New Affordable-Housing Rules Will Stifle Construction in Los Angeles

LOS ANGELES—This city became the latest major U.S. municipality to require that developers include affordable housing in new projects—a move hailed by advocates, but one that builders say could crimp the supply of homes in the nation’s second-largest housing market.

Policy makers in cities around the U.S. are turning to so-called inclusionary zoning programs to ensure developers set aside housing units for residents who couldn’t otherwise afford to live there.

Nearly two-thirds of Los Angeles voters last week approved a citywide affordable-housing requirement for developers seeking to build projects of 10 or more units that need a zoning or height change.

The rule requires that up to 25% of units in rental properties and up to 40% in for-sale projects meet affordability guidelines. Alternatively, developers can pay a fee to the city.

New York City and Seattle passed similar requirements earlier this year.

The Los Angeles initiative goes a step further, however. It also sets wage standards for the projects.

Developers must pay construction wages on par with those required for public-works projects, hire 30% of the workforce from within city limits, set aside 10% of jobs for certain disadvantaged workers living within 5 miles of the project and ensure 60% of workers have experience on par with graduates of a union apprenticeship program.

The mandates could double the hourly wage for some construction trades compared with state median wages. The pay for a carpenter, for example, could rise to $55.77 an hour from $26.16, according to an economic analysis sponsored by opponents of the initiative.

Supporters say those wage differentials are inflated. And some developers will be less affected by the change. Those who build primarily affordable housing, using government subsidies, already must pay higher wages. Developers of large high-rise projects, meantime, often use union work crews.

The measure was backed in part by the Los Angeles County Federation of Labor, a union group, which argued the city needed an alternative to developers who were “paying poverty wages and pushing people out of the city.”

Laura Raymond, who led the campaign backing the initiative, said builders receive a financial benefit in the form of zoning changes. “There’s some value that needs to be given back to the community in the form of affordable units and wage standards,” she said. Ms. Raymond works with the Alliance for Community Transit-Los Angeles, which promotes “smart growth” and affordable housing near transit hubs.

But developers said the combination of elevated wages and additional requirements for below-market-rate housing would prevent projects from being built at all. That would worsen housing-supply shortages in one of the nation’s most expensive regions.

“It’s already a lot of brain damage and work for a project to go through in L.A.,” said Paul Habibi, a professor at UCLA’s Anderson School of Management who also develops and invests in apartments in the city. “It’s really only going to stifle the number of housing units built.”

Shawn Evenhaim, chief executive of Los Angeles developer California Home Builders, said he stopped purchasing land months ago that would fall under the new requirements, anticipating the initiative would pass. He has enough land to get him through the next two to three years, but after that he said he will have to look outside the city limits.

“There’s a huge shortage of housing in L.A., and a huge shortage of low-income housing,” he said. “They took that problem and made it worse.”

Mr. Evenhaim said he favors an existing state program that allows developers to add greater density in exchange for including affordable units—a program he believes is reasonable and doesn’t constrict the overall housing supply.

On Thursday, the Commerce Department said housing starts rose 25.5% in October to a seasonally adjusted annual rate of 1.323 million, the strongest pace since August 2007. But they remained below levels seen during the late 1990s, a period before the boom and bust that economists consider more normal.

Research is mixed on whether affordable housing mandates restrict the overall supply of housing in an area. A San Jose State University study of California cities adopting such requirements in the mid-2000s found a notable decline in building permits after the rules were put in place, whereas other studies have found little or no effect on overall construction.

Policy makers typically view the process as a trade-off: In exchange for providing the affordable housing, cities allow developers to build more units than typically allowed. In theory, that would allow the developer to recoup some of the costs of providing the below-market units.

Ralph McLaughlin, chief economist at real estate tracker Trulia, said the wage requirements are the biggest wild card for Los Angeles.

“Those are additional costs that the developer must bear or pass down to the market-rate units,” he said. And while added density may give a developer more revenue, “it’s unclear whether that’s going to offset those higher labor costs.”

Write to Chris Kirkham at chris.kirkham@wsj.com