartment projects that come with more modern amenities and higher rents.

Housing commission executives said the city has 23,440 units of existing subsidized housing that was built under certain covenants and requirements, also known as deed-restricted housing with time spans for affordable pricing. There are an additional 47,000 non-restricted units that are currently deemed affordable, but many of those are in older properties that are expected to be torn down and replaced in coming years.

The city council in coming weeks intends to discuss potential responses recommended by the housing commission. Those include providing seed funding for a public-private affordable housing preservation fund to acquire and rehabilitate properties; redirecting other city funds currently earmarked for redevelopment projects; implementing fees on short-term rentals that could support affordable housing efforts; and providing financial assistance or other incentives to landlords to preserve current affordable units.

Maintaining the current stock of affordable housing could be financially daunting. The housing commission projects the cost to preserve deed-restricted housing will top $300,000 per unit or an estimated total of $1.7 billion over the next 20 years.

The proposals follow other measures being discussed by San Diego officials, including the possible placement of a $900 million housing bond to finance development of 15,000 mostly subsidized apartments on this fall's ballot.

A similar bond measure was passed last year by San Francisco voters. Cities across California, along with state lawmakers, have put forward numerous proposals over the past year to deal with a crisis-level shortage of affordable housing.

These measures seek to tackle the problem with approaches such as rent control, developer fees, targeted relaxation of zoning and building-height restrictions to encourage construction, and programs to boost the supply of accessory dwelling units, including cottages known as "granny flats" and even smaller units dubbed "tiny houses."

Whatever measures they pursue, they have an additional challenge ahead now, too.

Apartment development fundamentals nationwide have been further complicated by massive job losses stemming from the coronavirus pandemic, causing rents to go unpaid and landlords to work out deferral arrangements with tenants as property owners face challenges paying their own mortgages.

California city and state officials have recently enacted or considered extensions of eviction moratoriums imposed during the pandemic, and San Diego and other cities are already seeing flattening of rent growth and the expansion of renter incentives to get newly built units leased. The situation could severely dampen investor and developer appetites for building new apartments in the weeks and months ahead.

"This has all brought the capital markets to a near standstill," said Joshua Ohl, managing analyst for CoStar Group in San Diego. "Liquidity concerns have spread, as underwriting deals has become increasingly difficult in our current economic environment."

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