Commercial (Non-Residential) Nexus Study & Linkage Fee Analysis

Transcription

1 Commercial (Non-Residential) Nexus Study & Linkage Fee Analysis CITY OF SANTA MONICA July 25, 2013 ROSENOW SPEVACEK GROUP, INC.

2 ROSENOW SPEVACEK GROUP, INC.

3 TABLE OF CONTENTS INTRODUCTION...1 Background...2 Affordability Levels...3 Summary of Findings...4 Report Organization...6 Data Sources...6 SECTION 1: NEXUS CONCEPT AND ASSUMPTIONS...7 Legal Background...7 Non-Residential Nexus Study Methodology...8 The Relationship Between Job Growth and Population Growth The Relationship Between Non-Residential Development and Job Growth Housing Needs of New Population vs. Existing Housing Need Substitution Factor Employment Multipliers Discount for Changing Industries SECTION 2: LOCAL ECONOMIC INPUTS AND ADJUSTMENTS Building Prototypes Employee Density Occupational Distribution by Building Prototype Employee Compensation Employment Patterns (Industry Change Factor) Unemployment Commute Patterns SECTION 3: MICRO ECONOMIC JOBS HOUSING ANALYSIS Approach Step 1: Establish Building Prototypes Step 2: Estimate Total New Employees Step 3: Adjustments for Market Conditions Step 4: Adjustment from Employees to Employee Households Step 5: Occupational Distribution of Employees Step 6: Estimate Distribution of Employee Wages Step 7: Estimate Household Income Category Distribution Step 8: Estimate New Households that Meet Income Criteria Step 9: Calculate Worker Households Income Categories and Adjust for Commute Patterns Summary i

4 SECTION 4: AFFORDABLE HOUSING COSTS Introduction Affordable Housing Cost Rental Apartments Valuation Affordable Housing Development Funding Gap SECTION 5: FEE ANALYSIS AND RECOMMENDATIONS Approach and Methodology Rental Apartment Projects Mitigated Development Funding Gap Impact Linkage Fee Calculation Impact Linkage Fee Consideration ATTACHMENTS Attachment 1: Occupational Categories and Wage Data Attachment 2: Affordable Housing Product Type Pro Formas Attachment 3: Linkage Fee Alternatives ii

5 INTRODUCTION This Commercial (Non-Residential) Nexus Study ( Nexus Study ) and Linkage Fee Analysis (collectively referred to as the Report ) has been prepared by the Rosenow Spevacek Group ( RSG ) for the City of Santa Monica ( City ) to analyze the affordable housing needs created by the development of nonresidential buildings in the City. The primary goal of this Nexus Study is to demonstrate the reasonable relationship between the purpose of the affordable housing fee, the fee amount, the revenue generated, and the impacts of commercial development that the proposed use of that revenue is intended to address. 1 The Nexus Study identifies the linkages between new non-residential land uses, the net number of new employees and employee households generated by businesses occupying these land use buildings, and the need for affordable housing units for these new employees. The Linkage Fee Analysis quantifies the cost mitigation associated with developing affordable housing units based on the identified need resulting from employees generated by new commercial development. Factors examined by the Nexus Study include the variety of jobs and varied degrees of compensation for workers in new non-residential buildings which in turn creates a demand for housing at all affordability levels. The Nexus Study quantifies the housing needs of new employees by income category within a variety of land use categories. The Nexus Study examines eight types of non-residential land uses, as identified in the City s 2010 Land Use and Circulation Element (LUCE) that are anticipated to be built over the next twenty years; they include office, hospital, hotel, retail, industrial, institutional, creative, and medical office. Each land use type results in a different mix of employment and income affordability levels due to the density of jobs, the type of jobs, and the corresponding employee compensation. The Nexus Study identifies the net number of new employee households living in the City, by affordability level, generated by the development of each of the land use types cited above. The resulting number of net new households indicates the number of housing units needed by income category. The affordable housing impact linkage fee is then ascertained based upon the cost to mitigate the affordable housing need generated by such development based on the development funding gaps associated with producing affordable housing units for each income category. This Nexus Study and Linkage Fee Analysis has been prepared to satisfy the requirements of reasonable relationship test set forth in San Remo, as well as to inform the decision makers as to the impacts associated with new non-residential development. 1 California courts have not required affordable housing in-lieu fees to meet the legal requirements of the California Mitigation Fee Act (AB 1600, 1987, Gov. Code et seq.). For example, in Action Apartment Ass n v. (2008) 166 Cal.App.4th 456, the appellate court identified the requirement to provide affordable housing as traditional land use legislation. In Building Industry Ass'n of Cent. California v. City of Patterson (2009) 171 Cal.App.4th 886, however, a different court of appeal found that while the in lieu affordable housing fee under review in that case was not subject to the Mitigation Fee Act, it was subject to the reasonable relationship test set forth in San Remo Hotel L.P. v. City And County of San Francisco (2002) 27 Cal.4th 643, 670 ("San Remo"). Therefore, for the purposes of this linkage fee, this analysis has been provided to clearly demonstrate the relationship of the fee to its proposed expenditures. 1

