News Summary
Los Angeles is experiencing a significant decline in apartment construction as developers pause new projects due to profitability issues and regulatory uncertainties. Despite high housing demand, rising construction costs, labor shortages, and stricter regulations are forcing builders to reassess their investments. Recent data indicates a sharp decrease in rental units under construction and hesitancy from major financial backers. While some developers aim to navigate the challenges, the city’s housing goals remain unmet, emphasizing the urgency for effective solutions to the ongoing housing crisis.
Los Angeles is facing a significant downturn in apartment construction as developers halt new projects amid challenges related to profitability and regulatory uncertainties. Despite a high demand for housing, several builders are reevaluating their plans due to a combination of rising costs, tightening investment, and ever-changing regulations.
Developers like Cliff Goldstein, who recently finished a luxury apartment complex, have determined that further investment in new projects is not feasible for the immediate future. Goldstein describes the current landscape for developers as “a needle in a haystack,” indicating the difficulty in finding viable financial opportunities in the current market. Similarly, Ari Kahan, a developer known for managing large-scale projects with up to 800 units, has not pursued any new site purchases for more than two years.
According to recent data from CoStar, the number of new rental units in the construction pipeline has sharply declined, with fewer than 19,000 apartments under construction in the third quarter of this year. This figure represents a staggering 30% drop from figures reported three years ago, even as vacancy rates remain low and rental prices stay high.
The decline in new developments is further compounded by major financial backers, including pension funds and insurance companies, shying away from Los Angeles investments. This change follows complications in housing regulations highlighted during the COVID-19 pandemic, leading many investors to seek opportunities in other cities. Kahan noted that the investment community has effectively “redlined” Los Angeles when it comes to funding for new developments.
Economic factors have also contributed to the struggle for developers. Increased tariffs have driven up the prices of construction materials, with reports indicating that costs for iron and steel have risen by 9%, while copper wire prices are up 14%. In addition, the construction workforce is feeling the effects of stricter immigration policies, with approximately 61% of California’s construction workers being immigrants and 26% classified as undocumented, leading to heightened labor shortages.
Over the decades, housing production in Los Angeles County has sharply decreased. Historically, the county saw over 70,000 units built annually in the 1950s; however, by the 2010s, that number had plummeted to less than 15,000 annually. In the last six years, approximately 152,000 new units were completed, with 90% classified as rental units; however, only 10% of these were deemed affordable for lower-income households.
The multifamily building permit issuance also reflects this downward trend, with a noted 68% decrease from July 2020 to July 2021—the second-largest drop in the nation. Investor concerns regarding the possibility of future regulations and temporary eviction limits during the pandemic have resulted in an overall hesitancy within the development sector.
Recently, city council members have proposed a study to assess the impact of implementing a minimum wage of $32.35 per hour for construction projects, along with an additional healthcare credit of $7.65 per hour. These potential new expenses have caused further anxiety among developers, who must now project that apartment rents will need to exceed $4,000 to $5,000 per month, necessitating tenant incomes of between $120,000 and $150,000 annually.
While many developers are stepping back, some like Jordan Lang see potential in acquiring properties during this lull in competition, positioning themselves for future investment cycles. Meanwhile, McCourt Partners continues to plan a redesigned apartment complex in Culver City, contingent upon renewed investment from institutional backers.
Los Angeles is mandated by state law to plan for over 456,000 new homes from 2021 to 2029, which includes approximately 185,000 affordable units. However, the city only permitted 17,200 housing units in 2023, roughly 30% of the yearly requirement needed to meet these housing goals. Additionally, more than 70% of the city’s residential land is currently designated for single-family homes, which severely restricts the potential for rental housing development.
Despite the challenges, housing advocates highlight trends aimed at streamlining regulations and shortening permitting times that could pave the way for future development. Proposed amendments to the building code may expedite construction, particularly in areas with strong transit access. The city has also established funding mechanisms, such as Measure ULA (the mansion tax), aimed at generating funds for affordable housing and tenant assistance, though some developers argue it may also discourage multifamily projects.
In an effort to address the ongoing housing crisis, the Los Angeles Housing Department announced $387 million in funding dedicated to new affordable housing projects, primarily sourced from the mansion tax. Nonetheless, developers emphasize that the complex reliance on various funding sources complicates the construction of affordable housing, reinforcing calls for clearer and more simplified financing options.
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Additional Resources
- Los Angeles Times: Apartment development pipeline dries up
- Wikipedia: Housing in Los Angeles
- LAist: Los Angeles city housing state goals annual progress report
- Google Search: Los Angeles housing crisis
- National Law Review: City of Los Angeles approves new ordinances to encourage housing development
- Smart Cities Dive: Solving LA’s housing crisis hinges on policy, zoning reform
- Architect’s Newspaper: LAHD mansion tax funds jumpstart affordable housing construction
- Google News: affordable housing Los Angeles
Author: STAFF HERE HOLLYWOOD
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