Santa Monica residents know the harsh reality of our housing crisis all too well. As rents continue to climb and home ownership slips further out of reach for many, we’re left competing for a severely limited housing stock with minimal new inventory being added each year. The consequences are clear: growing homelessness, persistent segregation, long commutes, environmental damage, and the steady exodus of young families and essential workers from our community.
Fixing all the ills of our housing crisis can feel like an insurmountable undertaking, but clear steps can be taken to start fixing key problems. To identify where to start, we can look to new research including a recent report titled “The High Cost of Producing Multifamily Housing in California” from Jason Ward and Luke Schlake at the RAND Institute, which illuminates how the excessive cost of producing housing in California compared to other states like Texas directly contributes to our crushing local housing costs.
Housing Supply is a Cost Problem
The basic factors determining whether developers build new homes is simple but often overlooked in policy discussions, especially those centered on zoning. The cost developers face to build housing, and what market rents or sale prices they expect to receive determines what they build and whether they build at all. When rents are high, even expensive projects can “pencil,” meaning that they make financial sense. If we want to get out of our shortage and make housing more affordable, we need developers to keep on building when rents are lower. This can only happen if development remains profitable at lower price points, which requires reducing the cost to build.
What the Research Shows
Ward and Schlake’s report reveals striking disparities between California and Texas in the cost and time it takes to build apartments:
- In the Los Angeles Metro area, the average market-rate development costs $350,000 per unit, versus only $133,000 in Texas. That’s high even in comparison to San Diego, where the average development costs $259,000.
- These unit costs reflect higher building costs per rentable square foot of $429 in LA, compared to just $167 in Texas and $335 in San Diego.
- Average production times for multifamily developments in California are 48.9 months—nearly two years longer than the 27 months typical in Texas.
- Municipal impact and development fees average $29,000 per unit in California while remaining less than $1,000 per unit in Texas.
These aren’t just abstract numbers, and they certainly do apply to Santa Monica. They represent real barriers to creating the housing our community desperately needs. Namely, high costs to build mean that fewer homes are built, and the only homes built are those which developers expect will command high prices.
Santa Monica Solutions: What We Can Do Now
There are numerous reasons for cost differences, including some unique to below market rate housing, that are beyond local control or which entail serious tradeoffs. The good news is we have smart options to change some of the factors driving high costs with action from our city council:
1. Streamline the Permitting & Inspection Process
The RAND research indicates that reducing production time to Texas levels could lower costs by 8% or more. For a typical $350,000 unit that would amount to $28,000. Here are three ways to start building more quickly:
A. Implement Appropriate Self-Certification: To facilitate faster approvals without overwhelming city staff, Santa Monica should advance its proposal allowing licensed professionals to certify that plans for minor commercial improvements, single family homes, and ADUs are consistent with code.
B. Allow Third-Party Permitting and Inspection: For permits and inspections that city staff cannot get to within 30 days, builders should be able to hire qualified third-party professionals to review permits and inspect work. Two bills (AB253 and AB1308) currently making their way through the state legislature propose to do just that for buildings up to 40 feet high with 10 units. Santa Monica can lead by passing comparable policies locally for immediate implementation, as well as requiring staff to notify builders in advance when they know the 30 day deadline will not be met.
C. Fix the Inspection Process: Coordinated rather than sequential inspections would significantly reduce delays according to Ward and Schlake. Additionally, the city should require inspectors to approve designs consistent with previously approved plans and create a rapid appeals process for inconsistent decisions.
2. Reform Fee Structures
Impact and administrative fees are the most self-evident ways that California municipalities increase the cost of building new housing, as they are direct payments from developers to cities. While impact fees raise funds intended for useful purposes, they are an unreliable source from year to year and generate nothing if housing isn’t built! Additionally, blocking housing reduces revenues of cities in the long-term from property taxes and sales taxes on the spending of new residents.
A. Eliminate Impact Fees for Multifamily Housing
Santa Monica’s current fee structure adds substantial costs: Transportation Impact Fees up to $4,578 per unit, Parks and Recreation fees of $8,876, and Cultural Arts Contributions of $2 per square foot. Eliminating these for multifamily housing would immediately reduce production costs by approximately $15,000 for a typical two-bedroom apartment.
B. Reform Administrative Fees
Projects currently pay steep administrative costs: $36,762 for Development Review, $16,211 for Architectural Review Board consideration and approval, and $13,920 for Administrative Approval—plus a 7.3% “General Plan Surcharge” on top of all these fees! Making these fees refundable when projects pull a building permit and break ground would incentivize actual construction rather than just approvals.
The Path Forward
The housing crisis didn’t develop overnight, and solving it will require more work than these proposals alone. But the RAND research makes clear that reducing construction costs is essential to increasing supply and ultimately bringing down housing prices. For a typical unit that costs $350,000 to build, these changes would reduce costs by at least $43,000, or more than 12%.
The benefits don’t stop there. Reducing timelines for building new housing could lead to even greater changes to the economics of homebuilding, such as by allowing the construction workforce to build more projects at the the same time, or reducing the necessary return on investment that financiers seek.
By implementing these policy changes, Santa Monica can lead the way in creating a more affordable housing market. We have research-backed solutions. What we need now is the political will to implement them. The question isn’t whether we can afford to make these changes. Given the economic and social costs of our current housing crisis, the real question is: can we afford not to?