6 Background The City Santa Monica adopted an Affordable Housing Production Program (AHPP) Ordinance to assist in the production of affordable housing units in the community. The AHPP is applicable to new market rate multifamily residential units constructed in the City. For program consistency purposes, the requirements and provisions under the AHPP, as amended June 11, 2013, are used in determining the income groups incorporated in this Study for purposes of identifying new employment segmented by income category, calculating affordable housing costs and the corresponding supportable linkage fee amounts. The following is a summary of the requirements and provisions set forth in the AHPP Ordinance. The AHPP is applicable Citywide to each new multifamily project involving the construction of two or more market rate units. Market rate projects include but are not limited to apartments, condominiums, townhouses or the multifamily residential component of a mixed use project. Projects exempt from the AHPP include designated landmark buildings or contributing structures to an adopted Historic District retained or preserved on-site as part of a multifamily project, multifamily rental housing projects to be developed by a nonprofit housing provider receiving financial assistance through a City housing trust fund program, non-residential projects, and projects for which a development application was determined complete prior to May 25, Multifamily ownership projects of four or more units may satisfy the affordable housing requirement by one of the following options: a. Providing the affordable units on-site; or b. Providing the affordable units off-site. In addition to the options established above, all other multifamily projects may also choose one of the following options: a. Paying an affordable housing fee; or b. Acquiring land for affordable housing. For ownership projects of not more than fifteen units in multifamily residential districts at least: 1) twenty percent (20%) of the total units must be designated as ownership units for moderateincome households; or 2) twenty percent (20%) of the total units must be designated as rental units for low-income households. For ownership projects of sixteen or more units in multifamily residential districts at least: 1) twenty-five percent (25%) of the total units must be designated for moderate-income households as ownership units; or 2) twenty-five percent (25%) of the total units must be designated for lowincome households as rental units. For all other multifamily projects that elect to develop the affordable units on-site at least: 1) five percent (5%) of the total units for extremely low-income households; 2) ten percent (10%) of the total units for very low-income households; 3) twenty percent (20%) for low-income households; or 4) one hundred percent (100%) for the total units for moderate-income households. 2

7 The AHPP requires the deposit of any payment made pursuant to the AHPP to an affordable housing reserve account separate from the General Fund to be used only for the development of very low- and low-income housing, administrative costs related to the production of housing, and monitoring and evaluation of the Affordable Housing Production Program. Affordability Levels The City s Land Use and Circulation Element of the General Plan provides data regarding the need for affordable housing in the City. The City s affordable housing needs are largely defined by the Regional Housing Needs Assessment (RHNA) promulgated by the Southern California Association of Governments (SCAG), which allocates the regional housing demand, by income category, to local jurisdictions as targets to be addressed in their respective Housing Elements. Santa Monica s fifth cycle RHNA for the period January 2014 through October 2021 reflects a total need for 1,674 new residential housing units, which include an allocation of 25.5% for very low income households, 16.1% for low income households, 17.0% for moderate income households, and 41.5% for above moderate income households. The maximum income level for lower and moderate income households, as defined in the California Health and Safety Code and as promulgated by the Housing and Community Development Department ( HCD ) is 120% of the area median income ( AMI ). The LUCE showed that 60% of the households in the City make less then 120% AMI, and identified that 72% of the City s households are renters, which is the highest proportion of renter households among all Los Angeles County cities. Moreover, the LUCE indicates that 35% of renter households of the very lowand low-income households within the City are overpaying for housing 2. The federal Housing and Urban Development Department s ( HUD ) threshold for overpayment is when households spend more than 30% of their gross monthly income on rent or mortgage payments. Overpayment is a critical issue, because it leaves households with insufficient funds for other necessities, such as food, health care, clothing, and utilities. Extremely low-, very low- and low-income households are not the only households in the City who are affected by the City s high housing costs. The City s affordable housing needs can be demonstrated through review of the following information. The 2012 U.S. Census American Community Survey data placed the median household income in Santa Monica at $68,842 ($5,737 per month). Based on Apartments.com and Craig s List data for August 2012 of new and existing apartments in the City, the median monthly rent for a one-bedroom apartment is $2,339, increasing to $3,546 for a two-bedroom apartment. This data indicates that a household would need to make approximately $7,796 per month to afford a median priced one-bedroom apartment within the City, or $11,820 per month to afford a median priced two-bedroom apartment. These rents represent approximately 136% and 206% of the $68,842 ($5,737 per month) median income respectively. According to the LA Times/DataQuick data, in August 2012 the median price for ownership condominiums in the City ranged between $470,000 and $775,000, with an average of $668,200. Based upon these prices, the estimated monthly housing cost, including principal and interest (based upon 80 percent financing loan), taxes, insurance, and HOA fees would be about $4,435. Therefore, in order to 2 As defined by State HCD, extremely low- and very low-income households generally earn not more than 30% and 50% of area median income respectively; low-income households earn not more than 160% of the very low-income limits for high cost areas such as Los Angeles County, where the limit reflects about 105% of the area median income; and moderate-income households earn not more than 120% of the area median income. 3

