Insights

Like hurricanes in the Southeast or tornados in the Midwest, wildfires have become an increasingly common risk in California. As the fallout from the recent Los Angeles wildfires continues, the response of other Golden State communities to past tragedies might offer clues as to today's government response and how the LA fires might impact the region's multifamily sector.

When it broke out in 2018, the Camp Fire in Northern California was the deadliest and most destructive wildfire in the state's history, burning over 150,000 acres. An estimated 50,000 people were displaced, and 18,000 structures were destroyed, causing $16.5 billion in damage and leveling the city of Paradise.

Amid the disaster, the Paradise population looked to nearby Chico for temporary housing. Local shelters quickly filled but would not allow pets, and some prevented mixed-gender cohabitation. Those who wished to remain as whole family units often chose to remain unhoused, resulting in several homeless encampments spread throughout the city.

As residents turned to long-term housing, families got creative. Properties that historically served the student population at California State University, Chico, were leased by families paying higher rental rates. The unprecedented demand pushed vacancy rates in Chico down to 2.3%, the lowest point in 20 years.

Record low vacancy did not translate into rent growth. The governor’s office implemented a state of emergency in Butte County, outlawing price gouging in rental housing and hotel rates, among other essential items. Additionally, properties were prohibited from evicting tenants and reletting the unit at a market rate.

On Jan.16, the governor placed the same restrictions on Los Angeles and Ventura counties.

Nearly 180,000 people have been evacuated as at least five fires burning in Los Angeles County destroyed thousands of houses, commercial properties and other buildings, including the near-total destruction of the upscale Pacific Palisades seaside neighborhood that created what one developer called a "staggering and mindboggling" scene.

Changes to zoning and permit approval processes on the fast-tracked scale of the Manhattan Project — the program that developed the atomic bomb during World War II — will be necessary to rebuild communities, Sean Burton, CEO of Los Angeles-based multifamily developer Cityview, told CoStar News.

“I don’t know how you even begin to address how to rebuild amid the scope of this massive destruction," added Burton, whose company has built 10,000 apartments in Los Angeles and across Southern California and other Western states.

The multifamily vacancy rate in Los Angeles is just over 5%, with the rate expected to dip to 4.8% before the end of this year, according to CoStar data.

Builders needed to finish constructing about 3% of the existing multifamily and single-family housing stock in the past year just to keep the region's rents and housing prices — already among the nation's highest — from rising even higher, Burton said in an interview.

Developers were on pace to finish just a half-percent of inventory in Los Angeles in the coming year. And that was before the fires that have destroyed at least 10,000 homes and other buildings, according to the L.A. County Assessor's Office.

"There are a lot of factors that will make this incredibly challenging," Burton said. “You need architects, lumber, concrete, city inspections — all of those things were not available in abundance last week, let alone today.”

About 8,600 market-rate units finished construction in the region over the past 12 months, representing inventory growth of less than 0.8%, according to CoStar data. The area's average rent is $2,299, almost one-third higher than the national average of $1,731.

"The fires will have to turbocharge the amount of change at the government level in order to rebuild," said Carl Muhlstein, chairman of Muhlstein CRE and a former longtime JLL executive.

Catalyst for change

Developers, including those building affordable housing, have long decried lengthy zoning and permit approval processes in the Los Angeles region created by complex government regulations and a shortage of planning personnel that regularly takes years to bring projects from the application stage to groundbreaking.

Now, "the planning and building departments are just going to be overrun," even as thousands of displaced residents try to lease a small number of available apartments near their burned neighborhoods in the Palisades, Malibu and West L.A., according to Muhlstein.

"Landlords expect multiple applicants per unit if it is close to the destruction," he said. "Single-family homes are already flying off the shelves in Manhattan Beach in pending sales at record prices. A friend of mine that has a condo project that he bought as a rental leased three units the very first night. They didn’t even ask the price, they said we’ll take it."

Only 2,000 vacant houses and apartments were available before the fire, with just 10% of those having three bedrooms necessary to house families, according to Chris Tourtellotte, managing director at LaTerra Development, a multifamily developer based in L.A.'s Marina del Rey suburb.

"A lot of families that are impacted are looking for a place to live," Tourtellotte said in an interview on CNBC. "Just the other day, I saw that a single-family home in Mar Vista was renting for $30,000 a month, 3,000 square feet, that should be renting for $12,000. So, there’s some price gouging going on, which is unfortunate."

A combination of high financing, insurance, labor and material costs, in addition to long waiting periods to start projects, has made it tough for developers to build, added LaTerra CEO Charles Tourtellotte.

"Ground-up new construction has been constrained for some time as it is, and now with costs relating to insurance and interest rates so high, for sure it's going to add to the difficulty to rebuild, or build anything new," Charles Tourtellotte said in the same CNBC interview. "The constrained housing market will only get worse with less housing and more demand, and the cost to live will just go up, it just has to."

Asked whether the region can muster the will and effort to speed up development, Cityview's Burton noted “you can’t be a developer if you’re not optimistic.”

“We have to use this as a catalyst for change," Burton said. "Not just the business and real estate community, but a much-broader swath of Angelenos need to demand change from our elected officials at all levels in how we do our zoning, planning and entitlement so we can build more housing."