The Michaels Organization

Raoul Amescua

The California residential real estate market is entering a phase of transformation in 2024, driven by a confluence of factors that promise to reshape the landscape, particularly in the rental sector. As we peer into the crystal ball of real estate trends, three major shifts stand out.   

1) The Ebbing Tide of Construction Starts

One of the most conspicuous trends in California’s residential rental market for 2024 is the decrease in construction starts. The familiar sounds of jackhammers and the sight of rising scaffolding may not be as prevalent, signaling a potential slowdown in the supply of new residential units. The causes of this decline are multifaceted, encompassing rising construction costs, high interest rates and a constrained capital markets environment, regulatory hurdles, all pose real challenges to developers to finance multifamily construction projects. The consequence for renters could be a tightening of availability, amplifying competition for existing units and potentially leading to upward pressure on rental prices.

2) The Recession’s Paradox: Softening Rent Costs Amid Economic Uncertainty

The looming specter of a predicted recession casts a shadow over the economic landscape, but within this uncertainty lies a potential silver lining for renters. Historical patterns suggest that economic downturns can lead to a softening of rent costs as demand for housing adjusts to the economic climate. While the broader implications of a recession are undoubtedly concerning, renters may find a momentary reprieve as the market adapts to the challenges of economic contraction. However, this respite may be short-lived, and the long-term effects will depend on the depth and duration of the economic downturn.

3) Policy Pivot: Serving the Attainable Market Requires Systemic Changes

A critical realization dawning on California’s real estate landscape is the imperative need for policy changes to address the demands of the attainable housing market, which is typically intended for households earning between 80% to 120% of Area Median Income (AMI). Simply put, the status quo falls short in serving the diverse needs of the state’s residents. Advocates are pushing for a recalibration of the property tax welfare exemption, suggesting that expanding the threshold up to 120% of AMI, beyond the current 80% of AMI limit, is essential to maintaining affordable housing equilibrium for California households. This would allow for a broader scale of affordable housing by allowing developments that provide deed-restricted units up to 120% of AMI to in turn receive property tax abatements for those units.

This shift aims to support a broader spectrum of residents who find themselves navigating California’s challenging economic terrain.

Furthermore, calls to re-codify the Joint Powers Authority Act highlight the importance of streamlining collaboration between public and private entities to provide needed new construction workforce housing for essential workers in the Golden State. This approach also enables the issuance of Essential Function Bonds, which are project-based, tax-exempt bonds purchased by private investors and outside of the state’s bond cap allocation, which is most commonly utilized for traditional affordable housing. Reinforcing this streamlined approach is seen as pivotal for fostering a more conducive environment for residential development.

In an era where innovation meets necessity, policymakers should also explore new avenues, such as utilizing surplus or excess government lands for residential projects beyond Very Low- and Low-Income residential units that these sites are typically awarded for. By repurposing underutilized spaces, the state could not only meet housing demands, but also to create vibrant, sustainable communities. This forward-thinking approach aligns with California’s commitment to equitable and sustainable development.

In addition, the California Department of Housing and Community Development (HCD), the state agency that provides grants and soft funding sources to fill the capital gap for traditional affordable housing, typically between 30% to 80% of AMI, needs to provide substantial grants and soft funding sources for residential projects that will provide housing for the state’s middle income workforce, as well as for affordable student housing projects. Currently there are minimal soft funding sources for these workforce housing projects and what does exist has a minimal impact on helping with a project’s economic feasibility.

California’s residential rental market in 2024 is poised at the intersection of change and opportunity. From a slowdown in construction starts to the potential alleviation of rent costs amid a predicted recession, the market is in flux. Yet, the most significant transformation may come from the realm of policy, where changes in expanding tax abatements, soft funding sources, and collaborative efforts with the private sector could pave the way for a more inclusive and resilient residential real estate market; however, policy makers and government agencies need a paradigm shift in order for this happen.