8 afford a median priced condominium in the City, the wage earner in a single earner household would need to make approximately $14,785 per month to conform to the 30% housing cost target. The minimum wage in the State of California is $8 per hour (or $16,640 per year), which is less than 18% of what is needed to rent a one-bedroom apartment in the City. This means that a full-time dual income household, where both workers make minimum wage, would not be able to afford to rent a median priced apartment within the City. It is expected that a portion of the new workers including lower income households working at low-wage jobs in new non-residential land uses developed in the City would seek housing within the City. However, due to a short supply of affordable units, many households would either be forced to live outside of the City (in which they work), or spend a large portion of their income on housing, or live in substandard conditions. The California Health and Safety Code (H&SC) provides a general definition of low and moderate income limits and identifies the calculation of the respective affordable housing costs and rents for each income category. Pursuant to the Health and Safety Code, HCD establishes and publishes annually the Qualifying Income Limits by income category adjusted for household size. The income limits and affordable housing cost criteria under the Health and Safety Code are widely used and generally applicable for various affordable housing programs implemented in local jurisdictions including those by redevelopment agencies and projects using redevelopment housing set-aside funds, those by housing authorities, and those under density bonus programs. The City s AHPP Ordinance, as amended, adopted the same criteria as identified under the Health and Safety Code. Accordingly, this Nexus Study uses the H&SC and AHPP income limits and rents criteria. The income category limits are generally defined as follows: Extremely Low-Income households earning 30% or less of the area median income; Very Low-Income households earning 50% or less of the area median income; Low-Income households earning 80% or less of the area median income; and Moderate-Income households earning 120% or less of the area median income. As footnoted above, however, Los Angeles County is identified as a high housing cost area by HCD and HUD, which results in the household income limits for the lower income categories exceeding the percentage of area median incomes identified above. The Nexus Study will identify the affordable housing need, by income category, generated by the development of new non-residential buildings in the City, including office, hospital, hotel, retail, industrial, institutional, creative, and medical office uses. Such buildings will house new jobs, many of which will be low paying, thus generating the need for housing affordable for those wage earner households. Summary of Findings The following provides a summary of the Nexus Study findings, which are detailed in Sections 1 through 3, and the Linkage Fee Analysis, as detailed in Sections 4 and 5 of this Report. The City s LUCE estimates that approximately 3.49 million square feet of non-residential development will occur during the twenty year period from 2010 to Based on the City s LUCE data analysis derived from the Los Angeles Unified School District 2008 School Fee Justification Study, which is used to identify employee density, it is estimated that new non-residential development in the City will create a total of about 6,918 net new worker jobs after adjustment for market factors. Further, based on a combination of data from the 2002 Economic Census and the 2012 American Community Survey, it is projected that the estimated 4

9 employment growth will result in about 6,122 new worker households, of which its is conservatively estimated that approximately 2,082 households (34%) may live in the City. An analysis of data for the Los Angeles County MSD provided in the OES Occupational Employment and Wage Estimates, the BLS Occupation and Wage Survey, and from the California Economic Development Department identifies that a substantial portion (69.7%) of the new worker households generated by the development of various new non-residential land uses would require housing affordable at the extremely low-, very low-, low-, and moderate-income levels (refer to Table 3-9). The following is a summary of the future affordable housing need for 1,451 units in the City generated by non-residential development, which is broken down as follows: 216 (15.0%) Extremely Low-Income Households 687 (47.3%) Very Low-Income Households 424 ( 29.2%) Low-Income Households 124 (8.5%) Moderate Income Households This Report also provides an analysis of the housing impact linkage fee associated with the affordable housing need generated by the non-residential development in the City. The linkage fee analysis (refer to Sections 4 and 5) translates the affordable housing need generated by each of the land use building prototypes (refer to Sections 1 through 3). This was done by adjusting the affordable housing need into square feet and multiplying that need by the cost to produce housing affordable in each of the income categories. Table I-1 below summarizes the maximum supportable impact fee on a square foot basis for each of the building prototypes, as well as a range of recommended reduced impact fees for the City s consideration. The recommended reduced fee levels are meant to avoid adverse economic impacts on the developers of new non-residential projects in the City. As discussed in Section 5 of the Linkage Analysis, the final impact linkage fee is recommended at between 5% and 25% of the maximum supportable fee established by the Non-Residential Nexus Study for each of the identified land uses. Table I-1, shown below, demonstrates the range of impact fees per land use. Per Square Foot Non-Residential Impact Fees 1 Table I-1 Santa Monica Linkage Fee Analysis Medical Office Hospital Hotel Retail Industrial Institutional Creative Office Full Impact Fee $ $ $61.43 $ $ $ $ $ Impact Fee Options (per Square Foot) 5% $11.21 $6.15 $3.07 $9.75 $7.53 $10.23 $9.59 $ % $22.41 $12.30 $6.14 $19.51 $15.05 $20.45 $19.17 $ % $33.62 $18.45 $9.21 $29.26 $22.58 $30.68 $28.76 $ % $44.82 $24.60 $12.29 $39.01 $30.10 $40.91 $38.35 $ % $56.03 $30.76 $15.36 $48.77 $37.63 $51.14 $47.93 $34.45 Source: Table 5-2 5

