In my last post, I introduced an interview with Bill Witte. According to The Planning Report (the interviewer), Witte is “president of Related California, oversees all multi-family and mixed-use development in California for one of the nation’s largest real estate firms.” Witte does describe, in detail, the housing supply challenges facing Los Angeles County. To summarize, zoning restrictions are only part of the supply problem. In and of itself, zoning deregulation won’t fix the supply shortage (let alone significantly move the needle on housing affordability). Witte also spends considerable time discussing the demand side of the gentrification equation. A real estate developer cogently outlines some of the constraints on demand:

First of all, it is worth considering the context in LA County for middle class residential options, which is related to a whole basket of issues, including quality of schools and other quality of life concerns. A lot of the working and middle class moved out of inner city neighborhoods to distant suburban areas in the ‘90s where housing is more affordable. So, an obvious problem arises from commuting—the time, the effect on families, and transportation costs, which have risen as gas prices have risen. That’s one problem. Another problem is the City and the County find it increasingly difficulty to support or attract the middle class, and that impacts a city’s economic base. The net result: middle class jobs may be less likely to locate in urban LA and LA County. …

… You have a coastal California with a relatively expensive housing market, but you also have a significant percentage of the population whose incomes are below middle class, and with job growth concentrated either in “knowledge economy” jobs that pay very well, or lower paying service jobs. There is a disconnect.

Emphasis added. If policymakers tackling housing affordability do not address that “disconnect” on the demand side, all the supply side reform will fail. Fair to claim the opposite is also true. However, all the lather about deregulation and greater densities rarely (if ever) links residence with income or quality of life. Greater density positively correlates with lower rents. Case closed.

Case re-opened:

In Toyota’s case, says Storper, the move to Texas makes good financial sense.

“And that’s because it’s a manufacturing firm, and it’s consolidating its headquarters operations, and it’s a perfectly natural thing to do,” he adds. “It’s not going to go to New York City either, right? And it’s not going to go to San Francisco or Chicago, because it wants a lot of land, it wants lower labor costs, and Texas offers those kinds of things. We don’t offer them in coastal California any more, and we’re never going to offer them again.” …

… “We’ve done research at UCLA which shows actually that, within Southern California, the communities that have had the most employment growth and the most wage growth in the past 20 years are the ones that have the highest local taxes and the highest land costs,” he says. “And that’s because for a place like L.A., for all of coastal California, basically – as well as places like New York and Washington and Boston – the activities that they are suited for are the ones that pay high wages and need a lot of interaction and a lot of density.”

Emphasis added. Toyota moves from California to Texas. So what? Michael Storper, the person quoted above, puts Los Angeles County into focus:

The issue, according to Storper, is that Los Angeles County – the heart of the Southern California metropolis – is undergoing a major transition from an old economy to a new economy.

LA County, he says, “had a lot of old economy. It was a huge manufacturing area for a lot of the 20th century, and its cost structure is no longer compatible with being an manufacturing center. It’s a very expensive place to live and do business.”

LA County is deleveraging from manufacturing. The working-class neighborhoods are still tied to the jobs moving to Texas, not the Innovation Economy jobs being created in Southern California. Storper’s research describes the disconnect that Bill Witte is seeing in the real estate market. To put a bird on it, back to Witte:

There are a lot of reasons, particularly along transit corridors, to have high-density housing. But almost by definition, unless land prices can be taken out of the equation by public ownership of land, that housing is going to be relatively expensive because of the high cost of constructing it.

Emphasis added. High land prices, as Storper points out, are a feature of the new economy. Witte contends that unless LA County does something about those land prices, high-density development will price out the middle class. All the additional supply is for naught.