10 Report Organization This Report contains five sections, as follows: Data Sources Section 1 Nexus Concept and Assumptions: This section presents a summary of the linkage concept and some of the key issues surrounding nexus analyses for jobs and housing. Section 2 Local Economic Inputs and Adjustments: This section provides an overview of the economic conditions in and around the City, including those key to the Non-Residential Nexus Study. Section 3 Micro Economic Jobs Housing Analysis: This section describes the analysis which was performed, linking jobs and housing relationships to the land uses and building prototypes examined. Section 4 Affordable Housing Costs: This section examines the cost to produce affordable housing units in the City. This analysis was used to associate a cost with the need for affordable units, as identified in Section 3. Section 5 Fee Analysis and Recommendations: This section combines the information from the analyses in Sections 3 and 4 to formulate the maximum non-residential affordable housing impact fees for the City. This section also adjusts and provides recommendations regarding the final fee levels, in order to provide reduced economic impact to developers of non-residential property in the City. RSG has prepared this Report using the most current and verifiable data available. Sources used include the US Census ( Census ), California Economic Development Department ( CEDD ), Department of Labor - Bureau of Labor Statistics ( BLS ), California Department of Housing and Community Development, the Southern California Association of Governments ( SCAG ), and First American Title MetroScan Information Service. The Census, CEDD, and BLS data and materials are widely used for demographic and econometric analyses including nexus studies prepared for a large number of jurisdictions in California. In addition, at the direction of City staff, employee density factors used in the LUCE were used as a basis for determining the estimated total new jobs resulting from the development of each land use type. RSG believes that these data sources are deemed to be reliable and believed to provide accurate and relevant information for this analysis. Nonetheless, RSG cannot guarantee their accuracy and assumes no liability for information from these sources or others. 6

11 SECTION 1: NEXUS CONCEPT AND ASSUMPTIONS Section 1 outlines the nexus concept and the assumptions used in the analysis. The analysis is centered on the linkages between population growth, non-residential development, employment, employee wages, and the demand for housing. The analysis connects the development of certain new non-residential land use building types, employees who will work in those building types, and the generated need for affordable housing. The model utilizes data from a number of sources including the BLS, CEDD, Census including the 2012 U.S. Census American Community Survey (ACS), HCD, and SCAG. In addition, conservative assumptions were used in order to not overstate the affordable housing need generated. Legal Background The first inclusionary housing ordinances were adopted in the early 1970 s. In analyzing initial challenges to them, courts characterized affordable housing and in lieu fee ordinances as traditional land use and zoning regulation, and not as exactions or impacts fees. The traditional land use ordinance position has been most clearly adopted by the New Jersey Supreme Court in Southern Burlington County NAACP v. Township of Mount Laurel, (N.J. 1983) 456 A.2d 390. In 1990, in Holmdel Builders Ass'n v. Township of Holmdel, (N.J. 1990) 583 A.2d 277, the New Jersey Supreme Court revisited the issue while reviewing the constitutionality of affordable housing fees required by several New Jersey cities. The court explained that "inclusionary-zoning devices," including inclusionary in-lieu fees, are land use ordinances that bear a "real and substantial relationship to the regulation of land" because they are specifically designed to help create affordable housing and will therefore affect "the nature and extent of the uses of land and of buildings... " Id. at The court held that inclusionary in-lieu fees are not exactions similar to impact fees, because the affordable housing requirements are not based on the impact of a project, but rather on the "the relationship that... development has on both the need for lower-income residential development and on the opportunity and capacity of municipalities to meet that need..." Id. at 288. In Home Builders Ass'n v. City of Napa, 90 Cal.App.4th 188 (2001), the first published California case regarding inclusionary zoning, the City of Napa argued that its inclusionary ordinance was a land use ordinance that merely regulated the use of a small part of a development, and that inclusionary in-lieu fees were not impact fees because the underlying inclusionary requirement was not a monetary exaction, but rather a land use control, and fees were paid only at the election of the developer. In rejecting plaintiff's claims that the City's ordinance was an invalid exaction under Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994), the Court of Appeals treated Napa's inclusionary zoning ordinance as "economic legislation that is generally applicable to all development in City." Id. at 197. In Action Apartment Ass n v., 166 Cal.App.4th 456 (2008), the Court similarly considered the City's inclusionary housing ordinance a traditional land use or zoning legislation and not an exaction. No California court has treated a generally applicable inclusionary housing ordinance as imposing an impermissible per se exaction or required in-lieu affordable housing fees to meet the legal requirements of the California Mitigation Fee Act. In Building Industry Ass'n of Cent. California v. City of Patterson ("Patterson ") (2009) 171 Cal.App.4th 886, however, the Court of Appeal applied the "reasonable relationship" test to an inclusionary affordable housing in-lieu fee, assuming that it was a generally applicable impact fee and without ever considering (at least in the published opinion) whether the underlying requirement was an exaction or a land use requirement. Nonetheless, the language in 7

12 Patterson characterizes the in-lieu fee under review as not substantively different from the in-lieu housing fee reviewed in San Remo, and subject to the requirement that there be a reasonable relationship between the amount of the fee and the "deleterious public impact of the development." 27 Cal.4th 643, This study has been provided to satisfy the requirements of San Remo. Non-Residential Nexus Study Methodology The following discussion provides an overview of the general concepts and methodology used in the Non- Residential Nexus Study. The analysis links the construction of new non-residential land uses to a net increase of new workers in the City. These new workers will need housing within a reasonable distance of their jobs, some of which will be in the City. The compensation levels paid to some of these workers will result in them needing housing which is affordable at the extremely low-, very low-, low-, or moderateincome levels. Briefly summarized in Figure 1-1 below are the basic analytical steps utilized to conduct the Nexus Study. A more detailed description of the methodology associated with each step is provided in Section 3, the Micro Economic Jobs Housing Analysis. 8

13 Nexus Analysis Process Figure 1-1 Step 1: Establish Building Prototypes The analysis is conducted based on individual non-residential land use building types for the land uses identified in the City s LUCE. For analysis purposes, prototypical 100,000 square feet of building area for each of the land use types identified in the LUCE was analyzed. The analysis of individual building types is based on general conditions within the City, as identified by City staff. Step 2: Estimate Total New Employees Estimate the number of new permanent direct employees which will be generated by the construction of the eight new non-residential land use building types. Employee density factors 9

14 were used to estimate the number of employees in each land use type. The employee density factors used in the Nexus Study are detailed in Section 2 of this Report. Step 3: Adjustments for Market Conditions This step incorporates into the analysis any changes in the local economy (including increases in unemployment) and the type of jobs and industries which make up the region. Specifically, declines and/or other shifts in the local economy can affect how new non-residential space is occupied. The result of these market condition adjustments is a reduction in the number of employees generated from the development of new non-residential land uses. Step 4: Adjustment from Employees to Employee Households This step adjusts the number of employees/workers to account for households in which there is more than one wage earner. In order to adjust for this consideration, a ratio of 1.13 workers per worker households is used in this analysis based on City Census data. Step 5: Occupational Distribution of Employees Job types are then associated with the land use prototypes to produce a distribution of employees by occupation. To do so, NAICS industry sectors were correlated to jobs depending on the likelihood that the industries would be housed in each building type. Next, the NAICS industry sectors are linked to OES occupation categories. This step is important because it links building types with occupational categories. Occupational categories are then linked to wage data addressed in the next step. Step 6: Estimate Distribution of Employee Wages Occupational data generated in Step 5, is combined with wage and salary information from the County (based upon NAICS and CEDD data) to estimate the distribution of employee wages. Employee wages were then converted to household wages using the employees per household ratio used in Step 4. Step 7: Estimate Household Income Category Distribution The results from Steps 5 and 6 allow the estimated number of employee households from the previous step to be categorized into household size (number of persons) by income, based on City Census data. This step is important because it allows the households created to have income and size associated with them. Step 8: Estimate the Households that Meet Income Criteria The previous step distributed households into size and income categories. The households are then allocated to specific income categories (extremely low-, very low-, low-, moderate- and above moderate-income households) per the income limits identified under the H&SC and the AHPP. Once the households have been placed into their respective income categories, it is possible to show the number of housing units required to meet the needs of the extremely low-, very low-, low-, and moderate-income households generated by the construction of each of the building prototypes. 10

15 Step 9: Adjust for Commute Patterns This step adjusts the total number of households by the percentage of employees/workers who currently live in the City. This step reduced the number of new households needing housing by approximately 66%. This adjustment is necessary since not all of the new employees generated by new non-residential buildings will live in the City. The adjustment reflects a combination of data from the 2012 Economic Census and the 2012 American Communities Survey data, which indicates that approximately 34% of the workers in Santa Monica also live in the City. The 34% factor reflects a reasonable and conservative estimate based on empirical data, while it may be a greater percentage subject to net increases in availability of housing units in the City. Step 10: Calculate Total Affordable Housing Needs Created by Non-Residential Buildings This final step adjusts the worker household per 100,000 square feet of building to calculate the total new worker households by income category that would live in the City pursuant to the LUCE land use development projections. The resulting total new worker households living in the City serve to reflect the total number of affordable housing units, by income category which is attributable to the total estimated non-residential land use types, if the City s land use projections are fulfilled. The Relationship Between Job Growth and Population Growth The linkage analysis assesses the growth in extremely low-, very low-, low-, and moderate-income households within the City generated by new development, and subsequent lack of affordable housing units available to these new households. A major contributing factor for population growth in most communities is job growth. Households would not arrive or stay in the community if jobs were not available in or near the area to support them. This trend is typically long term since economic cycles and other factors including the availability of housing units can result in population growth without jobs. For these reasons, this analysis is specifically designed to address the long term linkage between the development of new non-residential land uses, job growth, and the resulting need for housing affordable to very low-, low-, and moderate-income households. The Relationship Between Non-Residential Development and Job Growth If population growth is in part driven by job growth, then what is the source of employment growth? Many factors contribute to the growth in employment in different areas. These factors tend to be interrelated and associated with outside forces. A major contributing factor is the development of new non-residential land uses, which will house jobs. The rationale behind a non-residential nexus study is that the construction of these new buildings is largely, but not solely, responsible for growth. Nonetheless, in the, new non-residential construction is an important factor contributing to population growth, while it is also an essential condition that precedes growth. As mentioned, new construction itself encourages population growth. This relationship was most recently seen during the ten year period 1995 through 2005, when construction activities in California were one of the main drivers of a thriving economy. In many regions including Los Angeles County, the development industry frequently serves as a proactive force inducing growth to occur, especially with projects of a speculative nature. 11

16 Lastly, new non-residential construction in particular encourages job growth because it precedes population growth. Job growth would not occur in our modern service economies without buildings to house new workers. In fact, the inability to develop new workspace will often constrain or even halt job growth in an area. Housing Needs of New Population vs. Existing Housing Need The Housing Element for the City, the City Inclusionary Housing Annual Report, and other materials indicate that while the housing needs of the existing lower-income households in the City are generally being met in accordance with the City s RHNA distribution, future activities to ensure affordable housing may be hampered by diminished funding availability. Moreover, many existing households, especially those at the lowest income levels, overpay for housing (payment of more than 30% of income for rent, as set forth in federal and state guidelines), live in overcrowded conditions, or cannot live in the City and must live and commute from less expensive locations. This Nexus Study does not address the housing needs of the existing population or the needs resulting from new residential construction, which was addressed in the 2005 Update Nexus Between New Market Rate Multifamily Developments in the and the Need for Affordable Housing. While new employment associated with residential development may result in some minor overlap with the new jobs resulting from new non-residential development, for a number of reasons, including but not limited to, building vacancy/under utilization, unemployment, under employment and part time employment factors, it is deemed to be very minor and would not generally induce a significant level of new commercial or other non-residential development. Accordingly, this Nexus Study focuses solely on documenting and quantifying the housing needs of net new households generated by new non-residential buildings. Substitution Factor Any new building in the City may be occupied either partially or entirely by workers or firms relocating from elsewhere. When a business relocates to a new building, there is a space in an existing building that is vacated. In turn, the vacated building will likely be filled by a combination of newcomers in the City or existing workers. Somewhere in this cycle, new jobs will be added to the region. The net effect is that new buildings accommodate new employees, although not necessarily inside of the new buildings themselves. Employment Multipliers The Non-Residential Nexus Study does not address the concept of multipliers. Multipliers refer to the concept that the income generated by certain types of jobs recycles through the economy, resulting in additional jobs. This Nexus Study omits such multiplier effects, because they are largely accounted for in the City s Residential Nexus Study, which measures the impact of new household spending on the need for affordable housing units. The assumption in the Residential Nexus Study is that the associated new jobs may be largely employed within existing businesses and buildings (or assist in generating the need for new buildings, as discussed under Substitution Factor ), and occupy new housing units. These new households themselves, and their need for affordable housing, are addressed in the Non-Residential Nexus Study. Their household spending and the need it generates for affordable housing (through the generation of new jobs) was analyzed in the Residential Nexus Study. 12

17 Discount for Changing Industries It is general practice in the preparation of a nexus analysis to examine the major sectors of the local economy and determine if there are long term trends in employment suggesting either decline or restructuring. In the case of long-term decline of one or more industries or sectors, it is appropriate to recognize that all new jobs may not be net new jobs. An analysis of the major sectors of the local economy and their recent trends was performed for this analysis and can be found in Section 2 of this Report. 13

18 SECTION 2: LOCAL ECONOMIC INPUTS AND ADJUSTMENTS This section examines some of the key local factors that affect the nexus analysis. These items include market characteristics such as land use types, employee densities, occupational distribution per building type, and compensation levels. This section also examines several key adjustments which must be made in the nexus analysis, including those relating to changing industries and employment trends, unemployment, and commuter patterns. Employment patterns and trends were determined by analyzing statistics reported in the North American Industry Classification System ( NAICS ) report and the annual Occupational Employment Statistics Survey ( OES ) from the BLS. Industries listed in the NAICS data were matched to building types and OES occupation categories providing the basis for determining the jobs created by new non-residential developments. Recent historical trends of employment were determined by analyzing the last five years of OES statistics. Building Prototypes The nexus analysis is centered on the linkages between population growth, new development, employment, employee salary, and the demand for housing. Non-residential development generally induces job growth, which results in the demand for housing including an increased need for affordable housing in the City. The first step in the analysis is to identify what types of non-residential land uses have recently been developed in the City or are likely to be developed in the future. Specifically, eight non-residential land uses, as identified in the City s LUCE, and corresponding building types were chosen for the analysis, including: Employee Density 1. Office 2. Hospital 3. Hotel (Hospitality) 4. Retail & Entertainment 5. Industrial/Light Manufacturing 6. Institutional 7. Creative/Post Production 8. Medical Office After identification of land use building prototypes, the next step in the analysis is to estimate the number of employees who would work in such buildings. For ease of analysis and presentation, a prototypical 100,000 square feet of building area was examined for each of the land use types. Each land use type has different employment densities as the demand for space is related to the level and type of employment. Employment densities measure the average amount of space that each employee occupies. The use of employment densities were used to estimate the number of employees for each land use type. The employment densities used in this Nexus Study reflect the employee density factors used in the LUCE. Densities are shown as the number of gross square feet occupied per employee. Identification of the employee density is derived from factoring the estimated median employee per acre, which is divided by the median floor area ratio (FAR) for the particular land use building types 14

19 adjusted for building efficiency. The following provides the employee densities used for each of the eight land use building prototypes. Office 275 square feet per employee: Average employee office density in urban areas is usually within the 200 to 300 square feet per employee range, however, these averages typically include high rise office buildings, which are much more efficient than low-rise offices more commonly found in suburban areas such as in Santa Monica. Additionally, the density can also vary depending on the type of office activity, for example, corporate headquarters versus officesupport activities. Hospital 560 square feet per employee: The average hospital and medical employee density is very similar to office uses. This category includes a variety of uses, from in-patient facilities where densities are lower, to out-patient facilities where densities are greater because beds and living facilities are not present. Hotel (Hospitality) 1,500 square feet per employee: Hospitality employee densities can vary greatly depending on the type of hotels present in a geographic area. For example, a City or area with a larger percentage of full-service hotels will have a greater employee density than an area with mostly limited-service hotels. This is because full-service hotels include additional facilities such as restaurants, spas, or retail, and also require a greater level of customer service, thus increasing the number of employees. According to the LUCE, approximately 40 percent of the City s hotel inventory are full-service or luxury hotels. The City anticipates both luxury and limited-service or budget-friendly hotels to be constructed due the City s beachfront proximity and excellent regional access; an average employee density for these types of hotels was used. Retail & Entertainment 425 square feet per employee: This category covers many different uses, including restaurants, big box retail centers, smaller neighborhood-serving retail centers, and street-front retail, which is typically found in downtown areas. The City is primarily served by shopper-good retail such as specialty clothing retail and convenience goods such as supermarkets and drugstores. According to the LUCE, the City is underserved by major drugstores and anticipates increased development in the future. Industrial / Light Manufacturing 500 square feet per employee: This category includes a variety of uses, including light industrial, manufacturing, fabricating, business incubator space, emerging technology, and research and development. Institutional 300 square feet per employee: This category covers a wide variety of buildings that serve the needs of the community including government, education, and cultural facilities. Creative / Post-Production 275 square feet per employee: This category includes entertainment services, post-production industry related to motion pictures and television, and other information-related occupations. Uses include film and music production, art galleries and studios, and record production and studios 3. Medical Office 500 square feet per employee: This category includes out-patient services. 3 As defined by the 2010 LUCE and BLS. 15

20 Occupational Distribution by Land Use Types This segment of the analysis involves allocation of jobs by occupation in the land use prototypes. For this portion of the analysis BLS data on the distribution of different occupational categories was used to estimate the occupational distribution in each of the land use prototypes. The North American Industry Classification System groups establishments into industries based on the activity in which they are primarily engaged at a national level. Establishments that do similar things in similar ways are classified together. The NAICS reports employment distributions for the 22 industry sectors shown in Table 2-1 at the national level 4. The percentages shown in Table 2-1 represent the distribution of the major occupational categories within each building prototype. For example, within an office building, 20.3% of the workers are categorized as being within office and administrative support occupations whereas 5.6% are categorized as computer and mathematical science occupations. The BLS provides statistics that correlate NAICS industry sectors to Occupation Employment Survey occupation categories at a metropolitan statistical level (MSD). The distributions of occupations within land use types are used in the Non-Residential Nexus Study to associate the employment generated from new buildings to occupations and annual incomes. 4 This distribution uses national level data as local NAICS data is not readily available. 16

21 Distribution of Occupations by Building Type (National Level) Table 2-1 Santa Monica Non-Residential Nexus Study Occupation Category Office Hospital Hotel Retail Industrial Institutional Creative Medical Office Management occupations 6.6% 3.4% 2.7% 3.4% 5.9% 5.1% 7.2% 3.4% Business and financial operations occupations 8.2% 2.2% 1.6% 3.7% 6.8% 6.9% 6.8% 2.2% Computer and mathematical science occupations 5.6% 1.0% 0.8% 1.5% 6.6% 3.7% 16.3% 1.0% Architecture and engineering occupations 3.0% 0.2% 0.3% 0.2% 5.2% 2.0% 1.6% 0.2% Life, physical, and social science occupations 1.1% 0.4% 0.1% 0.0% 1.2% 1.4% 0.1% 0.4% Community and social services occupations 1.6% 3.9% 0.1% 0.1% 0.1% 2.8% 0.0% 3.9% Legal occupations 1.4% 0.1% 0.1% 0.2% 2.2% 1.5% 0.3% 0.1% Education, training, and library occupations 14.8% 1.8% 0.0% 0.1% 0.1% 12.4% 0.6% 1.8% Arts, design, entertainment, sports, and media occupations 2.4% 0.3% 0.5% 0.8% 2.0% 1.7% 17.0% 0.3% Healthcare practitioners and technical occupations 1.4% 24.3% 0.8% 1.5% 1.1% 10.6% 0.0% 24.3% Healthcare support occupations 0.8% 14.1% 0.6% 0.4% 0.6% 5.7% 0.0% 14.1% Protective service occupations 1.8% 3.2% 4.2% 2.1% 2.6% 4.5% 0.1% 3.2% Food preparation and serving related occupations 1.4% 2.4% 47.2% 22.2% 0.3% 2.3% 1.7% 2.4% Building and grounds cleaning and maintenance occupations 4.7% 8.4% 11.7% 6.0% 6.0% 4.7% 0.5% 8.4% Personal care and service occupations 2.6% 6.2% 3.3% 3.2% 0.4% 4.3% 2.0% 6.2% Sales and related occupations 7.8% 2.1% 4.4% 23.2% 4.7% 3.2% 12.9% 2.1% Office and administrative support occupations 20.3% 17.4% 10.7% 17.4% 17.1% 19.4% 19.2% 17.4% Farming, fishing, and forestry occupations 0.1% 0.0% 0.0% 0.1% 0.0% 0.1% 0.0% 0.0% Construction and extraction occupations 0.9% 0.7% 0.8% 0.5% 13.2% 1.2% 0.2% 0.7% Installation, maintenance, and repair occupations 3.4% 1.3% 1.7% 4.9% 4.2% 2.2% 10.4% 1.3% Production occupations 4.8% 3.2% 3.9% 3.2% 13.3% 1.8% 1.6% 3.2% Transportation and material moving occupations 5.5% 3.3% 4.5% 5.3% 6.3% 2.7% 1.5% 3.3% Note: This table is derived from the OES Occupational Employment and Wage Estimates "National 3-digit NAICS Industry-Specific Estimates" dataset Source: U.S. Bureau of Labor Statistics (2012) 17

22 Employee Compensation An important component of the analysis is the compensation paid to employees in the new nonresidential land uses. Since compensation can vary greatly for similar jobs, depending on what geographic region that job is located in, it is important to use local data when estimating the wages of the new employees. For this analysis the occupational data previously shown in Table 2-1 is combined with wage and salary information from the BLS Occupation Wage Survey for the Los Angeles/Long Beach/Glendale Metropolitan Statistical District and from the CEDD, as shown in Attachment 1. The wage and salary information in Attachment 1 was used to calculate the income related to specific occupations. The OES occupational categories are the same as those used by the CEDD. The distribution of jobs within the occupational categories was estimated to be the same as the distribution with the MSD, of which the is a part. Employment Patterns (Industry Change Factor) During the past four years, the national and regional economies have experienced a significant decline not seen since the Great Depression. Since 2007, a large number of job losses in certain occupation groups were mitigated only in part by gains in other occupation groups, while the growth for all occupations remained fairly flat at less than 1%. The chart on the following page identifies the percent change of all the major occupational groups listed by the OES from through for the Los Angeles County MSD. Since 2007, the region experienced substantial losses in management, protective services, construction, extraction, installation, maintenance and repair occupations. On the bright side, the region experienced substantial gains in the business and financial, computer and mathematical, community and social service, and health care occupations. The other occupation groups experienced modest gains, in part due to shifting occupational choices. During the period from 2011 to 2012, the California EDD reported the largest year over increases for the leisure and hospitality employment sector including accommodation and food services, arts, entertainment and recreation occupations for the Los Angeles Metropolitan Statistical Division. Increases were also reported for the professional and business services sector, 55% of which was in the administrative and support services occupation, with gains also occurring in the professional, scientific, technical and management occupations. The information and government sectors both experienced declines in employment levels. The growth in some occupations, along with the steep decline in others, suggests that future new employment generated by new non-residential land uses will be in some part taken by existing workers changing from one occupation category to another. To account for this, a conservative 10% reduction was applied, identified herein as the Industry Change Factor, for jobs generated by the construction of new non-residential buildings. 18